What happened

Shares of pet-centric e-commerce company Chewy (CHWY 0.25%) plunged on Wednesday following the company's release of financial results for the second quarter of 2022. Surprisingly, pet owners are cutting back. And this is why Chewy stock was down 9% as of 1:20 p.m. ET.

So what

In Q2, Chewy's net sales only increased 13% year over year to $2.4 billion, a sharp deceleration from its nearly 27% net sales growth rate in the same quarter last year. One of the biggest reasons for its slowdown was its stagnating customer base. At the end of the quarter, Chewy had 20.5 million active customers, only 2% more than this time last year.

Chewy's net sales per active customer were up 14% year over year to $462, an encouraging sign. However, this number might have been even higher if not for inflation. Since costs are going up, Chewy and other pet companies are charging higher prices. And Chewy's management noted that pet owners are consequently cutting back on discretionary purchases.

With consumers cutting back on some items, Chewy's management reduced its full-year revenue guidance. Previously it guided for net sales of at least $10.2 billion. Now it's guiding for $10 billion at most. And stagnating growth and lower guidance had investors understandably disappointed today.

Now what

Chewy's stock performance today may have been worse if not for a pleasant profitability surprise in Q2. Almost miraculously, its gross profit margin improved thanks to price increases and better logistics management. And the company was also free-cash-flow positive ($1 million) even though it spent $48 million on infrastructure. 

Chewy's infrastructure is a real competitive advantage as it grows -- it will be hard for another company to replicate what it's built so far. And if the company is already turning the corner on profitability, the stock could be destined for better days in the future.