Chewy’s (NYSE:CHWY) recovery hinges on balancing profit margins and customer retention

  • CHWY missed out on earnings by a tiny margin
  • The lower forecast is not surprising given the macro environment
  • The tailwinds of the pandemic have likely passed, but this has been priced in. Investors should watch out for margin improvements.

More than 3 years since its market debut, Chewy, Inc. (NYSE:CHWY) is back to baseline as it is trading around the price levels where it was listed on the exchange.

During that time, the company has more than doubled its revenue, but consistent performance seems to elude it.

See our latest review for Chewy

Chewy Q2 Results

  • EPS: $0.053 (versus a loss of $0.04 in 2Q 2022).
  • Revenue: $2.43 billion (up 13% from Q2 2022).
  • Net revenue: $22.3 million (up $39.0 million from Q2 2022).
  • Profit margin: 0.9% (up from the 2Q 2022 net loss). The shift to profitability was driven by higher revenues.

Chewy lowered expectations for the full-year forecast, giving a range of $9.9 billion to $10 billion from the previous US$10.2-10.4 billion).

This created mixed reactions from institutions. Morgan Stanley is cautious about cutting marketing spend and margins – giving an equal weight rating with a price target of US$39. Meanwhile, Evercore ISI has a much higher price target at US$54, as well as an outperform rating – although they acknowledge the high Y/Y jump in stocks, likely caused by the aftermath of the pandemic.

CHWY has a rising short interest

The following data shows a brief interest in CHEWY

NYSE: CHWY Short Interest, Source: market beat

It is currently at 24% and rising, making it a potential candidate for the short squeeze. The last time this happened was in May, when the stock rebounded more than 100% from its lows. Interestingly, the current president of GameStop, the most popular retail stock, is Ryan Cohen, founder and former CEO of CHWY.

According to popular sentiment trackers, CHWY has not shown increased activity among retail investors.

CHWY Revenue Growth and Projections

Chewy has increased its revenue by 17% over the past year. We think that’s a nice growth. Unfortunately, investors wanted more because the stock price was then down 57%. It is of course possible that the activity still records strong growth. It will just take longer than expected to do so. In our opinion, it is not enough to look at income, anyway. Always consider when profits will flow.

The image below shows how earnings and income have been tracked over time (if you click on the image you can see more details).

NYSE: CHWY Earnings and Revenue Growth September 3, 2022

Good to see significant insider buying over the past three months. We believe earnings and revenue growth trends are even more important factors. We therefore recommend that you consult this free report showing consensus forecast.

A different perspective

The last twelve months have not been great for Chewy shares, which have underperformed the market, costing holders 57%. Meanwhile, the broader market fell around 18%, which likely weighed on the stock. While tempting, the company is unlikely to pursue retail investor activism over GME and AMC. Chewy is a company that focuses its marketing on customer loyalty – betting on the predictability of pet food consumption and the convenience of the subscription-based business model. For this reason, potential investors should pay close attention to margins, as management recently adjusted EBITDA margin targets upwards to 1.75-2%.

To better understand Chewy, we need to consider other factors. For example, we have identified 1 warning sign for Chewy which you should be aware of. If you are interested in other stocks that insiders buy, take a look at this free list of growing companies with insider buying.

Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.

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