Shares of pet-goods e-commerce company Chewy (CHWY 21.57%) rose by 12.3% in October, according to data provided by S&P Global Market Intelligence, in contrast to the S&P 500 index, which fell by almost 3%. The stock gained ground steadily throughout the month before receiving an outsize boost late after it announced a new telehealth service for pets on Oct. 28. However, it then gave back some of its gains, possibly because of uncertainty related to the company's relationship with PetSmart.
The COVID-19 pandemic has driven a large share of retail sales out of brick-and-mortar stores and into e-commerce channels, and pure-play online sellers like Chewy have benefited. Investors naturally have taken note of the trend. But the company attracted even more bulls after it announced that it would be rolling out its Connect With A Vet program across the country. Though it's available only to customers enrolled in Chewy's auto-ship program, the telehealth service is free, and addresses one of the challenges presented by physical-distancing guidelines. Investors responded by sending the stock higher.
However, on Oct. 30, reports surfaced that PetSmart wasn't following through with a previously planned $4.65 billion debt sale. The deal was designed to support the complete separation of PetSmart from Chewy, but market conditions aren't cooperating. In other words, PetSmart hadn't drawn enough buyers of its junk bonds to make it work. Chewy stock dipped after that news broke.
In Chewy's 2019 annual report, there was an entire section detailing eight risk factors related to its relationship with PetSmart. Even though Chewy functions independently, PetSmart is still technically its parent company and controls most of the voting power. For Chewy's retail investors, it would be a good thing if these two companies completely separated. At this point, it's unclear when that will happen.
That said, PetSmart's large ownership stake doesn't detract from Chewy's real successes in 2020. The company has gained a significant number of new customers during the COVID-19 pandemic and many of them are likely to keep patronizing it for the long term. For now, management needs to continue focusing on increasing the efficiency of its operations and turning this into a profitable business.