Chewy's Growth in Premium Offerings Sets Up Potential Stock Rally
Chewy shares shot higher on Wednesday, but how far will it rise?
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Wednesday was not a great day for the markets, but it was no disaster. The Nasdaq fell 1.1%, and the S&P 500 lost 0.6%. It was a red day, coming after a late-month bullish run.
Some technicians are warning of a double top in the large-cap index. The outline of a potentially bearish pattern is visible (shaded yellow), but it’s too early to turn bearish. There are still plenty of bullish signs.
Despite Wednesday’s selloff, the S&P 500 is less than 2% away from its all-time high of 5667, set on July 24, 2024. The bellwether index has closed above its 50-day moving average (blue) for ten consecutive sessions. At no point this year has the S&P 500 crossed below its 200-day moving average (red), currently resting at 5115.
In Wednesday's sea of red, one green name stood out. Pet-focused retailer Chewy CHWY soared to an 11.06% gain after reporting second quarter earnings. Florida-based Chewy has gained over 33% since we first recommended the stock on May 30, 2024.
Chewy traded above $30 for the first time in over a month before pulling back. The stock appears to have formed a rounded bottom, a bullish technical pattern (shaded yellow). That pattern suggests a rally to $40 may be on the cards.
The stock bottomed when it reached its 200-day moving average (red) on August 5, 2024 (green arrow). Wednesday’s rally coincided with a massive increase in volume, the highest since July 1, 2024 (red arrow). This signals the likely presence of institutional buying, a bullish sign.
In a CNBC interview, Chewy CEO Sumit Singh boasted of the retailer's 20 million active customers during the just-ended quarter, with net sales of $556 per active customer over the past year.
Chewy is benefiting from gains in premium product sales, like healthcare and insurance. The company also opened two new Chewy vet care clinics during the quarter, raising its total to six.
Sales of high-margin premium pet foods are strong, Premium products are bolstering Chewy’s gross margins, which have climbed to 29.5% from 28.3% last year.
Let’s not forget the wild card. Keith Gill, aka Roaring Kitty, has been silent since posting a cartoon image resembling Chewy’s logo two months ago. At that time, he indicated his ownership of over 6% of Chewy’s outstanding shares.
Gill was the catalyst behind a huge move in GameStop GME in 2021, as shares of the video game retailer shot from $4 to $120. His actions were depicted in the film "Dumb Money." If Gill rallies the troops around Chewy, there’s no telling what could happen.
On the other hand, Chewy might not need Gill’s endorsement. In addition to beating earnings estimates by a healthy margin, the company raised sales guidance, both for the current quarter and the full year.
At the time of publication, Ponsi was long CHWY.
