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Why Chewy Stock Fell on Friday

By Jon Quast – Sep 11, 2020 at 3:39PM

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The company had a strong quarter and upbeat guidance, but the CEO sold over $5 million in stock.

What happened

Shares of pet e-commerce company Chewy (CHWY -4.32%) fell on Friday after the company reported results for the second quarter of 2020. Growth was strong, and management was optimistic it can retain its newly acquired customers. As a result, many analyst firms raised their price targets on the stock. Nevertheless, Chewy stock was down 10% as of 3:15 p.m. EDT.

Part of the sell-off may be related to another piece of news that dropped yesterday. Prior to the earnings release, CEO Sumit Singh sold some of his Chewy stock.

A frustrated man lays his head on a table with a down, red stock chart in the background.

Image source: Getty Images.

So what

Chewy's Q2 net sales grew 47% year over year to $1.7 billion. The company has acquired 4.6 million new customers over the past year, and has added more new customers in the first half of 2020 than in all of 2019. And management is excited about this group of buyers. Their purchase habits are similar to those of people who have been Chewy customers for years, which suggests they may stick around long after the COVID-19 pandemic.

According to The Fly, many analysts loved the quarter enough to raise their price targets on Chewy stock. For example, Barclays raised its price target from $55 per share to $60 per share. And RBC Capital raised its price target from $62 per share to $74 per share. These actions typically lead to a stock going up. But insider selling may be overshadowing the otherwise strong quarter for Chewy.

On Sept. 9, CEO Singh sold around 79,000 shares of Chewy stock, according to a filing with the Securities and Exchange Commission (SEC). He sold in four separate transactions that grossed him around $5.5 million. He now owns just 11,000 shares, although he does directly own over 2.2 million additional restricted stock units that can convert to common stock over time.

Now what

In theory, if you were CEO with an inside perspective, you wouldn't sell your shares if you expected business to boom. In reality, CEO and insiders receive stock as part of their compensation. And they like to use their compensation to buy stuff, just like anybody else. It's why it's best to note insider transactions, but not read too much into it.

It's more important to focus on the business fundamentals for Chewy. Specifically, investors would be right to focus on customer retention in coming quarters. Demand for this growth stock's services literally surged overnight because of exogenous circumstances. It's the kind of rare opportunity that can't be squandered. 

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

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Stocks Mentioned

Chewy, Inc. Stock Quote
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Barclays PLC Stock Quote
Barclays PLC
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Royal Bank of Canada
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