Today's Drop in Chewy's Share Price Explained
In the second quarter of 2022, pet retail giant Chewy reported its financial results, showcasing a stagnant customer base growth and a modest increase in active customers. Despite this, the company managed to post earnings per share (EPS) of $0.35, beating estimates by $0.01, and revenue of $3.12 billion, slightly above analyst expectations.
The company's revenue grew by 6.3% year-over-year, a deceleration compared to the same quarter last year. The increase in net sales per active customer might have been higher if not for inflation. Chewy's net sales per active customer were up 14% year over year to $462.
One of the key factors contributing to Chewy's financial performance was its reliance on the subscription Autoship model, which accounts for approximately 80% of its revenue. This model provides revenue stability and margin expansion potential, underpinning optimism about improving gross margins, EBITDA margins, and free cash flow generation.
Chewy's gross profit margin improved in Q2 2022, thanks to price increases and better logistics management. The company was free-cash-flow positive ($1 million) in Q2 2022 despite spending $48 million on infrastructure.
Despite these positives, the stock currently trades at a relatively high forward price-to-earnings (P/E) ratio of about 31.68, above the sector average. This reflects elevated market expectations that imply some valuation risk. The stock price has shown resilience, recently rising around 1.14% amid broader market declines, signaling investor confidence.
Analysts project strong future earnings growth, expecting a 37.5% EPS increase compared to the prior year, supported by bullish sentiment and a Zacks Rank #2 (Buy) rating. Evercore ISI recently reiterated an Outperform rating with a $52 price target, indicating a potential 31% upside from current levels around $40.80.
However, some risks linger, including the challenge of sustaining customer acquisition growth and addressing occasional insider selling activity, which might temper near-term investor sentiment.
In summary, Chewy's stock outlook post-Q2 2022 is positive but with noteworthy valuation and growth execution risks that investors should monitor. The company's strong Q2 2022 results, analyst optimism, and strategic advantages provide a solid foundation. However, the elevated valuation and concerns about customer growth and insider selling activity warrant careful consideration.
It's important to note that pet owners are cutting back on discretionary purchases due to the higher prices charged by pet companies like Chewy. This trend might impact the company's future growth. Nevertheless, the pet industry appears to be stabilizing, which bodes well for Chewy as an online market leader in this space.
Overall, Chewy's potential for future growth and profitability, coupled with its competitive infrastructure, make it an interesting investment opportunity. However, investors should carefully assess the valuation and growth risks before making investment decisions.
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