Chewy (NYSE:CHWY) is all set to release its fiscal 2021 third-quarter results after the market closes on Thursday, Dec. 9, and investors will be hoping for a strong showing from the online retailer of pet supplies that has struggled on the stock market so far this year.

CHWY Chart

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The chart above is proof that Chewy stock has been a massive underperformer in 2021, which seems a tad surprising given the impressive growth of its customer base, an increase in spending by pet parents, and a rapidly rising top line. However, the company's upcoming earnings report could breathe life into the stock and help it close the year on a high. Let's see why that may be the case.

Chewy could deliver on expectations this time

Chewy posted a wider-than-expected loss when it had released its Q2 results on Sept. 1 thanks to the increased investments made in "wages, benefits, and hiring incentives across our fulfillment network in order to maintain customer experience and business continuity." The company also increased its marketing expenses as a percentage of sales last quarter in a bid to drive strong customer acquisition for the long run.

Chewy also struggled due to supply shortages in the second quarter, which led to elevated out-of-stock levels and hurt sales. The higher expenses and lower sales led Chewy to post an adjusted loss of $0.04 per share last quarter, which was slightly higher than Wall Street's expectations of a loss of $0.02 per share.

Dachshund sleeping on a bed with an eye mask.

Image source: Getty Images.

Chewy expects $2.21 billion in Q3 revenue at the midpoint of its guidance range, which would translate into a 24% jump over the prior-year period. Wall Street's expectations are in line with Chewy's revenue estimate, while analysts expect the company to reduce its adjusted net loss per share to $0.04 from the year-ago period's net loss of $0.08 per share.

There are a couple of reasons why Chewy could do better than Q2 and meet expectations this time. First, it looks like online pet retailers have been able to successfully pass on cost increments to customers. This is evident from rival Petco's recent results, whose CEO Ron Coughlin remarked on the November earnings conference call that:

On inflation, like the broader marketplace, we have seen some price increases on vendor-supplied product that we have been able to pass through. The high end of the pet category where we focus is highly inelastic. In an aggregate, we haven't seen an impact on unit volumes.

A similar scenario at Chewy could help ease some of the pressure arising out of higher costs, and help it meet Wall Street's bottom-line expectations. The second factor that may boost Chewy's top and bottom lines in Q3 is the increase in customer spending. Chewy recorded a 13.5% year-over-year increase in net sales per active customer (NSPAC) in the second quarter.

This was the first time Chewy's NSPAC crossed the $400 mark, and it was a meaningful acceleration over the previous quarters.

Metric

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Net sales per active customer

$357

$356

$363

$372

$388

$404

Year-over-year growth

6.6%

3.2%

2.8%

3.3%

8.7%

13.5%

Data source: Chewy's quarterly shareholder letters.

Chewy could witness a nice bump in the NSPAC once again in Q3, as its customers tend to spend more money as time passes. It estimates that customers spend $700 in their fifth year with the company, compared to $400 in the second year, which means that long-term Chewy clients are likely to have increased their spending.

All of this indicates that Chewy could spring a positive surprise when it releases its quarterly results.

Why it makes sense to buy before earnings

Chewy trades at 3.44 times sales, which is a discount to the company's 2020 sales multiple of 5.6. What's worth noting is that Chewy is on track to end the fiscal year with sales growth between 25% and 26%, and it could maintain such impressive growth levels thanks to its strong share in the fast-growing online pet retail market.

That's why investors looking to get into a high-growth company that could deliver healthy upside in the long run should take a closer look at Chewy before its earnings report, as the stock could break out thanks to a strong set of numbers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.