3 questions Chewy will answer for investors on Tuesday

Softit’s (NYSE:CHWY) the stock price and its activity have been moving in opposite directions lately. The e-commerce pet products retailer increased sales and profitability to a solid level through the end of 2021. Still, Wall Street dragged its shares lower on worries about a disruptive downturn ahead.

Those concerns could be mitigated — or amplified — when the company announces its fiscal fourth quarter results in a few days before releasing a detailed outlook for the year ahead.

So let’s take a look at the key questions in this report, due out Tuesday, March 29.

Image source: Getty Images.

How much of a slowdown?

There’s no doubt that Chewy will see slower growth as economies reopen and people shift spending to in-person shopping. Pet adoption trends have also plummeted after weathering most of the pandemic. These factors helped boost sales gains to 24% in the prior quarter, compared to growth of 27% in the second quarter of the fiscal year.

Most investors expect a further slowdown on Tuesday, with revenue growth of around 19%. However, this lower figure would still translate into market share gains for Chewy.

After all, the company makes more than two-thirds of its sales through subscription mailings. Look for CEO Sumit Singh and his team to highlight the relevance of this offer when discussing Chewy’s successes throughout the holiday shopping season.

Are margins falling?

There is no shortage of challenges likely to put pressure on earnings in the fourth quarter and most of 2022. Costs are skyrocketing for everything from transportation to labor, and these spikes come at a time when Chewy has to spend more on its infrastructure to account for all the extra volume it’s gained over the past two last years.

These factors helped keep Chewy in the red through the end of October, although profitability rose slightly from a year earlier. Investors are bracing for worse results on this metric, with Chewy’s operating profit margin likely shrinking after just crossing into positive territory.

Chart of operating margin (TTM) of CHWY

CHWY Operating Margin (TTM) Data by YCharts

Of course, a quick return to net losses is no threat to the stock’s broader investment thesis. But such a move would imply lower profits in 2022.

What does 2022 hold for us?

Wall Street will focus on the outlook for the new fiscal year that management issues as part of its operational update. Heading into the report, most investors expect sales gains to slow to less than 20% from around 25% growth for the current year. Pressures likely to impact this revenue include supply chain challenges and changing consumer buying behavior. On the positive side, Chewy can count on its strong customer loyalty to help it maintain its market share.

The bleaker earnings outlook has played a big role in Chewy’s weak stock price performance of late. Wall Street is bracing for executives to predict soaring losses in the year ahead as capital spending accelerates.

This is the right decision for Chewy to make, as it will help solidify its sales gains and strengthen its infrastructure for many years of growth to come. Still, investors aren’t thrilled about the prospect of a 2022 that pairs slowing sales gains with increased spending.

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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool owns and endorses 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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