Every once and awhile, markets throw investors a bone – a pun very much intended here. That bone is the recent pullback in Chewy (NYSE:CHWY), which has Chewy stock residing more than 27% below its 52-week high.
No doubt about it, the decline in the online pet care and accessories retailer is breathtaking, confirming that, as is the case with many e-commerce names, this one isn’t for the faint of heart. Just a couple of weeks ago, Chewy flirted with $75. Now it’s at $53.
Chewy’s recent weakness stems from a few factors, all of which arrived in a confined timeframe. First, although the company’s second-quarter financials were better than expected, it still lost money and the stock suffered some punishment as a result. Second, an analyst threw some cold water on the stock, saying it could lose some luster when the novel coronavirus is defeated.
Finally, Chewy is commencing a secondary equity offering of 5.1 million shares, though another 765,000 could be tagged on to that tally. Secondaries are dilutive and Chewy slipped on the headlines. Good news: All those challenging headlines are temporary in nature.
Chewy Stock Will Regain Lost Form and Then Some
Sometimes, investing is as simple as what we see with our own eyes. It’s just one example, but clearly it’s been a positive sign for Amazon (NASDAQ:AMZN) investors that more of those blue vans on the road and more packages are piling up on doorsteps.
I see the same thing with Chewy. Literally. I’ve had a dog for nine years and worked from home for most of that time so with all those walks – three or four per day – I’m pretty aware of the rise of e-commerce at the “last mile” level. Something I’ve seen with my own eyes is more and more Chewy boxes on my neighbors’ doorsteps.
That’s anecdotal data. Something more concrete is in order.
The recently held Jefferies Global Consumer Conference revealed this statistic: The Covid-19 pandemic led to a 60% increase in pet adoptions and fostering the first quarter. That’s a massive acceleration in pet ownership indicating that the forecast for pet care sales rising to $203 billion by 2025 isn’t far flung. It’s risky being bearish on Chewy when folks are increasing pet ownership.
Additionally, the notion that Chewy is vulnerable in a post-coronavirus world is dubious at best. E-commerce was stealing market share from brick-and-mortar retail prior to the coronavirus and the pandemic merely accelerated that situation. Just because a vaccine comes to market doesn’t mean consumers are going to alter their shopping. Not when convenience and staying out of stores is a benefit of shopping with Chewy.
“Management noted that customers acquired post-COVID exhibit similar economics and shopping patterns as pre-COVID customers,” said Raymond James analyst Aaron Kessler in a recent note.
Chewy Has Resiliency
Much like other online retailers, Chewy has post-pandemic resiliency attributable to multiple tailwinds. First, many new pet owners are figuring out what those of us that have been in the game awhile have long known. Pets are great to have around and excellent ways of de-stressing. Whether its cozying up with your cat or taking your dog for a walk, pets can make a bad day a whole lot brighter.
Of course, that’s anecdotal/emotional stuff that Wall Street doesn’t focus on. However, it’s relevant with Chewy because as more pet owners join the party and more treat their furry friends as members of the family, spending increases.
As just one point, nearly three-quarters of pet owners prioritize the quality of food they feed their pets. Just as there are healthy alternatives for humans, there are for pets, too, and take it from a dog owner, healthy pet food isn’t cheap. However, good owners are willing to allocate that cash because they love their pets and that provides a tangible catalyst for long-term Chewy stock upside.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
