Categories Analysis, Retail

Chewy looks attractive ahead of earnings; should investors buy the dip?

Margins remain under pressure from elevated expenses, mainly related to COVID safety measures and employee compensation

When people rushed to online marketplaces during the COVID-induced shutdown, Chewy, Inc. (NYSE: CHWY) was one of the preferred destinations for buying pet products. For the company, its ramped-up e-commerce capabilities and aggressive innovation came in handy when the shelter-in-place orders came into effect.

Shares of the Florida-based online pet store, which competes even with large players like Amazon (AMZN) for market share, peaked early February before paring most of the gains in the following weeks. Market watchers are of the view that the current downturn is temporary. Their consensus target price points to a rebound in the coming months that could raise the value close to the $100-mark. Selling the stock now is not a good idea, rather keeping it on the watchlist would pay-off in the long term.

Towards Profitability

In the last three quarters, Chewy came out with financial results that topped expectations. Though the performance improved steadily, the bottom-line remained in the negative territory all along, continuing the losing streak even two years after its Wall Street debut. The company will be publishing its fourth-quarter numbers on March 30 after the closing bell, amid expectations of a further improvement in earnings performance. Market watchers are looking for a 45% sales growth.

Chewy ended the last quarter with a total of 17.8 million regular customers, which represents a 40% increase year-over-year. Then, net loss narrowed sharply to $0.08 per share from $0.20 per share last year, supported by a 45% growth in sales to $1.78 million. The top-line benefited from strong holiday sales, especially in the private label category. Customers’ favorable response to the company’s innovative offerings like medication compounding and Connect With a Vet also contributed to the topline.

Stressed Margin

Meanwhile, margins suffered due to elevated expenses, mainly linked to COVID-related safety measures and employee compensation. The efforts to enhance omnichannel capabilities, such as expansion of the fulfillment network, added to the cost escalation. The trend is expected to continue in the near future, given the persistent uncertainty related to the pandemic.

Related: Chewy Q3 2020 Earnings Call Transcript

We continued to be laser-focused on executing against our commitment to pets and pet parents to deliver exceptional customer experiences by offering a broad assortment of brands and products with the convenience of e-commerce. That commitment extends to pet health and wellness. As part of our goal to make better healthcare more affordable and accessible, we recently launched medication compounding and Connect with a Vet, our proprietary telehealth platform. These two innovative businesses are valuable additions to the growing healthcare business and represent our first service-based offerings for pet parents.

Sumit Singh, chief executive officer of Chewy

Stock Performance

Currently, Chewy’s shareholders are a disappointed lot, thanks to the stock’s pullback from last month’s peak, after entering the year on a high note. Nevertheless, the company’s market value more than doubled in the past twelve months.

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Read the full conference call transcript here. It’s free!

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