By Jacob Sonenshine

Chewy emerged from its latest earnings report with its tail between its legs. The stock's tumble might have created an opportunity to snap up some shares.

Heading into Wednesday's second-quarter release, an optimist might have said the online pet-food retailer was riding high. Shares had gained 26% for the year through Tuesday's close, and everything was pointing to a strong report, with earnings expected to grow 38% from the year before. It was a chance for the company to show that growth was continuing apace -- and send shares heading back toward a 52-week high.

A pessimist, however, might have said the stock was set up for disappointment -- and disappointment arrived. While sales grew 9% to $3.1 billion, beating estimates, and earnings met forecasts, management's full-year guidance called for sales growth to slow to 7.5%. It raised the guidance, but still kept the profit margin outlook unchanged. That implies the company will incur more than $11.5 billion of operating expenses this year -- more than expected -- as it works to purchase and market the right products for customers. The stock dropped 17% to just over $35 following the release.

The plunge looks like an overreaction. For starters, Chewy's guidance might not be what it delivers. It has delivered better-than-expected sales in 16 of the past 20 quarters, according to FactSet, with the average result 1% above estimates and the few misses no worse than 1.4% below expectations. The company usually maintains or raises its guidance, having lowered it only once in the past eight quarters. If past is prologue, Chewy is likely guiding conservatively, and sales could still grow at a rate close to the 9% it reported in the second quarter.

Margins, despite increased investments, weren't all that bad. Chewy guided for more than two percentage points of margin expansion versus last year, with implied guidance for earnings before interest, taxes, depreciation, and amortization, or Ebitda for 2025 up 24% versus 2024.

Margins, too, might be even better than expected, thanks to Chewy's growing advertising business. Selling more of the higher-margin advertising space on its website, which currently accounts for less than 1% of total sales, should help profits over the long term. Ad sales are growing faster than the rest of the business, and CEO Sumit Singh said on the earnings call that it could eventually reach 3% of the business, a boon to profitability since ads come with gross margins that top 60%.

Nor should investors forget the long-term opportunity -- which is why Chewy is making investments in the first place. These days, tens of millions of U.S. households have pets, and Chewy, with only 20.9 million customers, is intent on grabbing more of them. As millennials and Gen Z move into houses and buy pets, while the amount each customer spends should increase because of what industry experts call the "humanization of pets."

Even with the recent disappointment, Chewy stock should be able to find support near $34, a level buyers have come in at several times since May. It even happened again on Wednesday. If the $34 level holds, expect shares to begin to rebound. It also helps that the stock was upgraded on Thursday to Buy from Hold at Deutsche Bank and to Buy from Neutral at Seaport Research Partners, which sees long-term value in Chewy's spending.

"We believe these investments are offensive and should enable Chewy to further gain market share," writes Seaport analyst Aaron Kessler, who has a $47 price target on the stock, up 34% from Wednesday's close of $35.11.

Remember, every dog will have its day.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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September 11, 2025 10:52 ET (14:52 GMT)

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