- Chewy reports Q1 earnings before the open on Wednesday.
- CHWY stock shoots up 28% on tripling of net income.
- Revenue beats consensus by $40 million, last year's total by 3%.
- CEO Sumit Singh adds $500 million buyback provision.
Chewy (CHWY), the online pet food retailer co-founded by Ryan Cohen of GameStop (GME) fame, has shot up 28% on Wednesday following a successful first quarter and the announcement of a share buyback policy. Shares are trading at the time of writing at $21.65 after closing Tuesday at $16.91.
The broad market is trending lower in the midweek bustle as hawkish comments from Minneapolis Fed Governor Neel Kashkari suggest that only two cuts to interest rates will appear late this year. This has pushed all three major indices — the S&P 500, NASDAQ and Dow Jones — lower to between -0.4% to -1.0%. The Dow Jones is backtracking more heavily as US Treasury yields rise.
Chewy earnings news
Chewy earned $0.31 in adjusted earnings per share (EPS) compared with consensus of $0.20. Revenue also bested consensus by coming in at $2.88 billion compared with $2.84 billion expected.
Revenue was up just 3% from a year ago, but net income nearly tripled from the same period. Including the consideration of stock-based compensation and taxes, net income rose from $22.9 million to $66.9 million. Though still slim, net income margin rose 150 basis points to 2.3%.
“Fiscal year 2024 is off to a solid start. We delivered strong net sales as well as record-breaking Adjusted EBITDA in the first quarter,” said Sumit Singh, Chief Executive Officer of Chewy.
The company has also instituted a $500 million share buyback program, which enticed the market to view Chewy as a safe bet since the repurchase program amounts to about 6% or more of the company’s market cap.
Gamestop FAQs
GameStop is a retailer of video games and gaming merchandise through its approximately 4,400 branded stores worldwide. More than 2,900 of these locations are in the United States. The company was founded in Dallas, Texas, in 1984 as Babbage’s but changed its name to GameStop in 1999. The company had revenue of $5.93 billion in 2022 but has been falling over the past decade as physical game purchases have been declining in favor of digital downloads directly from hardware providers like Sony’s Playstation, Microsoft’s XBox, Nintendo and the Steam platform. The company trades under the GME symbol on the New York Stock Exchange.
In January of 2021, retail stock traders that organized on Reddit’s r/WallStreetBets forum realized that GameStop’s short ratio exceeded its float through the use of naked shorts. This information circulated until a group of traders decided to buy up the small amount of shares that were available. This caused the price to jump 1,500% in a famous short squeeze that month when short-sellers were forced to repurchase shares to close their short positions at higher and higher prices. Traders like Keith Gill walked away with millions of dollars in profits, while hedge funds like Melvin Capital and White Square Capital would eventually shutter due to extreme losses on their short positions. Traders on the Reddit forum made memes to proselytize their bets on GameStop, which helped the long trade proliferate. Later many of these same traders would glom onto new “meme stocks” like AMC Entertainment and Bed, Bath & Beyond.
In its most recent quarter, Q1 2023, GameStop saw revenue decline 10% YoY to $1.237 billion, which is pretty much par for the course. Much of the reduction in sales is due to declining game and collectible revenue, while hardware and merchandise sales have actually been increasing. GameStop has been making the most of the situation by cutting back on labor costs (SG&A) to the tune of $100 million YoY. These cost-cutting measures led GameStop to cut its net loss YoY by two-thirds to about $50 million. With more than $1 billion in cash on its balance sheet, so its backers think it has enough runway to become profitable again. Out of 12 recent analyst marks, the vast majority gave GME stock a “Hold” rating, while four analysts gave it a “Buy” or “Strong Buy”.
Ryan Cohen, the founder and former CEO of Chewy.com, made a large investment in GameStop in December 2020, preceding the stock’s epic short squeeze. Cohen became one of the most high-profile investors in the meme stock and later became Executive Chairman of the company. His tenure has resulted in a number of high-profile changes to management. A number of executives left GameStop once Cohen arrived, and he is said to have used his perch to install new executives from Chewy and Amazon in key positions. Cohen owns approximately 12% of the company.
Chewy stock forecast
Chewy stock has been drifting into a three-year downtrend that began when the pet retailer hit an all-time high of $120.00 in February 2021. Even after Wednesday's rally, CHWY still trades near the bottom of its March 2020 pandemic-caused nadir. It only broke back below that level last fall before finding support near $15.00.
The 20-day Exponential Moving Average (EMA) has broken above its 50-day counterpart on Wednesday. But in order to end its three-year downtrend, CHWY needs to break above the prior range high of $25.24 and general resistance at $25.00.
CHWY daily stock chart
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