As long as short interest remains high, the overall impression of CHWY stock is subdued
shareholders a Tough (NYSE: DU) are getting some relief from the stock’s relentless sell-off. In late-day trading, CHWY stock is up 23.8% on a strong earnings report. The online pet retailer not only beat expectations for earnings per share, but also posted a surprise profit of three cents per share.
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Chewy also posted revenue of $2.43 billion, slightly higher than the $2.41 billion expected by analysts. It was also an increase from the $2.39 billion the company shipped in the previous quarter. And it was up 13% year-on-year (YOY) over 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 about what’s going on with the online retailer.
A bullish sales history is emerging
Looking at the company’s earnings report, and specifically the analyst conference call, two things struck me. First, Chewy is doing a good job growing its net revenue per active customer (NSPAC). It’s a key metric that analysts use to forecast the possibility of long-term revenue growth.
In the first quarter, the company increased NSPAC by 15%. The $446 is an all-time high. And management was quick to point out that many of those customers were acquired in the past three years (ie, during the pandemic). This suggests that certain behaviors have changed and customers are unlikely to return to their old patterns.
For what it’s worth, the company cited internal data showing that the customer’s total spend increased from $200 to $700 between their first and fifth year as a customer. That means the NSPAC count is likely to keep rising. And the company continues to grow its customer base, suggesting this quarter’s earnings report could be no fluke.
Will stronger margins lead to stronger revenues?
As promising as the revenue outlook may seem, it doesn’t fully explain the sharp rise in earnings. To get there, it suggests the company is seeing margin improvement. And that seems to be the case.
Gross margin increased 210 basis points year over year. And while it’s still down 10 basis points year-over-year. Considering that Chewy, like all e-commerce retailers, has been struggling with increased freight costs, this is an encouraging number.
It’s getting cloudy here
Despite all the positive insights from the earnings report, the short interest rate on CHWY shares remains uncomfortably high at over 20%. On the one hand, this gives reason to believe that what is happening to the stock today could be the start of a short squeeze. And as investors saw in 2021, that could mean there’s still more upside to come.
But it also means the stock won’t move higher based on a fair idea of its true value. It benefits as investors try to cover their short positions.
In fairness, analysts trailed by MarketBeat Give CHWY stock a target price of $63.45, up 120% from the current price. Significantly, that would put the stock within striking distance of 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 to watch list. Short squeezes can reverse pretty quickly and you don’t want to be the bigger fool. Play through another quarter, however, and if the company’s optimistic sales and earnings outlook performs as expected, another opportunity could arise when short-term interest rates reach less problematic levels.