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Why Chewy Stock (Only) Rose 15% in April

By Jon Quast – May 7, 2020 at 11:01AM

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Encouraging first-quarter guidance sent the stock flying, but analyst downgrades brought shares back down before April ended.

What happened

Pet-product business Chewy (CHWY 6.09%) kicked April off by reporting full-year 2019 earnings and reporting higher sales volume due to COVID-19. This resulted in shares of Chewy rising 15.3% in April, according to data provided by S&P Global Market Intelligence.

April's gain doesn't tell the whole story. Chewy stock has risen over 40% in 2020, and has recovered over 75% from March lows. This rapid rise led some analysts to declare the stock overvalued, which prevented further gains in April.

CHWY Chart

CHWY data by YCharts

So what

In the third quarter of 2019, Chewy reported quarterly net-sales growth of 40% year over year. That growth rate fell to 35% in the fourth quarter. But with the COVID-19 pandemic affecting consumer behavior, management noted sales picking up in late February and continuing to grow until now. Because of this, it issued sales guidance for the upcoming first quarter of 2020 (a rarity this year) of $1.50 billion to $1.52 billion. That would be 35% to 37% year-over-year growth -- a sequential acceleration. 

E-commerce retail stocks have been popular with investors during the coronavirus anyway. But with Chewy reporting upbeat guidance, the stock quickly rallied from March lows. The rapid rise led a couple of analysts to downgrade the stock from buy to hold. This is what caused shares to dip again slightly at the end of April.

A woman walks four dogs.

Image source: Getty Images.

Now what

If I were a Chewy shareholder, I would be looking past analyst comments and short-term sales trends at the long term. In particular, next quarter I'd like to know if Chewy is acquiring new customers at an increased rate because of coronavirus, or if existing customers merely made temporarily larger purchases in fear of a supply shortage. If customer growth accelerates, that means this health crisis is driving Chewy adoption -- an enduring positive factor. 

Furthermore, I'd be keeping tabs on the progress of Chewy's new Pennsylvania fulfillment center. Slated to open in 2020, it will be more automated than its previous 10 fulfillment centers. This automation is intended to enable higher volume and lower costs, increasing profitability. Considering the company reported a net loss of $252 million in 2019, any improvements to profitability are crucial for its long-term viability.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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