Shares of online retailer Chewy (NYSE:CHWY) — which focuses on pet food and other pet-related products — fell about 12% Thursday morning before slightly paring the loss. Although the company posted solid results for its fiscal second quarter, CHWY stock couldn’t overcome management’s concerning comments. As well, an analyst downgrade clouded proceedings. Still, investors must be aware of the holistic circumstances before making a decision.
According to TipRanks, Chewy posted revenue of $2.78 billion, representing an increase of 14.4% on a year-over-year basis. Encouragingly, this tally beat the analyst consensus target by $20 million. On the bottom line, the e-commerce specialist posted earnings per share of 15 cents, which also beat expectations (in this case, by 6 cents).
Even better, during Q2, net sales per active customer increased by an impressive 14.7% to $530. Fundamentally, such a performance symbolizes a positive juxtaposition against lingering U.S. consumer concerns about the broader economy.
However, Chewy CEO Sumit Singh noted that its customers are slightly more discerning coming out of Q2 during an interview with CNBC. In addition, Evercore ISI analysts downgraded CHWY stock to “in line” from “outperform” with a $35 price target (reduced from $53). CNBC reported that Evercore was not particularly impressed with the company’s Q2 EPS results.
Could CHWY Stock Present a High-Risk Contrarian Opportunity?
Following the earnings disclosure, CHWY stock enjoyed significant chatter on various social media platforms. Generally speaking, Chewy walks a tightrope between two narratives. On one hand, fears about economic resilience naturally warrant some consternation. But on the other hand, U.S. pet owners tend to be a higher-income subsegment of the consumer economy.
For the bad news, CNN recently reported that consumer sentiment soured at the end of summer on inflation concerns. In addition, people rightly have some anxieties about keeping their jobs. Unfortunately, layoffs have started to pick up again.
Nevertheless, the positive side centers on the resilience of pet-owning households. According to data from Forbes Advisor, households with annual incomes of $100,000 and over are most likely to own pets. Within this segment, 63% own dogs and 40% own cats. Therefore, it’s possible that pet owners generally hold more mission-critical and higher-paying occupations.
On the surface, then, CHWY stock may seem like a compelling contrarian opportunity. However, it’s important to note that if layoffs accelerate, they likely won’t just impact modest-compensating roles. Also, during the Great Recession, pet abandonment represented a sorrowful dynamic.
One would hope that this situation won’t repeat itself. Still, it’s not an impossible proposition.
Why It Matters
Prior to the Evercore downgrade, analysts pegged CHWY stock as a consensus moderate buy. This assessment broke down as 13 buys, five holds and one sell. Moreover, the average price target landed at $43.61, implying roughly 80% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
