Chewy, Inc. (CHWY) shares plummeted 10.74% in pre-market trading on Wednesday, despite the online pet products retailer reporting better-than-expected first-quarter results. The significant drop appears to be driven by a slight decrease in gross margin, which disappointed investors who had high expectations following the stock's recent strong performance.

For the first quarter of fiscal year 2025, Chewy reported net sales of $3.12 billion, an 8.3% increase year-over-year, surpassing both analysts' expectations of $3.08 billion and the high end of the company's guidance range. Adjusted earnings per share came in at $0.35, significantly above the FactSet consensus estimate of $0.17. However, the company's gross margin decreased to 29.6% from 29.7% in the same period last year, a decline of 10 basis points.

The sharp stock decline highlights the market's sensitivity to even minor setbacks, especially given Chewy's recent stock performance. Prior to this report, Chewy's shares had soared 37.9% over the past three months, closing at its highest price since February 2023 on Friday. The company maintained its full-year net sales outlook of $12.3 billion to $12.45 billion and its adjusted EBITDA margin guidance of 5.4% to 5.7%. Despite the overall positive results and maintained guidance, the marginal dip in gross margin appears to have triggered a significant sell-off, as investors reassess their high expectations for the company's profitability and growth trajectory.