Most portfolios are doing well these days. Major market indexes hit new highs on Friday, but not all stocks are playing. Chewy (NYSE: CHWY) is one of those former market darlings who didn’t get the memo.
The online retailer of pet supplies has seen its shares sent to the doghouse. The chewy stock has fallen 55% over the past year, down 85% from its peak three years ago. This might seem like a bad time to warm to this out-of-favor investment, but with a telling financial report coming later this month it might as well sound like filling a food bowl. Let’s see why Chewy can finally turn things around in March.
Its bite is worse than its skin
Business has slowed considerably for Chewy. Net sales rose just 8% in its fiscal third quarter, ended Oct. 29, just shy of market expectations. Chewy’s CEO will point out how the platform has grown in market share relative to industry growth in the low single digits, but it’s not enough. After seven consecutive quarters of posting top-line growth in the teens — and significantly higher year-over-year gains before that — this is the first time Chewy has failed to deliver a double -digit increase in net sales.
It gets worse. Chewy closed the fiscal third quarter with 20.3 million active customers, slightly below where it was three months and a year earlier. The news isn’t much better at the other end of the income statement where last year’s profit turned into a loss. Chewy also lowered its fiscal year guidance, looking at fiscal fourth-quarter net sales below where analysts had been.
There are bright spots in the brutal report. Net sales increased despite a decrease in customers as trailing net sales per active customer increased 14% over the past year. Gross margin also improved. The percentage of sales using Chewy’s Autoship feature — where orders scheduled to ship automatically at set intervals are discounted — expanded to 76.4% of mixed revenue.
The bad news outweighs the good news. No sugarcoating rough coat. Chewy stock still deserves a better stock chart.
An investor’s best friend
We’re three months removed from Chewy’s brutal third quarter report. The market rallied 13%, but Chewy continued to sink. It hit a fresh all-time low less than two weeks ago.
Chewy’s announcement last week that it will deliver new financials on March 20 sent some investors scrambling for a human-sized Thundershirt to weather the jitters. Expectations are dim. Analysts and Chewy’s own guidance called for a continued deceleration in net sales. Wall Street pros are bracing for a 2% increase in net sales, possibly the first time in Chewy’s history that it has yielded industry market share. They see another small quarterly deficit reversing a prior-year gain.
I’m not going to predict a miraculous turnaround here. The report mood be bad Analysts who monitor online traffic trends and other channel checks haven’t chimed in on a positive note in nearly two months. However, the depressed share price finds us at a point where the stock could still start to recover with just a whiff of a report that isn’t terrible.
Chewy has potential catalysts working in its favor. International expansion and the December launch of its pet health practices offering won’t move the needle on this month’s report. However, early strength on either front could lead to a higher outlook for the 2025 fiscal year that began last month. Analysts are already seeing a return to profitability and a 5% increase in net sales for the new year. What if Chewy confirms those targets or is more confident? The long-term outlook for the industry is strong because all the dogs and cats we adopted early in the pandemic are bigger, hungrier, and more active today. It’s time for Chewy and the rest of the pet food stock to return to the market’s feeding dish.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chewy. The Motley Fool has a disclosure policy.
March’s Chewy’s a Cold Pet Stock That Could Be a Hot Dog was originally published by The Motley Fool
