Investing in Chewy will require more than an earnings report

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As long as short interest remains elevated, the overall picture for CHWY stock is murky

As long as short interest remains elevated, the overall picture for CHWY stock is murky

Shareholders of Soft (NYSE: CHWY) get some relief from the title’s relentless sell-off. At the end of the day, CHWY stock is up 23.8% on a strong earnings report. The online retailer of all things pet not only exceeded earnings per share expectations, but also posted a surprise profit of three cents per share.

Chewy also posted revenue of $2.43 billion, slightly above the $2.41 billion expected by analysts. This is also an increase from the $2.39 billion the company delivered in the prior quarter. And that was a 13% year-over-year (YOY) increase from the same quarter in 2021.

But before you decide to participate in this CHWY stock rally, let’s take a look at the good, and not so good, that’s going on with the online retailer.

A bullish revenue story emerges

Dig into the business revenue report, and more particularly the conference call with the analysts, there are two things that stood out to me. First, Chewy is doing a good job of growing its net sales per active customer (NSPAC). This is a key metric that analysts use to determine the possibility of long-term revenue growth.

In the first quarter, the company increased the NSPAC by 15%. The $446 is an all-time high. And management was quick to point out that many of these customers were acquired within the last three years (i.e. the pandemic). This speaks to the fact that some behaviors have changed and customers are unlikely to revert to their old patterns.

For what it’s worth, the company cited internal data to show that between the first and fifth year of being a customer, the customer’s total spend rose from $200 to $700. This means that the NSPAC number is likely to continue to increase. And the company also continues to expand its customer base, suggesting that this quarter’s earnings report may not be a fluke.

Will stronger margins mean stronger revenues?

As promising as the earnings outlook appears to be, it does not entirely explain the sharp rise in earnings. To get there, it suggests that the company sees an improvement in its margin. And that seems to be the case.

Gross margin increased by 210 basis points compared to the previous year. And although it is still down 10 basis points on an annual basis. Considering that Chewy, like all e-commerce retailers, is facing rising shipping costs, this is an encouraging number.

This is where things get cloudy

Despite all the positives from the earnings report, short-term interest in CHWY shares remains uncomfortably high at more than 20%. On the one hand, it gives reason to believe that what is happening with the stock today could be the beginning of a short squeeze. And as investors have seen in 2021, that could mean there’s more upside to come.

But it also means that the stock is not progressing on the basis of a fair notion of its real value. This benefits because investors are rushing to cover their short positions.

In all fairness, the analysts followed by market beat give stock CHWY $63.45 price target an increase of 120% compared to the current price. Significantly, that would take the title a striking distance from the all-time high it hit in early 2021.

Should you take a bite out of CHWY stock?

If you don’t currently have a position in the stock, I think this is one for the watchlist. Short squeezes can reverse pretty quickly, and you don’t want to become the biggest fool. However, let another quarter play out and if the company’s bullish outlook for revenue and earnings plays out as expected, there may be another opportunity when short-term interests move to less troublesome levels.

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