By Denny Jacob

Chewy's stock run-up on the year is taking a hit over margins and guidance but some analysts say there is plenty of upside.

Shares of the online pet-products retailer have soared in recent quarters on a string of steady results that showed consumers continuing to flock to its platform and spend, even amid broader uncertainty in the economy. The stock was up 17% since the last trading day in the prior quarter and up about 37% on the year through Tuesday.

But virtually flat gross margins in the first quarter and sales guidance for the year that at the midpoint was below Wall Street's estimates sent shares down 12%, to $40.26, on pace for their largest decline in nearly two years.

"They probably needed to do a beat-and-raise quarter for the stock to hold and they didn't," Evercore ISI's Mark Mahaney said, adding that the gross margins were also a little light. "But I don't think there's anything that's fundamentally changed in the thesis."

RBC Capital Markets' Steven Shemesh in a research note said the bar was very high for Chewy. He said that the gross margin was a slight disappointment while the maintained guidance for the year implies some deceleration in the second half.

Despite the concerns, Mahaney expects the stock to eventually regain given a steady increase in sales--both total and sales from its automatic subscription program--going back to last year and three straight quarters of sequential customer additions, among other improving metrics. He also expects initiatives related to revenue from advertisements and deeper forays into pet healthcare and veterinary centers to drive growth further.

"The most interesting one is probably the ad revenue," said Mahaney. "You've seen this with a lot of e-commerce companies and it particularly helps drive the gross margins."

William Blair's Dylan Carden isn't surprised by the stock movement, noting investors tend to react poorly on the day of its results. He adds that Wall Street, in particular, has reacted sensitively to concerns about its margins going back to the third quarter in the last fiscal year.

But Carden sees Chewy as a dominant force in an industry that is increasingly moving online, all while continuing to take share from competitors such as Petco Health & Wellness. He adds that enough attention isn't being given to its autoship delivery offering that has grown as a percentage of sales in the last few quarters, which will support its margins further.

"It's my top pick for the year. It remains my top pick for the year," Carden said.

Write to Denny Jacob at denny.jacob@wsj.com

(END) Dow Jones Newswires

June 11, 2025 15:45 ET (19:45 GMT)

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