Chewy, Inc (NASDAQ: CHWY) shares are moving lower following a solid report and mixed guidance. The takeaway from the results and outlook contradicts this move and has the stock set up for a buy later in the year. While the margin outlook is weak, the guidance can be labeled cautious and includes plans for investment and flexibility in uncertain conditions. Share prices are down now, but where will they be after another year of profitable growth and market share gains? International expansion plans are cutting into the margin outlook now but will drive margin expansion later. 

“We recognize that the operating environment remains challenging, so we will continue to be disciplined and focused as we navigate 2023,” a shareholder presentation explained. “Our first-quarter and full-year 2023 guidance reflects a balanced view that incorporates the strength and visibility of our business model, and our planned growth investments, while also providing some flexibility against an uncertain economic backdrop.”

Chewy Has Solid Quarter, Shares Fall

Chewy had a solid quarter, with revenue and earnings exceeding the analysts' estimates. Revenue came in at $2.7 billion or up 13.4% compared to last year beating the Marketbeat.com consensus by 220 basis points. The strength was driven by resilience in the non-discretionary categories that offset weakness in discretionary categories. Autoship, the company’s pillar, grew by 18% to account for 73% of the revenue, a 260 basis point improvement over last year. 

The margin was also impressive, with pricing actions and supply-chain improvement driving a 270 basis point gain at the gross level and 460 basis points at the adjusted EBITDA level. This resulted in a surprise profit on a GAAP and adjusted basis, leaving the adjusted EPS at $0.16 or $.26 better than forecast. 

The only bad news in the report is a slight decline in the active user count. Active users fell 1.25%, which is a small amount given the economic uncertainty and layoffs that have been announced. Chewy sees the US addressable market worth $130 billion, which leaves a substantial growth opportunity on the table. 

The guidance is mixed, revenue is above consensus, and the margin outlook is cautious. The company expects revenue to grow by 12% to 13% in Q1 and moderate to 10% to 12% for the year. Margin is expected to be flat to down compared to this year, but this includes a cautious stance, so it qualifies as a low-ball estimate. 

The Analysts' Response Is Mixed, But Supportive Of Price

The analysts have held a steady Moderate Buy rating on Chewy stock for the last 12 months, but the price target has decreased significantly. The post-release action is equally mixed, including 3 reiterated ratings with 2 price target reductions. The consensus of these 3 is near $41 and below the current consensus. If this trend continues, Chewy shares will likely continue to bottom but upside potential will be limited. Morgan Stanley analyst Lauren Schenk says the "international expansion was expected, and should see accelerated growth when launched, but market likely sees this as the beginning of a multi-year investment cycle."

Shares of Chewy are down nearly 5.0% on the F23 outlook and trading deep in a support zone where buying should be expected. The question is if short selling will drive the stock down to $30 or lower to retest the recent lows. The short interest is above 25% and can be expected to cap gains in the near to short-term and leave this stock range bound if not moving lower.