During the pandemic’s online shopping boom, Chwey Inc. (CHWY) garnered much attention being an online pet retailer. Confined to their homes, customers found it easy to tend to their pet’s needs without leaving their safe zone as Covid-19 wreaked havoc. As the pandemic hype started to fade, so did the hyped growth of the company. Down over 60% year to date and nearly 70% in the past 12 months, the pure-play pet e-tailer suffered immensely this year. Joining in on the broader downfall of equities this year, CHWY’s wider losses came from continued worse-than-expected earnings lately.

Investors and analysts were once again expecting not-so-good results for the first quarter of 2022 as the year has added even more challenges to the company’s woes. But despite the numerous challenges and headwinds, the company posted upbeat earnings and guided above the expectations. This resulted in a huge rally in the stock after the earnings were released on June 1, after the market close. Thus, CHWY surged by a nice 16.01% in the pre-market to trade at a price of $27.25 per share. An active volume of 6.02 million shares was responsible for the huge uptick. Prior to the earnings, the stock had subtracted 5.28% in regular trading as investors anticipated the earnings to fall below the expected, once again.

CHWY’s Q1 Earnings Surprise

Despite negative expectations and numerous challenges, the online pet supply company’s earnings were better than expected. The company came out with a profit of 4 cents a share against an expected 11 cents loss per share for the quarter. This represents a huge earnings surprise of nearly 130% for the quarter. The net income was $18.5 million, including share-based compensation expenses.

Moreover, CHWY generated net sales of $2.43 billion in Q1 2022, which rose by 13.7% YOY. Analysts were expecting net sales of $2.41 billion, which was narrowly topped by the company.

However, the adjusted EBITDA declined by 21.8% YOY to $60.5 million, with a margin of 2.5%. Gross margin also fell down to 27.5% due to a loss of 10 basis points.

2022 Outlook

While the earnings beat was a cause of rally in itself, it was the better-than-expected guidance that really overjoyed the investors. As per the shareholder letter, the company expects:

The Q2 and fiscal 2022 guidance of the company surpassed the analysts’ expectations at the top end. Analysts had their sales forecast pegged at $2.44 billion for Q2 and $10.26 billion for the full year.

Challenges & Headwinds

This year has been extremely harsh on the market so far due to multiple blows from all directions. The recovery and reemergence of Covid-19, the Russian invasion of Ukraine, soaring inflation, rising interest rates, and global supply chain hurdles, all have been taking a toll on the stock market. The Nasdaq Composite is trading in the bear market territory and the S&P 500 Index is growing closer to it. While these are enough reasons to warrant the difficult positions CHWY has been in, the company has several added woes as well.

Recovery from the pandemic has led to a decline in the company’s sales as physical retailers and vets are on the market once again. A larger concern has been the supply chain bottleneck for the company. Supply chain disruptions made it difficult to secure products wanted by consumers, while shortages are rising prices on everything from labor to fuel. Huge shipping costs and labor availability problems have been its Achilles heel, while higher-than-usual out-of-stock inventory levels weighed on its top line.

According to the company, sold-out products and inventory shortages were the foremost reason for the lower sales. The sales were hurt twice as much as the company had anticipated. Given the challenging macroeconomic and geopolitical situation, it is even expected that CHWY might reduce its expectations as many e-commerce retailers have done recently.

Bright Future Ahead

Despite the near-term problems and challenges, the long-term future of the company remains bright. The U.S. pet retail industry was estimated to be $123 billion in 2021. Out of which, the online channel accounted for 37% of pet food sales late year. And it is further anticipated that the online channel will result in 55% of the overall pet food sales in the U.S. by 2025. Even though online shopping has seen a little decline since the pandemic surge, it is still here to stay and expected to keep blooming.

According to third-party estimates, CHWY had approximately 41% of the market share in the online pet retail segment. Being a dominant player in the market, the company is well-placed to further expand and grow its business while capitalizing on the increased adoption of online shopping ahead. For the longer run, analysts expect the company’s earnings to clock a compound annual growth rate of a humungous 267% over the next five years.

Even for the current supply chain constrained situation, the company has started taking measures with Chewy Freight Services and import routing launch in Q1 2022. The company launched CFS in the Pheonix market in Q1 and now plans to scale it throughout 2022 and 2023. Both the CFS and import routing will help the company with overcoming the higher freight and transport costs.

CHWY’s Ratings & Valuation

The stock was recently upgraded by Zack’s Investment Research from a “strong sell” to a “hold”. Jefferies Financial Group has set it on a buy with a price target of $60 and Barclays an equal weight of $26. The average rating for CHWY at the moment is “Buy” and the average price target for the stock is $70.81.

Currently, the stock is trading at 1.2 times sales, much lower than the S&P 500’s average of 2.6.

Conclusion

The pet supply online retailer, like most equities, has had a hard time this year. A major reason for the downfall of CHWY, however, has been its quarterly financials, which have fallen below the expectations over the past three quarters. Numerous challenges, including macroeconomic instability, supply chain hurdles, and pandemic hype recovery, have played a part in the declining sales of the company so far. But despite the challenges, the company came out a winner in the latest earnings report, which was a beat on both the top and bottom lines. Even more so, the company’s guidance also was impressive given the headwinds and economic conditions.

But even if the company does not perform well in the short term, the long-term future of the company is very bright. With an average buy rating, strong valuation, and a price target with a huge upside, CHWY is a stock to have in one’s portfolio.