Why Chewy stock skyrocketed today

Shares in an e-commerce platform for pet supplies Chewing (NYSE: CHWY) rose on Wednesday, reaching 27% as of 11 a.m. ET.

The company reported earnings this morning that far exceeded expectations, while also announcing a new share repurchase program. Investors liked what they heard, which sent the stock soaring. However, they may also want to be cautious about further profits from this.

The pet industry and Chewy’s recovery?

For context, Chewy’s stock is down about 28% from the year before the earnings, so this gain was really just the company getting back to even-line levels this year. The consumer pet care industry is struggling as adoption rates have declined from pandemic levels and high interest rates have limited consumer spending.

Are there already the first signs of recovery? In the first quarter, Chewy reported revenue growth of 3.1% to $2.88 billion, beating expectations of $2.85 billion, and adjusted earnings per share of $0.31 beat expectations of $0.20.

The results were even more impressive as the company continued to lose customers; the number of active customers decreased by 2.1%. However, average revenue per customer increased significantly by 9.6%.

The percentage of customers who took advantage of the autoship feature – which gives you a discount in exchange for setting up recurring automatic shipments – increased from 75.2% a year ago to 77.6% in the first quarter. Even after discounts are taken into account, the adoption of autoship is a positive sign because it turns the Chewy customer into a “more persistent” user with more recurring revenue, which investors love.

Importantly, in an era of higher interest rates, Chewy achieved positive profitability, with its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin increasing to 5.7% from 4% in the year-ago quarter.

Finally, the board approved a $500 million share repurchase program – representing approximately 5.4% of the company’s market capitalization at this valuation after today’s rally. Chewy can afford this with over $1.1 billion in cash on its balance sheet and no debt.

Investors should continue to exercise caution

It was a nice rebound for Chewy, whose shares have probably fallen a bit too much, but investors may want to temper their enthusiasm after today’s rally, which may be the result of short covering.

Although only about 5.2% of Chewy’s shares were sold short as of May 15, this actually represented almost 20% of the company’s publicly traded shares. When the short interest rate is this high, even small hits can force short sellers to cover their trades en masse. But pop can be short-lived.

The bigger problem is that Chewy continues to lose customers. Management appears to be doing a great job of growing revenue per user and increasing margins, but it’s hard to be too enthusiastic about the company until its customer numbers start growing again.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool takes positions on and recommends Chewy. The Motley Fool has a disclosure policy.

Why Chewy Stock Skyrocketed Today was originally published by The Motley Fool