Why I'm Buying Chewy Amid Stock Beatdown
Here's my trading plan for the online pet product retailer.
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Chewy CHWY reported the firm's fiscal first quarter financial results on Wednesday morning. The quarter was solid. The guidance was OK. Still, the shares moved sharply lower. I have been buying this dip ahead of the regular session. I think this sell-off may be either misguided or simply algorithms overfeeding on early momentum. This is that story. Let us rock.
For the period ended May 4, Chewy Inc., the online pet-focused retailer, posted an adjusted EPS of $0.35 (GAAP EPS: $0.15) on revenue of $3.116 billion. While both the top line and adjusted bottom line results beat Wall Street's expectations, the sales print was good enough for year-over-year growth of 8.3%. Active customers grew 3.8% to 20.756 million, while net sales per active customer grew 3.7% to $583. More importantly, autoship sales increased 14.8% as autoship customers grew as a percentage of total sales from 77.6% to 82.2%.
On The Quarter...
CEO Sumit Singh commented in the press release, “Fiscal year 2025 is off to a strong start as the momentum at Chewy continues. We delivered top-line growth exceeding the high end of our net sales guidance range, year-over-year growth in active customers, and compelling profitability and free cash flow generation. These results are a testament to the resiliency of the pet category and underscore the strength of Chewy’s value proposition and our ability to continue to gain market share.”
Operations
As net sales grew 8.3% to $3.116 billion, the cost of those sales grew 8.3% to $2.192 billion. This left a gross profit of $923.8 million (+8.2%) as gross margin dropped from 29.7% to 29.6%. Total GAAP operating expenses grew 7.3% to $846.9 million, leaving GAAP income from operations of $76.9 million (+19%).
After accounting for interest, other income and expenses as well as taxes, GAAP net income landed at $62.4 million (-6.7%). This was due to less interest income and an increased provision for taxes from the year-ago period. That works out to a GAAP EPS of $0.15, which is flat from the year-ago comparison.
Once share based compensation expense of $78 million and several other smaller impacts are adjusted for, the firm's non-GAAP net income increased 8.6% to $148.9 million. That put the firm's adjusted EPS print at $0.35, up from $0.31 a year ago.
Guidance
The firm provided some forward-looking guidance, not in the press release, but in the materials released for the earnings call for those who like to do their own homework. For the current quarter, Chewy projected net sales of $3.06 billion to $3.09 billion, which would work out to growth of 7% to 8%. Wall Street was looking for about $3.03 billion, so this was a nice beat. The firm also projected adjusted EPS of $0.30 to $0.35. This brought the midpoint of the range above the $0.31 that Wall Street had in mind. Another beat.
For the full fiscal year, Chewy is projecting net sales of $12.3 billion to $12.45 billion. This is what I think the sellers or algorithms latched on to early on Wednesday morning. Wall Street was looking for something close to $12.4, so this pulled the midpoint of the range just below that consensus view. A miss. The firm is also projecting a full-year adjusted EBITDA margin of 5.4% to 5.7%.
Fundamentals
For the period reported, Chewy generated operating cash flow of $86.4 million (+5.5%). Out of that number came $37.7 million in capex spending. This left free cash flow of $48.7 million. Out of that total, the firm repurchased $23.1 million worth if common stock. The firm does not pay a cash dividend out to shareholders.
Turning to the balance sheet, Chewy ended the quarter with a cash position of $616.4 million and inventories of $806.9 million. This put current assets at $1.712 billion. Current assets add up to $2.14 billion. Now, normally, we don't like to see a current ratio of less than 1.0 and this one lands at 0.8. However, more than half of this is in accounts payable and there is no short to medium-term debt. In fact, the firm has no debt load at all, which we really, really like.
Total assets amount to $3.06 billion including goodwill of just $39.4 million and no other intangibles. We like that a lot, too. Total liabilities less equity comes to $2.685 billion. The not so current liabilities are mostly operating leases. Again, there is no debt on this balance sheet.
My Thoughts
I believe that Wednesday morning's sell-off is an overreaction to the full-year revenue guidance, which just barely disappointed. Cash flows are fine. Profitability is not a problem. The balance sheet is in very good shape. There is a lot more to like here than to be disappointed in.
Readers will see that the stock came roaring out of a falling-wedge pattern of bullish reversal in early April. The stock then fit neatly into an Andrews' pitchfork model, that lasted until Wednesday morning's sell-off. Relative strength is plummeting. The daily MACD just took a turn for the worse. Is this beat-down for real?
CHWY quickly gave up its 21-day EMA on Wednesday morning. That took the swing crowd out of the game, which accelerated to move. I have been buying the shares in small pieces since well before the opening bell. I stopped when I found out I was going to write about Chewy today. I will not take any next action until this article is public, so as not to front-run my own work.
That said, my goal is to get more aggressive as the stock approaches its 50-day SMA, which is currently around $39.20. That's where I am thinking the algorithms that are forcing this overshoot to the downside flip around and start cannibalizing their peers. If that lien fails, then portfolio managers will start exiting the name and the 200-day line will come into play. As always, my 8% rule stands as a primary risk management tool.
At the time of publication, Guilfoyle was long CHWY equity.
