Morgan Stanley delivers blunt message to America’s pet owners

If you own a dog or a cat, you almost certainly have a Chewy box somewhere in your house.

Chewy has spent years building a loyal, subscription-driven customer base of pet owners who buy food, medicine, and supplies automatically, month after month.

You might be that loyal customer. But the problem right now is that even loyal pet owners are watching their budgets.

Morgan Stanley reviewed Chewy's Q2 fiscal 2026 results in a note titled Managing Through the Treat-cession, which it shared with TheStreet on Sept. 9.

The firm cut its price target to $36 from $37 while maintaining its Overweight rating. CHWY closed the Sept. 9 earnings day down 11%.

The stock is down 36.22% year to date and 39.96% over the past year, according to Yahoo Finance . If you have been holding Chewy for five years, you are down a massive 71.89%. Based on 17 Street analysts offering 12-month price targets for CHWY in the last three months, the average price target is $29, TheStreet noted.

"Treat-cession" is a wry description of the tougher macro backdrop facing pet spending in 2026.

What the Chewy quarter showed, and why the 11% sell-off was overdone

Chewy raised both its fiscal year 2026 revenue and EBITDA guidance. That should be a positive. But the market disagreed, selling the stock 11% in the session following the report.

Morgan Stanley's note said the sell-off was an overreaction, but only partially, because the surface-level beat masked a more complicated underlying picture.

Q2 net sales of $3.33 billion grew 7.3% year over year, as noted in Chewy's Q2 fiscal 2026 results . But strip out the inorganic contributions from SmartPak and Modern Animal acquisitions, and organic growth was 5.7%, decelerating approximately 120 basis points from Q1.

The EBITDA beat included roughly $15 million in one-time items that will not recur. Excluding those, the midpoint of fiscal year 2026 EBITDA guidance actually decreased by approximately 6 basis points. Stock-based compensation jumped 17% quarter over quarter, giving bears another talking point to question earnings quality.

"Given underlying fundamentals were in-line, we think the -11% move is overdone," Morgan Stanley wrote in the note. "But it's hard to argue for a meaningful re-rating until we see positive organic estimate revisions."

The sell-off was too severe, but the stock will need evidence, not reassurance, to recover.