What happened

Shares of online pet retailer Chewy (CHWY 1.91%) fell out of the gate on Dec. 10, dropping a quick 10% in early trading. The loss wasn't a surprise, however, as investors digested the company's after-the-close third-quarter 2021 earnings update from Dec. 9. The results themselves were a bit mixed, but it's the trend that's likely the real problem.

So what

The third quarter's results showed a number of very big positives. For example, sales of just over $2.2 billion increased 24.1% compared to the third quarter of 2020. Of that total, sales to customers using "autoship" increased 26.7% to 70.6% of overall sales. These are customers who set their purchases of food and other items to recur regularly, making them almost an annuity-like income stream. Meanwhile, Chewy's active customer count increased 14.7% year over year, and sales per active customer jumped 15.4%. That's all very good news for a still-growing company, given that Chewy also recently entered the pet insurance sector and has been working with veterinary practices to integrate the online retailer's services into their practices (creating another revenue source for the vet and adding respected promotors/sellers for Chewy). That said, the company lost $0.08 per share in the quarter, in line with the same period last year. But red ink is not uncommon for a growth-oriented company. All in all, shareholders should probably be pleased with the quarter despite the loss.

A dog eating from a bowl with a child.

Image source: Getty Images.

So why did Wall Street take a glass-half-empty approach today? The answer is likely found in the broader sales trend. When the pandemic hit and people were left hiding in their homes, demand for Chewy's services spiked because people were socially distancing (and thus not going to physical stores as much) and there was an uptick in pet adoptions. So Chewy was one of those companies that actually benefited from the changes brought about by the coronavirus. Those sales gains, however, have slowed down in 2021. For example, while the sales increase of 24.1% in the third quarter of 2021 is impressive on an absolute basis, it pales in comparison to the 45% year-over-year sales gain witnessed in the third quarter of 2020. This has been an ongoing issue.

Investors often extend trends too far into the future, expecting outsize performance to continue, it sometimes seems, indefinitely. That usually doesn't happen, and growth at growth companies eventually slows down as they gain scale. The company could still be traversing a desirable path, but when growth falls short of investors' elevated expectations, Wall Street can still take a dim view of a company's financial performance. That's likely what's going on with Chewy's results today despite the still-impressive sales growth the retailer achieved in the quarter.

Now what

In fairness to the bears out there, Chewy's story isn't quite as good as it was in the early days of the pandemic. However, that doesn't mean that the long-term outlook has turned negative. At this point it just seems this fast-growing pet retailer is maturing and, as is normal, growth is starting to slow down. If you are a long-term investor, you'll want to make sure you properly balance the long term with the short term here so you can set proper expectations. Indeed, at this point, Chewy still seems to have a bright future, especially with so many customers trusting it enough to set their purchases on autopilot.