Chewy Shares Fall Despite Solid Earnings. Is it a Buying Opportunity?

September 11, 2020

I’ve previously talked about how much I like Chewy and nothing in its latest set of earnings has made me think otherwise.

The online pet retail posted a stellar fiscal second quarter which saw sales climb 47.4% year-on-year. Even better for investors is the fact that Chewy also expanded its gross margin by 190 basis points year-on-year to 25.5%.

Although still loss-making, this is narrowing – a net loss of US$33 million in its latest quarter was down substantially from US$83 million in the year-ago period.

Free cash flow was negative, a reversal from last year’s fiscal second quarter positive free cash flows but I’m willing to forgive the company given the capital investments it’s making in its fulfillment centres.

Building out capacity and subscriptions

These investments are a signal of management’s vision for the future; building out automated fulfillment centres that can meet increased demand.

The company’s Autoship service – a membership subscription programme – also saw solid growth of 45.3% year-on-year to US$1.16 billion it its latest quarter.

If you’re a pet owner, you likely know you’ll need products A, B and C on a regular basis for your furry friends. What better way to get that demand met than having it automatically shipped from Chewy’s subscription service?

It’s perhaps a sign of how much it has run up – Chewy shares are still up over 170% year-to-date – that it sold off on “poor” earnings.

But if you’re looking to pick up shares of a leading online consumer retail name in a fast-growing niche, I can’t think of a better company than Chewy.

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Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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