Chewy's stock drops, as Wall Street may have gotten too excited ahead of earnings

By Tomi Kilgore

Online pet-products retailer matches profit expectations and its revenue slightly beats, but stock pulls back after recent sharp rally

Chewy's stock dropped early Wednesday, as just matching earnings expectations wasn't good enough for investors.

Shares of Chewy Inc. stumbled in early trading Wednesday, as the online seller of pet products reported fiscal second-quarter earnings that matched analysts' projections but that weren't good enough to satisfy Wall Street's high expectations.

The earnings report comes after the stock (CHWY) rallied 16.6% over the past month through Tuesday, compared with the S&P 500 index's SPX gain of 1.9% over the same period. The pre-earnings bullishness was highlighted by Mizuho's upgrade of the stock on Monday, with the firm citing expectations of "another strong print and positive catalyst."

The stock sank 9.6% in premarket trading, reversing an earlier gain of more than 4% just before the earnings were released.

For the quarter to Aug. 3, net income fell to $62.2 million from $299.4 million in the same period a year ago. Meanwhile, adjusted earnings per share - which excludes nonrecurring items such as share-based compensation expenses in the latest quarter and a deferred tax asset release last year - rose to 33 cents from 24 cents, in line with the average analyst estimate compiled by FactSet of 33 cents.

When Mizuho upgraded the stock to outperform on Monday, analyst David Bellinger said he was expecting a beat by enough for the company to boost its outlook.

Net sales for the latest quarter grew 8.6% to $3.1 billion, just above the FactSet consensus of $3.08 billion. The results were boosted by a 15% increase in autoship sales, or deliveries set up by customers to automatically recur, which now represent a record 83% of total sales.

The number of active customers rose 4.5% to 20.9 million, above the FactSet consensus of 20.76 million.

The company said it was seeing strong adoption of its Chewy+ membership program, which is a good sign for future sales given that members are buying at a higher frequency and attaching more products to their orders than nonmembers.

Chief Executive Sumit Singh said on the post-earnings call with analysts that he expects Chewy+ sales to increase to about a mid-single-digit percentage of total sales at the end of the year, compared with 3% of total sales in July.

He noted, however, that the downside is that Chewy+ sales come at a lower gross margin rate - meaning they are less profitable - than regular sales. "We will remain disciplined in evaluating the program structure, including pricing and member benefits," Singh said, according to a FactSet transcript.

Looking ahead, Will Billings, Chewy's interim principal financial officer, said third-quarter adjusted EPS is expected to be 28 to 33 cents, which surrounds the current FactSet consensus of 31 cents. Net sales are expected to be between $3.07 billion and $3.1 billion, which is above current expectations of $3.05 billion.

-Tomi Kilgore

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09-10-25 0915ET