On paper, Chewy (CHWY) seemingly did everything right. For one thing, the online retailer of pet products continues to ply its trade in one of the most relevant industries. Fundamentally, people – especially millennials – love their four-legged friends. In addition, Chewy delivered an unexpected profit in the fourth quarter. The circumstances set themselves up for a compelling (and bullish) opportunity for CHWY stock.
Instead, the opposite scenario materialized. During the midweek session, Chewy revealed its better-than-anticipated Q4 numbers. Nevertheless, CHWY stock fell more than 5%. What’s even more disturbing, during the afterhours session, the security gave up an addition 2.54% of equity value. Usually, a positive surprise yields rewards, not penalties.
From the fundamentals to the financials, CHWY stock appears to operate in a topsy-turvy world. As a press release published on Business Wire noted, pet owners (parents) prefer to spend time with their furry friends over their human counterparts. Given how much animal lovers treat their canine and/or feline companions as family members, this survey isn’t exactly groundbreaking.
In terms of the objective data, Zacks Equity Research revealed that Chewy delivered earnings per share of 16 cents. This tally beat Wall Street’s consensus estimate for a loss of 12 cents. Not only that, the latest performance handily overshadowed the year-ago print, which produced a loss of 11 cents. Per Zacks, Chewy’s Q4 report produced an earnings surprise of 233.33%.
On the top line, the e-commerce specialist posted revenue of $2.71 billion for the quarter ended January 2023. The result beat out the consensus target by 2.4%. Further, the latest sales haul outpaced the year-ago total of $2.39 billion.
That’s not all. Net sales per active customer increased to $495 from $430 in the prior year. Also, Chewy’s leadership team anticipates Q1 2023 sales to land between $2.72 billion and $2.74 billion. In contrast, analysts forecasted sales of $2.67 billion.
That doesn’t sound like CHWY stock deserves red ink and yet that’s exactly what it got.
A Small Crack Scares Investors Away From CHWY Stock
In fairness, one detail may have startled investors regarding CHWY stock. Notably, management disclosed that Chewy’s active customer count slipped to 20.4 million, down from 20.7 million one year ago. In Q3, Chewy ended the quarter with 20.5 million active customers.
Perhaps under any other circumstance, investors wouldn’t blink an eye. However, we live under extremely unusual circumstances. Most recently, of course, the banking sector fallout remains a major point of anxiety. However, the Federal Reserve also continues to raise interest rates to tackle stubbornly elevated inflation. But as failing banks demonstrated, too much hawkish action can break cogs in the economy.
Moreover, investors of CHWY stock need to be cautious about mass layoffs. With fewer people having high-paying jobs, we could see households choose to cut their pet care budget.
Granted, such a prospect appears disgustingly cruel and I would agree. However, it’s also important not to be naïve about desperation impacting human behavior. As NPR pointed out, during the Great Recession, many people abandoned their pets, to the chagrin and admonishment of animal advocacy groups.
Therefore, it’s quite possible – simply because it happened before – that another recession or cycle of economic hardship may see humans once again turning their backs on their four-legged family members.
Millennials Are a Different Breed
To be sure, it’s difficult not to get a sinking feeling with CHWY stock. For one thing, the Barchart Technical Opinion rating indicator reveals that CHWY represents a 24% sell. It warned that its average short-term outlook suffers from low confidence.
As well, CHWY stock made up the ranks for unusual stock options volume but not in the way that shareholders would prefer. Following the close of the March 22 session, CHWY’s total volume reached 111,903 contracts against an open interest reading of 303,199. The delta between the Wednesday session volume and the trailing one-month average volume came out to 348.22%. Further, call volume reached 48,515 contracts but put volume pinged at 63,388.
Though it seems the market may be conspiring against CHWY stock, intrepid investors may want to take the contrarian approach here. Fundamentally, I believe that the millennial age demographic – which has gravitated toward pet ownership – will break the cycle of pet abandonment.
Why would this be so? If you think about it, most millennials were still in their schooling years when the Great Recession broke out. They watched their parents suffer from job losses, with many incurring the devastation of losing their homes.
Put another way, each generation may have a unique scar imposed on them. For millennials, the pain of broken promises continues to haunt and thus dictate their behaviors as adults. Because of this overriding psychological impact, millennials will probably hold onto their pets to the bitter end. Therefore, CHWY stock may be a buy, not a sell.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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