Institutions choke on results from Chewy, Inc

Institutions have taken large stakes in Chewy, Inc (NYSE:CHWY) over the past two years, driving institutional ownership to nearly 100%. That's quite a feat considering the short interest is also hovering around 25%, so there's quite a bit of stock in the market. The net of institutional activity, however, shifted in favor of the bears in calendar Q2, so don't start thinking a short squeeze is about to happen. Not only has institutional selling intensity increased from Q2 to Q3, but earnings results are not a catalyst for higher prices. On the contrary, the release of second quarter results will only intensify shorting and institutional selling and bring the stock back to its recent lows. The question is whether the market will hold at these lows or if this stock heads into the single digits.

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Chewy reports strong, guides weak

Chewy had a strong quarter with revenue growth of 12.5%, but this may be the last quarter of strong growth. The $2.43 billion in revenue missed the consensus figure by 80 basis points and the commentary is not favourable. Company CEO Sumit Singh said consumers were opting out of discretionary items and advice had been reduced. Looking to the second quarter, revenue strength was driven by a 14.4% increase in net spend per active customer and a 2.1% increase in active customers offset by lower new customer acquisitions. Active customers now exceed 20.1 million and are driving strong gains in the company's auto-delivery segment, which is key for investors. Autoship grew 17.3% year-over-year and accounted for 73.1% of revenue.

Going down to the margin, the news improves but it is still overshadowed by the indications. The company said gross and operating margins both widened, with net margin up 170 basis points from a year ago. This generated EPS of $0.05 per share, which was well above expectations and beat the consensus of $0.16. The bad news is that the forecast for the third quarter is weak and the outlook for the full year has been cut to a range below consensus.

The company now expects just $9.95 billion in revenue for the fiscal year, down from $10.3 billion previously and below the consensus estimate of $10.26 billion. Assuming consumer trends continue to deteriorate as they have been, the forecasts might be overly optimistic. The company also reported a 40% year-on-year increase in inventory, which could play a role in compressing margins later in the year if rebate and clearance actions come into play.

Analysts cut Chewy, Inc targets

Analysts cut targets for Chewy, Inc. stock prices, but sentiment is still bullish. Analysts rate the stock as a Moderate Buy and have it for the past year, but the price target is down. The consensus price target is down 50% in the past 12 months, but still 50% above price action, so there will be a bounce in action at some point. The takeaway from analyst discussions is that short-term headwinds are impacting the business, but long-term growth prospects remain intact.

The Technical Outlook: Chewy Could Hit Bottom

Chewy, Inc may be at its lowest, but the move is still in play, so there is significant risk to the outlook. The stock rebounded from the $22.50 level earlier this year and is now back to that level. If support starts at $22.50 or higher, investors should expect price action to enter a trading range, if not to the upside. If the market can't hold the price at $22.50, however, shares of Chewy, Inc could head into the single-digit range.

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