Why Chewy Stock fell 10.5% at open today

What happened

Online pet retailer actions soft (NYSE: CHWY) fell out of the gate on December 10, rapidly losing 10% early in the session. The loss was not a surprise, however, as investors digested the company’s third quarter 2021 results update after the December 9 close. The results themselves were a bit mixed, but it’s the trend that’s probably the real problem.

So what

The third quarter results showed a number of very big positives. For example, sales of just over $ 2.2 billion were up 24.1% from the third quarter of 2020. Of that total, sales to customers using “auto-delivery” increased by 26. , 7% to reach 70.6% of overall sales. These are customers who make their purchases of food and other items recur on a regular basis, making it almost an annuity-like income stream. Meanwhile, Chewy’s active customer count grew 14.7% year-over-year and sales per active customer jumped 15.4%. This is great news for a growing business, as Chewy has also recently entered the pet insurance industry and worked with veterinary firms to integrate the online retailer’s services into their businesses. practices (creating another source of income for the vet and adding respected promoters / sellers for Chewy). That said, the company lost $ 0.08 per share in the quarter, in line with the same period last year. But red ink is not uncommon for a growth-driven business. Overall, shareholders should probably be happy with the quarter despite the loss.

Image source: Getty Images.

So why has Wall Street taken a half-empty approach today? The answer probably lies in the general sales trend. When the pandemic hit and people were left in hiding in their homes, the demand for Chewy’s services increased because people were socially distancing themselves (and therefore not going to physical stores as much) and there was a slight increase in pet adoptions. Chewy was therefore one of those companies that really benefited from the changes brought about by the coronavirus. These sales gains, however, slowed in 2021. For example, while the sales increase of 24.1% in the third quarter of 2021 is impressive in absolute terms, it is paltry compared to the 45% increase in sales in year-over-year. observed in the third quarter of 2020. This is a constant problem.

Investors often extend trends too far into the future, expecting disproportionate performance to continue, it sometimes seems, indefinitely. This usually doesn’t happen, and the growth of growing companies ends up slowing down as they get bigger. The business might still go down a desirable course, but when growth falls below the high expectations of investors, Wall Street can still have a grim view of a company’s financial performance. This is likely what is happening with Chewy’s results today despite the still impressive sales growth the retailer achieved in the quarter.

Now what

In fairness to the bears, Chewy’s story isn’t as good as it was at the start of the pandemic. However, that doesn’t mean the long-term outlook has turned negative. At this point, it looks like this fast growing pet retailer is coming of age and, as usual, the growth is starting to slow down. If you’re a long-term investor, you’ll want to make sure you balance the long term and the short term here so you can set the right expectations. Indeed, at this point, Chewy still seems to have a bright future, especially with so many customers trusting him enough to pay for their purchases on autopilot.

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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool owns and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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