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Why Chewy Tanked 10% in September

By Andrew Tseng – Oct 9, 2020 at 7:18AM

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Here's why the stock took a breather after a strong run.

Shares of Chewy (CHWY -1.16%) tanked 10.2% in September, according to data from S&P Global Market Intelligence.

That move sent the stock of the online retailer of pet food and supplies from $61 per share to $55 during the month. For context, shares of Chewy were down 21% for the year in mid-March, but ended September up 89% for the year.

What happened

During September, Chewy reported strong fiscal second-quarter results, which showed 47% net sales growth and encouraging margin expansion. Gross profit margin improved to 25.5% in the quarter from 23.6% in the year-ago quarter, while active customers grew 38%. Clearly, the COVID-19 pandemic is helping more pet owners discover Chewy's convenient online shopping experience.

In addition, Chewy announced a secondary offering of 5.1 million additional shares at a price of $55.25 per share. The underwriter, Morgan Stanley, bought them all, and has an option to purchase another 725,000 shares, and plans to resell them into the market.

A golden retriever eats dog food out of a bowl.

Image source: Getty Images.

So what

Chewy's strong quarter wasn't really surprising to investors because the company's been growing very strongly for a while. It's also been seeing fairly consistent profit margin expansion as it gains scale efficiencies. So even though the quarter was strong, it wasn't strong enough to be a positive surprise to investors. That can lead to short-term sell-offs.

Plus, the sale of additional shares could signal that management thinks the stock is on the expensive side. While that's not always the case, and even management teams don't always get these sorts of calls right, the sale of additional stock tends to cause investors to temper their enthusiasm at least for a bit.

Now what

Chewy has a bright future as the leading online retail specialist in the pet category. As more of the category moves online over the long term, it's likely Chewy is going to continue to win a very healthy share of that growth. As that happens, the company should continue to improve its profit margin.

Eventually, Chewy plans to launch a marketplace of pet-related services, which should also contribute to improving profit margin. Investors who believe in the company's future might want to buy the dip.

Andrew Tseng 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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