Why Chewy Stock Dropped 11% Last Month

Shares of pet e-commerce company chew (CHWY 4.93%) fell 11.2% during July, according to data provided by S&P Global Market Intelligence. The stock actually fell closer to 12% in the first few days of July. It then fully recovered before finally slipping back to its 11% decline for the month – it’s been a bumpy ride.

Some of the volatility in Chewy stock since July is attributable to meme stock traders — investors excited by other investors on social media. One of the faces of the meme-stock movement is Keith Gill, aka Roaring Kitty. In late June, a regulatory filing showed that Gill owned 6.6 percent of Chewy’s stock, a shockingly high number that continued to excite meme stock investors in July.

However, a class-action lawsuit against Gill threw some cold water on the Chewy-stock meme-stock movement, even though the lawsuit was dropped just days later.

Additionally, the analyst community provided commentary during July on Chewy stock that varied in tone. E.g, Read analyst Steven Zaccone raised his price target on Chewy stock to $28 per share, up $12, according to The Fly. But its own analysis leads Wolfe Research to believe that Chewy stock will only be an average performer here, according to Fintel. Investors could be either encouraged or discouraged depending on which analyst they listened to in July.

What is really important?

I hope readers noticed the theme of what drove Chewy’s stock price in July. Whether it was meme stock investors or prominent Wall Street analysts, Chewy’s stock rose and fell as divergent opinions drove sentiment. This can generate stock returns over a short period of time, such as a month. But in the long run, more material factors are more important.

In August, Chewy’s stock continued to decline, and it may have a more material explanation. On August 1, Amazon reported quarterly financial results. And CFO Brian Olsavsky said, “Consumers (are) careful about their spending, trading down, looking for lower (average selling price), looking for deals. This continued in Q2 and we expect it to continue in Q3.”

For retailers and e-commerce companies, this comment from Amazon is seen as a good boost to the economy. Chewy shares are down as investors worry that consumer spending is slowing.

What now?

Chewy is scheduled to report its second quarter financial results on August 28. So investors won’t know for sure how the business has fared recently until then. But net sales in the first quarter rose just 3%, and guidance guided only 2% to 3% in the following second quarter.

That’s a really modest growth rate for Chewy. The company has a lot of long-term promise. But I would expect investors to react negatively if the company falls short of its modest growth expectations when it reports Q2 results. And with consumers stretching, it’s certainly possible that Chewy faces headwinds for now.