Chewy stock has been on a tear, up 20% year-to-date.
Chewy (NYSE:CHWY), the online retailer of pet food and supplies, delivered a strong first quarter that beat earnings and revenue estimates. So why was the stock price sinking 10% on Wednesday?
The company saw revenue increase 8% in the quarter to $3.12 billion, which beat estimates of $3.08 billion.
Net income dropped about 7% to $62.4 million on higher costs of sales and expenses. However, earnings held steady at 15 cents per share, same as Q1 of 2024.
But adjusted earnings, which exclude one-time and special items, were 35 cents per share, up 13% year-over-year. That was better than estimates of 33 cents per share.
“Fiscal year 2025 is off to a strong start as the momentum at Chewy continues,” Sumit Singh, CEO of Chewy, said. “We delivered topline growth exceeding the high-end of our net sales guidance range, year-over-year growth in active customers, and compelling profitability and free cash flow generation.”
Chewy increases the number of active customers
Another positive for Chewy in the quarter was that it increased the number of active customers by 3.8% to 20.76 million. That was better than analysts’ estimates. It is also higher than the growth rate for fiscal 2024, which was 2.1%.
In addition, net sales per active customer increased 3.7% to $583, up from $578 per customer in the previous quarter. Autoship sales jumped 15% to $2.56 billion, accounting for 82% of total sales, up from 77% of sales a year ago.
In addition, Chewy maintained its guidance for the rest of the fiscal year. It is calling for net sales of $3.06 billion to $3.09 billion in the second quarter, which would represent 7% to 8% growth year-over-year. But that would be down slightly from Q1.
Further, its adjusted earnings remain at 30 cents to 35 cents per share, which is below Q1 at the midpoint.
For the full year, Chewy expects sales of $12.30 billion to $12.45 billion, which would be up 4% to 5% over the previous year. The adjusted EBITDA margin is targeted at 5.4% top 5.7%, which would be up from 4.8% in 2024.
So why is Chewy stock down?
Overall, it was a pretty strong earnings report, which would typically indicate the stock price moving higher or at least holding steady.
But there are likely a couple of reasons why investors were selling off.
First, while the adjusted EBITA margin increased 50 basis points in Q1 to 6.2%, the gross margin was down 10 basis points year over year to 29.6% while the net margin dropped to 2.0% from 2.3% in the same quarter a year ago. Investors may have been concerned with shrinking margins and the potential for them to shrink further if costs of goods and expenses keep rising.
Also, while net sales are projected to increase for the year, it is at a slightly slower pace than it was in 2024. That’s not terribly concerning, but investors may have been hoping for a guidance bump to justify the high P/E ratio.
Chewy stock has been on a tear, up 76% over the past year and 20% year-to-date. That has pushed the valuation considerably higher, as it is trading at 51 times earnings. That may not be sustainable with this outlook, so some investors may be taking profits.
Ultimately, it’s a question of the high valuation. Otherwise, Chewy is a good solid grower that you should put on your radar. But look for a lower valuation and entry price to get on board — its still too high right now.
