What happened

Shares of online pet retailer Chewy (CHWY 2.99%) fell 29.3% in August, according to data from S&P Global Market Intelligence.

As a growth stock with little in the way of current profits, Chewy was hammered throughout the month as worries over inflation reignited and long-term interest rates rose.

The month was capped off with Chewy's Aug. 30 earnings report, which, while beating analyst expectations, showed a worrying decline in active users and cautious commentary from management.

So what

In the second quarter, Chewy saw revenue increase 14.3% to $2.78 billion, while adjusted (non-GAAP) earnings per share of $0.15 were relatively flat year over year. Still, both figures beat analyst expectations, and Chewy's stock initially surged in the after-hours trading immediately following the release.

However, the stock reversed to a big drop after investors dug into the details and digested management's commentary in the shareholder letter written by CEO Sumit Singh, who said:

Coming out of the summer months, we are sensing a shift in consumer mindset toward being more discerning, and at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice. This behavior is driven by a more fluid macro environment including high levels of inflation, which have been passed through the industry over the past 18 months... Now, while we are more insulated than some others, we are not fully exempt from the pressures currently facing the pet industry. Pet household formation remains relatively muted and the consumer mindset continues to be pressured. These factors, taken together, make the current environment a challenging period to forecast consumer behavior... Taking this into consideration, we continue to see potential for returning to net adds growth during the second half of this year, but in light of recent trends, we are now expecting a wider range of potential outcomes.

On that point, Chewy did continue to see a mild (0.6%) decline in active customers, even though spending per customer continued to rise. So, while Chewy does seem to have a very loyal customer base, investors may be left wondering how large its market opportunity is, and how much market share its service can really capture.

In addition to growth concerns, long-term bond yields rose in August as inflation worries came to the fore once again. Rising rates pressure growth stocks in two ways; first, higher rates lower the present value of future earnings. Second, higher rates may further pressure the consumer, leading to lower pet adoption and spending.

Now what

Chewy still has its fans. Just today, Sept. 6, research firm Argus upgraded Chewy to a buy rating on this dip, noting that a lot of Chewy's revenue comes from recurring auto-ship products, while the company continues to gain share in the pet health and pharmacy segment.

Still, even if Chewy executes well and maintains a loyal customer base, it will have to show that it can grow earnings much further to justify its 200 P/E ratio and forward P/E of 75.