Why Chewy Stock Is Sinking This Week

Key Points

• Chewy's stock dropped due to conservative guidance.

• However, the online pet goods retailer is firing on all cylinders, operationally.

• Chewy's focus on numerous higher-margin business ideas could boost profits.

• 10 stocks we like better than Chewy ›

Shares of leading online pet goods retailer Chewy (NYSE: CHWY) are down 15% this week as of 1 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence. Chewy reported second-quarter earnings on Wednesday, delivering a 9% increase in sales and a 38% rise in adjusted earnings per share (EPS).

However, management guided for a slower 7.5% sales growth and just $0.30 in adjusted EPS (down from $0.33 in Q2) in its upcoming quarter, prompting this week's sell-off.

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Market reaction aside, Chewy is firing on all cylinders

Drops like these are peculiar. Yes, guidance was a bit conservative, but there's a solid chance that Chewy ends up beating its estimates anyway in the upcoming quarter.

Image source: Getty Images.

And as for the company's actual Q2 results, things look great.

Not only were sales up 9%, but Chewy's autoship sales (such as recurring dog food purchases) rose 15% -- now accounting for 83% of the company's total sales. These figures indicate that the majority of Chewy's sales are recurring, predictable, and stable, establishing a substantial sales base that should only grow over time.

On top of this stability, the company is diving into numerous higher-margin verticals, such as:

• Sponsored ads, which were a key driver for Chewy's gross margin rising 90 basis points
• Chewy+, a new $49 per year membership program, which already equalled 3% of sales in July
• The launch of Get Real, a private-label, fresh dog food brand with premium pricing potential
• The opening of 20 total Chewy Vet Care locations by year's end, bringing higher margins from the veterinary industry

Trading at 29 times forward earnings and with its profit margins set to continue improving over time, Chewy remains one of my favorite stocks right now -- even after rising 29% over the last year.

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Josh Kohn-Lindquist has positions in Chewy. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.