Investing.com -- Shares of Chewy Inc . (NYSE:CHWY) rose over 3% in pre-market trading on Friday following an upgrade from Citi Research, which revised the stock to a "buy" rating from a "neutral" rating, citing what it described as an "idiosyncratic EBITDA opportunity."

The new rating reflects the analysts' positive outlook on Chewy’s capacity for margin expansion and sustainable revenue growth, underpinned by specific operational advantages unique to the company within the pet retail sector.

This positive stance aligns with a broader upward revision of the target price to $40 from $28.

Citi’s analysts flagged a set of company-specific drivers contributing to what they see as Chewy’s path toward profitability and improved EBITDA performance.

Key among these are a rebound in customer acquisition rates and a streamlined cost structure.

As per Citi’s forecast, Chewy’s active customer count—a core metric that had seen a decline over the past two years—is beginning to stabilize and is expected to turn positive by year’s end.

Chewy’s ability to attract and retain customers despite a generally slowing pet industry growth suggests that it is successfully distinguishing itself from competitors.

The analysts note that Chewy’s emphasis on recurring revenue through services such as auto-ship, which accounts for a significant portion of sales, and expanding health and wellness offerings are pivotal to its market share gains.

Operationally, Citi points to Chewy’s increasing reliance on automated fulfillment centers, a shift expected to help manage rising demand more efficiently and drive down operational costs.

This pivot enables the company to improve service quality while maintaining profitability goals, particularly as Chewy enhances its product mix with higher-margin offerings like sponsored ads and private-label health products.

Citi’s assessment implies that this focus on operational efficiencies and high-margin revenue sources puts Chewy in control of its EBITDA margin trajectory, estimating it could reach as high as 5-10% in the near term.

While Citi projects a favorable risk-reward profile, it mentions potential risks, particularly around customer growth sustainability and competitive pressures from larger players in the pet retail space.

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