The institutions took some big bites of Chewy (NYSE:CHWY) over the last two years, driving the institutional ownership up to nearly 100%. This is quite a feat considering the short interest is also running near 25%, so there are quite a few shares on the market.
However, the net of institutional activity shifted in favor of the bears in calendar Q2, so don’t start thinking a short-squeeze is about to happen. Not only did the intensity of institutional selling increase from Q2 to Q3, but the earnings results were not a catalyst for higher prices.
If anything, the Q2 earnings release will only intensify the short-selling and the institutional selling and drive the stock back down to its recent lows. The question is if the market will hold at those lows or if this stock is headed down to the single digits.
Chewy Reports Strong, Guides Weak
Chewy reported a solid quarter with revenue growth of 12.5%, but this may be the last quarter of strong growth. The $2.43 billion in revenue missed the consensus figure by 80 basis points, and the commentary is not favorable.
Company CEO Sumit Singh said consumers are pulling back on discretionary items, and the guidance was reduced. As far as Q2 goes, revenue strength was driven by a 14.4% increase in net spending per active customer and a 2.1% increase in active customers, offset by a decline in new customer acquisitions.
Active customers now top 20.1 million and are driving strong gains in the auto-ship segment of the business, which is the key for investors. Autoship grew by 17.3% YOY, accounting for 73.1% of the revenue.
Moving down to the margin, the news gets better, but the guidance still overshadows it. The company said the gross and operating margins widened, with the net margin up 170 basis points versus last year. This drove EPS of $0.05 per share, which is well above expectation and beat the consensus by $0.16. The bad news is that guidance for Q3 is light, and the full-year outlook was reduced to a range below consensus.
The company is expecting only $9.95 billion in FY revenue, down from $10.3 billion and below the $10.26 billion consensus estimate. Assuming consumer trends continue to deteriorate as they have been, the guidance could be overly optimistic. The company also reported a 40% increase in YOY inventory that could play a role in margin compression later in the year if discounting and clearance actions come into the picture.
Analysts Trim Targets For Chewy
The analysts are trimming their targets for Chewy, Inc share prices, but the sentiment is still bullish. The analysts rate the stock a Moderate Buy and have for the last year, but the price target is falling. The consensus price target is down 50% in the last 12 months but still 50% above the price action, so there will be a rebound.
The takeaway from the analyst chatter is that near-term headwinds impact the business but the long-term growth outlook remains intact.
The Technical Outlook: Chewy Might Be Bottoming
Chewy, Inc might be bottoming but the move is still in play, so there is ample risk in the outlook. The stock bounced from the $22.50 level earlier this year and is now headed back to that level. If support kicks in at $22.50 or, higher, investors should expect the price action to enter a trading range if not move higher.
If the market can’t hold the price up at $22.50, however, Chewy, Inc.'s shares could be heading down to the single-digit range.
