Chewy Q2 Results Were Hard To Swallow

Chewy had a great second quarter if one marred by slowing year-over-year growth. The $2.16 billion in net revenue is up only 1% sequentially, and 27.1% year-over-year but it did beat the consensus estimate by 460 basis points. The company points out that customer add ons slowed from the peak of the pandemic but remain above pre-pandemic levels and are still growing. Results were driven by a 21% increase in new customers coupled with a 13% increase in ticket average per customer. Notably, the company points out that industry trends were flat compared to Chewy’s double-digit increase in search traffic which points to solid market share gains.

Moving down the report, the margin and earnings news is a bit mixed but there is one key factor to be aware of that alters the landscape. The company’s GAAP loss of $0.04 missed the consensus by $0.03 but includes more than 425 million in share-based compensation expenses. Excluding that, gross margins are up 200 basis points and we’re coupled with a 20 basis point improvement in operating margin to deliver $0.02 in adjusted earnings. This is not only $0.03 better than expected but a surprise profit as well.

At least six sell-side analysts have come out with commentary in the wake of Chewy’s second-quarter report. While none of them have altered their rating they all lowered their price target. The broad consensus among the analysts is a strong buy with a price target near $100 or about 12% above the pre-release closing price. The consensus among the six most recent analyst comments is a strong buy as well but their price target is just above $90. The Community Rating on the stock is overwhelmingly bullish as well with more than 67% of the community bullish on the stock. In our view, is suffering from a post-pandemic-peak malaise that will soon pass.

Believe it or not, but the uptrend in Chewy is intact. Market action over the past year has been well above trend and supported as much by the market sentiment as by Chewy’s actual results. The 10% decline is bad news for some, but only if they sell out now. This is an opportunity for others because price action is still well above the uptrend that was established before the pandemic struck. In our eyes, once price action confirms support again, the fundamentally driven uptrend will continue. That confirmation could happen as high as the $75 level or higher. If the $75 level is tested and support fails, the market won’t really be in trouble until it moves below the $65 level. Assuming Chewy confirms strong support at any of these levels, we would be interested buyers of the stock. Trends within the pet industry are strong.

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