What happened
Shares of pet e-commerce company Chewy (CHWY 2.99%) plunged 23.9% in September, according to data provided by S&P Global Market Intelligence. And while there wasn't any one thing driving its steady slide during the month, there were a few contributing factors.
For starters, the S&P 500 was down almost 5% in September, which is a substantial drop from a single month. For this reason, many stocks were down, including Chewy.
Additionally, investors appear to be thinking about the economy in general. According to The Conference Board's latest report on Sept. 26, consumer confidence is falling, and consumers say their current financial situations are getting worse. That's potentially bad news for a business like Chewy, which relies on discretionary purchases.
Finally, Chewy's management launched a mixed shelf offering on Sept. 15. A shelf offering gives the company flexibility to raise cash at its discretion in a variety of ways. But it doesn't say how much it plans to raise or when. While this could potentially be a good thing for shareholders, perhaps investors didn't like the lack of details.
So what
For evidence that the market is concerned about the economy, consider commentary from Wall Street analyst Rupesh Parikh of Oppenheimer. According to MarketWatch, Parikh downgraded Chewy stock from a buy rating to a hold rating on Sept. 20, citing weakness in consumer spend for pet food.
Parikh said the decline in spend for pet food was due to the "challenging backdrop," which is a common way for an analyst to talk about macroeconomic conditions.
Talk of a slowing economy and challenged consumer spend for pet food could impact any number of companies. But investors may be particularly jumpy when it comes to Chewy.
Here's why: In the second quarter of 2023, Chewy's net sales per active customer were $530 on a trailing-12-month basis. That was up 14.7% year over year, which is great. However, it accounted for the entirety of the company's top-line growth in Q2.
In other words, Chewy is failing to attract new customers. Therefore, it's relying on those customers to spend more. However, if those customers pull back on spending -- as Parikh believes they already are -- it could see its sales drop. No wonder the market may be a bit uneasy when it comes to Chewy stock.
Now what
Wall Street provides stock ratings based on a short-term outlook. Even when downgrading Chewy stock, Parikh said that the company still has good "long-term prospects." And considering the stock market can gyrate unpredictably over the near term, finding companies like Chewy with great long-term prospects is a sound strategy.
I agree when it comes to Chewy's long-term outlook. The company has built an impressive pet e-commerce business in the U.S. that is profitable. It has growth opportunities that can eventually help the top line. And maybe it has ideas that can be funded from the shelf offering.
Therefore, September's drop may be a gift for patient investors.
