Why Chewy Stock Had a Bad Week

What happened

Shares of pet-centric e-commerce company Chewy (NYSE: CHWY) have had a bad week. As of 12:20 p.m ET on Friday, the stock was down 13% for the week, compared to a 0.5% gain for the S&P 500. This underperformance resulted from information in the company's report for the fourth quarter of 2022.

So what

To be clear, most of what happened to Chewy in 2022 was good, in my opinion. Net sales surpassed $10 billion for the year, growing 13.6% year over year. And even more exciting, Chewy is now profitable. Granted, the company's net income of $49.2 million comes at a razor-thin margin of less than 1%. But past investments are paying off.

Chewy's profit has multiple explanations, but I believe the most important one is management's focus on warehouse automation. For multiple years, the company has been automating warehouses to make them more efficient. And in 2022, it finally paid off, helping deliver the company's first full-year net profit.

Shifting gears to what troubled the market this week, Chewy isn't gaining new customers. In the fourth quarter of 2021, it had 20.7 million active customers. And it had 20.5 million in the third quarter of 2022. In the fourth quarter, it had just 20.4 million, down both year over year and sequentially.

Many think that Chewy should be gaining customers, not losing them. And that left a sour taste in investors' mouths going into 2023, despite otherwise great progress in 2022.

Now what

For 2023, management anticipates 10% to 12% year-over-year top-line growth, which suggests it's unlikely to add many new active customers in the coming year. According to The Fly, Deutsche Bank analyst Lee Horowitz believes Chewy's customer growth will be "likely tepid at best."

It's also concerning that management expects its profit margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be flat or even slightly down. One would have expected modest revenue growth to lead to modest adjusted EBITDA margin improvement.

Perhaps its outlook for stagnant profits is related to Chewy's growth plans. The company says it plans to enter its first international market in the coming year (the market is yet to be announced). And that could be costly, even though it would provide a new avenue for growth.

In conclusion, 2022 was a good year for Chewy, and there's reason for optimism. But the stock fell this week over concerns about customer growth. And I believe the concern is worth investors' attention in the coming quarters.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. 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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