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Chewy Q1 earnings beat estimates, stock rallies

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Yahoo Finance's Brad Smith and Brian Sozzi break down Chewy's stronger-than-expected quarter and the outlook for the e-commerce company as pandemic pet adoption slows.

Video Transcript

BRIAN SOZZI: And here is that opening bell. Kick off today's trading session.

[BELL]

And there we have that opening bell on Wall Street, sponsored, of course, by our friends at FlexShares. And again, lots of focus on Microsoft here. Of course, that Dow component warning, warning about their profits in their sales owing to FX headwinds.

But we did have some other companies and movers to watch here, Brad. We're watching Chewy. In the pre-market, shares were up about 16% here. That is after the company posted better than expected results. And coming into the session, a good shoutout, a good note from the folks over at Citigroup, that the short position in Chewy was about 25% of the flow coming into this report.

BRAD SMITH: Wow.

BRIAN SOZZI: So the shorts really be betting against another disappointing quarter from Chewy. They didn't necessarily get it, but I would argue this was not a clean quarter from the company. You had gross profit margin pressure. You had a miss on their auto ship customers, a little over 20 million, I believe. The Street was looking for something a little stronger. So not a clean quarter from Chewy, but perhaps just a little bit of a relief rally.

BRAD SMITH: Yeah, the gross margin actually declined about 10 basis points year over year, the company had noted. And then, additionally, you look at the net margin. That declined as well by about 100 basis points year over year. All these things considered, do the pandemic pet owners or the pandemic pet purchases or those furry friends that you allowed into your home, does that equate into future growth and consistent future growth and upselling from the Chewy side? Where can they continue to, as we had seen on the Petco front as well, a company that is very familiar with Chili-- or not Chili's, Chewy. I'm interrupting--

BRIAN SOZZI: That was the name of my former dog. No, not really.

BRAD SMITH: Yeah, I'm just putting a restaurant business inside the Chewtopia, if you will. But at the end of the day, it really does come back to where they can see some of the overlaps in services and products. We had seen more of these pet retailers leaning into insurance, other services that could become more sticky in creating this ecosystem here for them particularly.

But I think from what we heard from the company and chief executive officer of Chewy, Sumit Singh, saying that the fiscal year is off to a good start, 14% top line growth, sequential improvements in gross margin and profitability. But at the end of the day, that's a sequential year over year. That's what we really want to take a closer look at here at the end of the day as well to really get a sense of how much they're able to keep those customers in their overall ecosystem on a year in, year out basis.

BRIAN SOZZI: Yeah, worth noting-- right, and you're worth noting here. You saw Chewy shares up about 15% in the pre-market, see some of those gains weaken here a couple of minutes in the session, perhaps as investors really drill down into this quarter. You have Citigroup reiterating a bearish rating on Chewy.

But I'll note this, too. I do not like to hear on the conference call from Sumit Singh lower pet adoptions, you know, seeing lower pet adoptions. And it was pet adoptions that drove this company's financial results during the pandemic. But by and large, interesting quarter from Chewy. And I joked around on Twitter, Brad. I love sharing everything with our viewers. Every time I see this company's report, I think about all my dogs that have died through the years. How depressing.

BRAD SMITH: What kind of dogs did you have?

BRIAN SOZZI: And there's my tweet. My team just put it up for me. That's just-- they do things every day that always surprise me to the upside. That is great work right there. And, you know, it's depressing. That's why I don't have a dog right now. These things really traumatized me.

BRAD SMITH: What kind of dog did you have growing up?

BRIAN SOZZI: I had a Cocker Spaniel at one point, Chips.

BRAD SMITH: Ah.

BRIAN SOZZI: The name Chips.

BRAD SMITH: Chips, wow.

BRIAN SOZZI: Yeah, I know Mom's going to love that. She watches us every day.

BRAD SMITH: We had an English Springer Spaniel named Kobe, actually.

BRIAN SOZZI: Dog's not dead, though.

BRAD SMITH: Yeah. Well, yeah. Well, anyway.