Why Chewy Shares Rocketed Higher Today

Shares of pet supply e-commerce platform Chewy (CHWY 28.79%) were rising on Wednesday, trading up 27% as of 11 a.m. ET.

The company reported earnings this morning that came in well ahead of expectations, while also announcing a new share repurchase program. Investors liked what they heard, sending shares rocketing higher. But they also might want to be cautious about further gains from here.

A pet industry and Chewy recovery?

For context, Chewy’s stock had been down about 28% year to date before earnings, so this pop was really just the company getting back to even for the year. The consumer pet-care industry has been struggling because adoption rates have slowed from the pandemic levels, and high interest rates are denting consumer spending.

Are there early signs of a recovery? In the first quarter, Chewy reported 3.1% revenue growth to $2.88 billion, beating expectations of $2.85 billion, and adjusted earnings per share of $0.31 beat expectations of $0.20.

The results were all the more impressive in light of the fact that the company continues to shed customers; the active customer count fell 2.1%. However, average revenue per customer was up a healthy 9.6%.

And the percentage of customers who used the autoship feature — which gives a discount in exchange for setting up recurring automatic shipments — grew from 75.2% one year ago to 77.6% in the first quarter. Even with the discounts, autoship adoption is a positive sign because it turns the Chewy customer into a “stickier” user with more recurring revenue, which investors love.

Also important in these times of higher interest rates, Chewy achieved positive profitability, with its adjusted margin under earnings before interest, taxes, depreciation, and amortization (EBITDA) expanding to 5.7% from 4% in the year-ago quarter.

Lastly, the board authorized a $500 million share repurchase program — equal to about 5.4% of the company’s market cap at this valuation after today’s rally. Chewy can afford it, with over $1.1 billion in cash on the balance sheet and no debt.

Investors should still be cautious

This was a nice rebound for Chewy, whose stock had likely fallen a bit too far, but investors might wish to curb their enthusiasm after today’s rally, which could be a result of short covering.

While only about 5.2% of Chewy’s stock was sold short as of May 15, that actually amounted to nearly 20% of the publicly traded float. When short interest is that high, even small beats can force short-sellers to cover en masse. But the pop could be short-lived.

The bigger issue is that Chewy is still shedding customers. Management appears to be executing flawlessly in boosting revenue per user and expanding margins, but it’s hard to get overly enthusiastic about the company until its customer count starts rising again.