Owning a dog or cat likely means you have a Chewy subscription box in your home.
For years, Chewy has cultivated a loyal, subscription-based customer base of pet owners who automatically purchase food, medicine, and supplies on a monthly basis.
You may be one of those loyal customers, but the current issue is that even the most dedicated pet owners are strictly monitoring their budgets.
Morgan Stanley analyzed Chewy’s Q2 fiscal 2026 earnings in a report titled “Managing Through the Treat-cession,” which was shared with TheStreet on September 9.
The investment bank lowered its price target from $37 to $36 while maintaining an Overweight rating. Following the earnings report, CHWY stock dropped 11% on September 9.
According to Yahoo Finance, the stock has declined 36.22% year-to-date and 39.96% over the past year. Long-term holders who have owned Chewy for five years are facing a substantial loss of 71.89%.
TheStreet noted that based on 17 analyst price targets for CHWY over the last three months, the average 12-month target is $29.
“Treat-cession” is a wry term describing the challenging macroeconomic environment impacting pet spending in 2026.
What the Chewy Quarter Revealed, and Why the 11% Sell-Off Was Overdone
Chewy raised its fiscal year 2026 revenue and EBITDA guidance. This should have been positive news, yet the market disagreed, driving the stock down 11% in the subsequent trading session.
Morgan Stanley’s note stated that the sell-off was an overreaction, albeit only partially, as the superficial earnings beat obscured a more complex underlying reality.
Chewy reported Q2 net sales of $3.33 billion, representing a 7.3% year-over-year increase according to its Q2 fiscal 2026 results. However, excluding inorganic contributions from the SmartPak and Modern Animal acquisitions, organic growth was 5.7%, decelerating by approximately 120 basis points from the first quarter.
The EBITDA beat included roughly $15 million in non-recurring one-time items. Excluding these, the midpoint of the fiscal year 2026 EBITDA guidance actually decreased by approximately 6 basis points. Furthermore, stock-based compensation rose 17% quarter-over-quarter, providing critics another reason to question earnings quality.
“Given that underlying fundamentals were in line with expectations, we believe the -11% decline is overdone,” Morgan Stanley wrote in its note. “However, it is difficult to argue for a meaningful re-rating until we see positive organic estimate revisions.”
The sell-off was too severe, but the stock will require tangible evidence rather than mere reassurance to recover.
The Pet Macro Weighing on Chewy’s Entire Story
The Covid-19 pandemic triggered a surge in pet adoptions, and consumers naturally spent heavily on their new companions. According to the American Pet Products Association, pet spending experienced one of the most remarkable runs of any consumer category from 2020 to 2022.
Those days are gone. Household budgets are tightening recently, with the costs of everyday essentials—including food, housing, and utilities—on the rise.
As a pet owner, you are likely to spend less or more cautiously, trading down in certain categories or stretching the time between purchases in others if budget dictates. However, I doubt anyone would bring in another companion if they cannot afford enough food for themselves.
Morgan Stanley believes the weakness has stabilized at an organic growth rate of approximately 6% year-over-year. Given current macroeconomic conditions, this is viewed as the correct baseline for the business—a holding pattern awaiting a catalyst to break the range.
There is some good news for Chewy bulls, according to Morgan Stanley. The company expanded its pet healthcare and services ecosystem by acquiring the veterinary platform Modern Animal in April 2026 and the equine health brand SmartPak (SmartEquine) in late 2025.
According to Morgan Stanley’s modeling, these acquisitions added $100 million and $80 million in fiscal year 2026 revenue, respectively.
Veterinary clinic expansion continues. The healthcare business, which boasts higher margins and stickier customer relationships than commodity pet food, is growing.
Chewy+ Redesign: The Catalyst Morgan Stanley Is Watching
The most compelling forward-looking element in Morgan Stanley’s note is the redesigned Chewy+ membership program, which management described as launching “very shortly.”
The program’s redesign represents the sole idiosyncratic catalyst in this story that does not depend on macroeconomic improvement.
If Chewy+ demonstrates promising early adoption in the second half of 2026, Morgan Stanley believes the company could aggressively leverage the program in fiscal 2027 to drive top-line acceleration—even if it means accepting a near-term margin offset.
Fiscal 2027 is where the real debate lies. Morgan Stanley estimates Chewy will target approximately 15% to 18% incremental margins in fiscal 2027, translating to roughly 50 to 70 basis points of EBITDA margin expansion based on the firm’s estimated 6.4% revenue growth.
That expansion rate is below the approximately 100 basis points Chewy has been adding, meaning the market needs to see either faster revenue growth or higher margin expansion before the stock can be re-rated.
Morgan Stanley’s discounted cash flow analysis points to a $36 price target, based on 7% revenue growth through fiscal 2030, long-term EBITDA margins of roughly 10%, and an 8.5x fiscal 2027 EBITDA multiple, which the firm considers attractive.
The bull case reaches $55, but Chewy would need to deliver 8% revenue growth, successfully scale Chewy+ and its clinics, and expand margins to 13%. The bear case drops to $14, assuming just 4% revenue growth and continued competitive pressure.
At around $21, Chewy trades at an estimated 8.5x fiscal 2027 EBITDA, while Morgan Stanley expects EBITDA to grow at a 16% CAGR through 2029. In other words, the stock appears priced for continued underperformance rather than the recovery implied by Morgan Stanley’s Overweight rating.
The catch is that a meaningful re-rating likely requires organic growth estimates to begin moving higher. Chewy’s ability to provide that catalyst in the second half of 2026 will determine which scenario ultimately plays out.
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