What happened
Shares of Chewy (CHWY 2.99%) were down 11% as of 10:18 a.m. ET on Thursday after the company's second-quarter earnings release.
The online pet care supplier reported sales growth of 14.3% over the year-ago quarter, with adjusted earnings per share remaining flat year over year at $0.15. However, what seemed to spook the market were comments from management that consumers are starting to trade down for value amid high inflation.
So what
All the key financial metrics looked healthy. In addition to stable sales growth over the first quarter and profitability, autoship customer sales were up 18% year over year, with net sales per active customer also up 14.7%. Autoship sales are a key strength for Chewy's business. These recurring sales made up 75.5% of total sales in the quarter, up from 72.6% a year ago.
But during the earnings call with analysts, management mentioned that customers are trading down to lower-priced pet food. What's more, Chewy's active customers decreased by 0.6% year over year. Wall Street sees this as a sign of increasing competition from Amazon and Walmart, but it could also reflect a broader slowdown in pet ownership amid high inflation.
Management reminded investors that household formation has been muted in this inflationary environment. There are a lot of variables in the broader economy that makes forecasting consumer behavior difficult right now. Indeed, the cost of pet care has increased with the price of everything else, which could be weighing on its customer growth.
Now what
For signs of the negative impact from competition, investors will want to monitor Chewy's margins in the coming quarters. Gross margin increased 20 basis points to 28.3% in the quarter, which means the company is not having to discount goods to compete. The promotional activity was higher in the quarter, but management noted it was "largely rational." This might indicate the concerns over competition are overblown.
