What happened
Shareholders of Chewy (CHWY 0.32%) lost ground to the market early Wednesday. The pet supply retailer's stock was down 6% by 11:15 a.m. ET, compared to a 0.5% drop in the S&P 500. The company is currently trailing the broader market by a wide margin in 2022, down 32% so far in the year.
Wednesday's drop came as investors digested new earnings reports that painted a mixed picture about the health of consumer spending.
So what
Target, one of the country's biggest retailers, said in a pre-market earnings announcement that sales trends materially weakened in late October and into November. The company cited inflation, slowing economic growth, and rising interest rates for depressing customer traffic and making shoppers more price sensitive. Target lowered its short-term outlook and warned about falling profit margins as it cuts prices.
Chewy's business isn't as sensitive to economic growth trends. Nearly 80% of its sales are nondiscretionary: regular purchases like pet food. Yet the stock still tends to react to changes in investors' level of optimism about the economy. Robust economic growth helps it attract more customers and higher spending, after all.
Now what
But the company overcame economic pressures through July to post solid sales growth and improving profit margins. Shoppers did not balk at its price increases, and they continued to sign up for its subscription autoship service.
Chewy might report similarly strong results in its next earnings announcement in early December. Or management could sound a similar tone to Target's team in saying that shoppers are becoming more price conscious and spending less.
In either case, the long-term outlook is bright for this growth stock, and so investors might consider taking advantage of declines in the share price to establish a position.
