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Chewy Q3 Earnings: Grappling With Supply Chain Bottlenecks

By Parkev Tatevosian, CFA – Dec 5, 2021 at 8:00AM

Key Points

  • Analysts and management align in forecasting 24% revenue growth in Q3.
  • Chewy is finding it difficult to maintain enough supply to fulfill customer demand.
  • Chewy's stock price is down 24% in 2021.

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The pet retailer is sustaining revenue growth despite economies reopening.

Chewy (CHWY 1.36%) is scheduled to report fiscal third-quarter earnings on Thursday, Dec. 9. Investors are anxious for an update on how the online pet retailer is doing.

The relatively young public company was a big winner at the onset of the pandemic. Pet parents still needed to buy food and essentials for their furry friends, and pet adoption rates increased during the pandemic as people were spending more time at home.

Moreover, folks were looking to avoid shopping in person, which became an added tailwind for the e-commerce specialist. Now that world economies are reopening, Chewy faces a new challenge -- supply chain disruptions causing product shortages and rising costs. Thursday's report should provide some news on how management is handling the current economic situation.

A dog wearing a Santa hat and running.

Chewy's stock is down 24% in 2021. Image source: Getty Images.

Customers are increasingly seeing items out of stock at Chewy

Chewy reported sales of $2.16 billion in its fiscal second quarter (which ended Aug. 1), a 27% increase from the same quarter a year earlier. Still, management noted then that the company did not have sufficient supply in Q2. Customers looking for items to buy were discovering some were out of stock. This was the case in Q1 as well and although the trend improved from the first quarter, it is still higher than management would like. Sometimes when customers find the desired item out of stock, they will substitute a similar product, a scenario that does not hurt the retailer much. However, sometimes customers will go to another store or website to buy the desired product. That can create problems.

Interestingly, one benefit of supply chain disruptions is that it is reducing promotions or discounts industrywide. This is what CEO Sumit Singh said in response to a question on the matter in the Q2 conference call: "So far -- this is actually directly correlated to the way supply chain and out-of-stock issues and overall freight conditions improve. And so, so far, we are continuing to assume a stable and relatively muted promotional environment as we move into the back half of the year."

That seems rational. With fewer products to sell, pet companies are offering fewer discounts and promotions. And that is having the effect of increasing profit margins. Indeed, in its most recent quarter, Chewy's gross profit margin reached 27.5%, 200 basis points higher than last year and the highest it has ever been. 

Will Q3 results unlock stock price appreciation for Chewy? 

Analysts on Wall Street expect Chewy to report sales of $2.21 billion and a loss per share of $0.04. The revenue expectation for Q3 on Wall Street is right at the midpoint of the guidance for 24% revenue growth management provided along with its second-quarter earnings release. It isn't always the case that management and Wall Street align on expectations. 

Chewy's stock price is down 23.6% on the year as investors worry about its prospects amid reopening economies. The company benefited as people preferred shopping from home at the pandemic onset, and investors are now worried that customers could revert to old habits as they feel safer leaving their homes. So far, earnings suggest that's not playing out, and Chewy continues to report robust revenue growth. If management can show it's been adept at handling supply chain disruptions when it reports Q3 results on Dec. 9, that might be the catalyst that lifts Chewy's stock higher.

Parkev Tatevosian owns shares of Chewy, Inc. The Motley Fool owns shares of and recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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