3 reasons why Chewy Stock is not in favor of the market


soft (NYSE: CHWY), a former market darling, is falling out of favor with the market lately. The stock rose to $ 120 per share earlier this year and has since fallen almost in half, trading at $ 63 as of this writing.

The disgrace can be attributed to several reasons, including, but not limited to: rising labor and advertising costs, reopening of economies and supply shortages. Let’s take a closer look at these factors individually to understand why the market places such importance on them.

Image source: Getty Images.

Inflation circulates throughout the economy

In their second quarter conference call, management pointed to an imbalance between labor supply and demand. As a result, the costs of getting people to work for Chewy are increasing. The company invests (increasing salaries and bonuses) to generate applications and onboard enough people to meet the existing demand for its products. In total, the company spent $ 30 million, about twice as much as in the previous quarter.

Additionally, Chewy is an online retailer of pet products and services; he is probably buying online advertising from companies like Alphabet and Facebook. Both of these behemoths have reported substantial increases in the price per click and cost per impression that they charge businesses to market on their platforms. Speaking of the increase in advertising rates, Chewy CEO Sumit Singh said, “While this was expected to some extent, the magnitude of the increase in the second quarter was unprecedented.”

Economic reopening could slow sales growth

Chewy saw a nice increase in sales at the start of the pandemic. As people tried to avoid shopping in physical stores to avoid the risk of contracting the novel coronavirus, they spent more money online. In fiscal 2020, Chewy’s revenue increased 47% from the previous year.

Yet in recent months millions more have been vaccinated against COVID-19 and the economic reopening has accelerated. So investors are rightly concerned that increased consumer mobility could hurt the online pet retailer’s sales. Even though customers don’t spend money at another pet store when they go out, they allocate money elsewhere, leaving less income to spend on their pets.

Supply chain bottlenecks

Supply chain bottlenecks appear to abound in all sectors of today’s economy. Customer demand for the products is higher than before the pandemic. Meanwhile, fewer people are willing to work at going wages with a deadly virus still circulating. This has led to shortages of everything from materials to truck drivers and port workers.

Chewy experiences high levels of out-of-stock items that their customers typically purchase from the site. This causes it to miss sales and potentially lose customers who might turn to another retailer who has sourced the desired product.

Overall, these are significant headwinds and investors have reason to be concerned about their impacts on Chewy’s business. That said, Chewy reiterated its earnings outlook and earnings for the year when it released its second quarter results. Moreover, the challenges, however persistent they may be, are temporary and are expected to ease as global economies emerge from the coronavirus-related disruptions.

While a decline in Chewy stock prices was to be expected, a fall from $ 120 to $ 63 could be an overshoot.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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