Stock Analysis & Ideas

Chewy’s Earnings Report is Investors’ Biggest Treat

Story Highlights

Chewy’s earnings report set investors’ tails wagging. Supply chain and inflation issues may be killing retail, but Chewy has an extra edge that should give investors some support, going forward.

Online retailer Chewy (CHWY), which made its name on the strength of pet treats and other supplies sent directly to the home, recently released its earnings report. Investors went wild, sending the company up 19.6% in pre-market trading on Thursday. Those gains have been holding up in today’s trading session. The stock is up about 19%.

The company’s earnings report lit the stock on fire, and I’m bullish on its outlook myself. Though most retailers will face a downturn from a potential recession, as well as inflation and supply chain issues, I’m pretty convinced that Chewy will enjoy a status close to that of, say, grocery stores.

The last 12 months for Chewy have been largely downhill. The company pared back nearly three-quarters of its value in the last 10 months. The company broke $94 per share back around August 2021 but started a downhill slide thereafter that brought the company to under $23 per share briefly.

The latest news, however, seems to be helping quite a bit. The company’s earnings report featured earnings of $0.04 per share. That’s a clear win against projections; FactSet was projecting that the company would lose $0.11 per share this quarter. However, it’s also a loss against this time last year, when the company posted earnings of $0.09 per share.

Better yet, revenue was actually up against this time last year. Revenue hit $2.43 billion in this quarter compared to $2.14 billion a year prior.

Wall Street’s Take

Turning to Wall Street, Chewy has a Moderate Buy consensus rating. That’s based on 10 Buys, seven Holds, and one Sell assigned in the past three months. The average Chewy price target of $49.82 implies 77.7% upside potential.

Analyst price targets range from a low of $23 per share to a high of $133 per share.

Investor Sentiment is Recovering

Currently, Chewy holds a Smart Score of 6 out of 10 on TipRanks. That’s the second-highest level of “neutral,” meaning that Chewy is fairly likely to match the broader market’s performance or exceed it only slightly. Based on current investor sentiment, this seems to be the case all over.

Hedge fund involvement, as determined by the TipRanks 13-F Tracker, is increasingly in favor of Chewy’s chances. Hedge funds bolstered their investments in Chewy nearly three-fold, going from a nearly-undetectable 15,000 shares to a significantly-hiked 58,286 shares between December 2021 and March 2022. That’s still a long, long way from the over 2.9 million shares held back in March 2020, however.

Insider trading, meanwhile, is heavily Sell-weighted. In the last three months, Buy transactions did lead Sell transactions by four to none. Interestingly, no insiders have sold Chewy stock since February 2022. However, going back to the full year shows a much different picture. Sell transactions led Buy transactions by 25 to 10 for the last 12 months.

Retail investors—at least, those who hold portfolios on TipRanks—are abandoning Chewy in droves. The number of TipRanks portfolios holding Chewy stock slipped 0.3% in the last seven days but dropped 3.2% in the last 30 days.

Chewy’s dividend history, meanwhile, doesn’t exist. Rather, the company seems focused on returning value to shareholders via internal development.

Investing in One of the Family

Most retailers—online or otherwise—are about to have some serious problems. With inflation raging out of control and a potential recession warming up in the background, people are likely to cut their discretionary purchases in a bid to weather current storms.

There are already signs that this is the case; a LendingTree report updated about a week ago reveals that Americans currently had $841 billion in credit card debt in the first quarter of 2022. The fourth quarter of 2021, meanwhile, had Americans at $856 billion in credit card debt.

Americans are deleveraging. If this trend continues, it could hit retailers all up and down the line.

However, Chewy enjoys one particular point that could spare it a lot of the worst of American belt-tightening. These are pet supplies. The odds of Americans getting rid of their pets en masse are pretty unlikely.

Morgan Stanley analyst Simeon Gutman found that consumers were “increasingly less willing to cut pet spending as a whole when real personal disposable income declines.” Indeed, a similar study from AlphaWise found that 37% of respondents were willing to take on debt to cover a pet’s medical expenses.

Take these factors together, and you’ve got a retailer that’s just been elevated from “discretionary” to “essential.” Essential retail is some of the last to get hit by a recession. Even then, it’s not a complete loss.

Yes, consumers will tighten their belts at the grocery store or the gas pump if absolutely necessary, but it usually takes quite a bit to get customers to back off at those locations.

Concluding Views

Here’s the good news about Chewy in a nutshell. Hedge funds are coming back. Insiders are buying again as opposed to selling. The trend may be Sell-weighted for the full year, but for the last quarter, it’s swinging to Buy. Retail investors departing Chewy may simply be jumping the gun.

This is a company that’s trading close to its lowest price targets. While its highest targets—or even its average ones—may be unattainable daydreams, a 10% jump or more over current levels doesn’t seem all that out of line.

There is significant potential for gains in Chewy. Its odds of losing out to discretionary income crunches look low. With people loving their pets like their children, it’s a safe bet that Chewy will be able to weather inflation and a recession alike. That’s good news for investors, and it leaves me bullish.

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