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Chewy (CHWY) Down Since Q2 Earnings Release: Should You Hold It?

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Shares of Chewy Inc. (CHWY - Free Report) fell post a worse-than-expected second-quarter 2021 earnings release on Sep 1, after the market closed. The waning tailwinds — earlier  led by the pandemic — were to be blamed for this downside.

Incidentally, the company had benefited when the pandemic peaked, triggering a spurt in pet adoption as people stayed at home under lockdown mandates. This, in turn, led to a surge in demand for pet supplies which aided its earnings.

Investors were on a sticky ground as the stock declined in after-hours trading. It has shed 12% value since the earnings release.

Shares Down

Investors chose to part ways with the stock after the online pet supplier reported an operating loss of 4 cents per share, wider than the Zacks Consensus Estimate of 2 cents. Revenues of $2.16 billion also fell short of the consensus mark of $2.17 billion. Besides, a tepid guidance for the ongoing third quarter was a spoilsport.

Like Chewy, which has decreased 14.6% year to date, many other stocks that enjoyed the COVID-19 boom are now witnessing their last-year gains being pared down as people turned offline from the online mode.

 

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Shares of Peloton Interaction, Inc. (PTON - Free Report) and Zoom Technologies Inc. (ZTNO - Free Report) have plunged 35% and 93%, respectively, year to date. Zoom surged a whopping 1890% from January to March, 2020 while Peloton was up 560% since the COVID-19 outbreak till the end of last year.

Investors are shying away from the stay-at-home stocks and are more sanguine about those that are riding the economic recovery wave.

All is not Lost

Chewy expects revenues between $2.2 billion and $2.22 billion for the third quarter and reiterated the full-year revenue guidance of $8.9-$9 billion, citing uncertainty related to the pandemic.

Despite a deceleration in revenues, which is quite obvious as the COVID-led surge in sales recedes, other metrics paint a favorable picture. Net sales per active customer (signifying customer spending) were $404, up 13.5% from the same-period level last year. This reflects customers’ stickiness for its products, allowing the company to capture recurring revenues from its active customers, up 21.2% year over year in the reported quarter.

The company  has increased its share of wallet from every cohort added to its platform over the past 10 years while its long-term revenue retention levels from each cohort remain well above 100%. As a result, the base of recurring revenues is poised to grow over time.

Should You Retain the Stock?

Chewy could carve a niche for itself in the pet supplies market and managed to face the competition quite well with the e-commerce giant Amazon.com, Inc. (AMZN - Free Report) .

The humanization and premiumization trend is a long-term tailwind for the pet supplier. Per ResearchAndMarkets.com, the pet market in the United States is expected to see a CAGR of 3.5% between 2021 and 2025, reaching a market value of $128 billion.

Moreover, the company stands to benefit from selling its products online and people nowadays prefer online shopping.

The company is launching marketing channels, which should drive incremental long-term customer acquisitions and build brand awareness. Work on initiatives around improving operational efficiency, boosting higher customer engagement and advancing sustainability will lead to additional top-line growth and support long-term profitability.

The company is opening up fulfilment centers, some of which are automated to address the challenges related to high labor costs, constrained transportation network and high freight costs. These initiatives will likely pitch in incremental contribution to EBITDA.

At its Chewy Health  segment, the company announced that it will unveil a marketplace for veterinarians, directly on chewy.com, in an attempt to expand its pet health offerings. While connecting pet parents with the vets, Chewy is trying to increase pet medication via its website.

Among other developments, the opening of the third Chewy Pharmacy, slated later this year, will enable serving customers in the Northeast and the Mid-Atlantic. The company also introduced fresh prepared foods, which can be shipped in custom-designed sustainable packaging to customers across 25 states, covering 56% of the U.S. population. Autoship sales are already approaching 50% of net sales.

Such concerted efforts position the company well to get a firm foothold in the $35-billion total addressable market.

To conclude, long-term investors should remain unfazed by quarter-to-quarter fluctuations. Their sole consideration must be the long-term growth trajectory, rather. Chewy appears a long-term player and therefore we recommend investors to keep its stock in their portfolio for handsome returns.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.