3 reasons tough stocks aren’t popular with the market

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Tough (NYSE: CHWY), a one-of-a-kind market darling, recently fell out of favor on the market. The stock rose to $ 120 per share earlier this year and has almost halved since then, trading at $ 63 as of this writing.

The fall out of favor can be traced back to a number of reasons including, but not limited to: rising labor and advertising costs, reopening economies, and supply shortages. Let’s take a closer look at each of these factors to understand why the market places such importance on them.

Image source: Getty Images.

Inflation circulates throughout the economy

In its conference call for the second quarter, management pointed to an imbalance in the supply and demand for labor. As a result, the cost of attracting employees to Chewy increases. The company is making investments (increasing wages and bonuses) to generate applications and attract enough employees to meet the existing demand for its products. In total, the company spent $ 30 million, about twice as much as it did in the previous quarter.

In addition, Chewy is an e-commerce retailer of pet products and services; it probably buys online advertising from companies like alphabet and Facebook. Both giants reported significant increases in the price per click and cost per impression they charge companies to market on their platforms. Regarding increasing ad rates, Sumit Singh, CEO of Chewy said, “While this was expected to some extent, the magnitude of the increase in the second quarter was unprecedented.”

The economic reopening could put a brake on sales growth

Chewy had a nice sales boost at the start of the pandemic. As people tried to avoid shopping in brick and mortar stores to avoid the risk of contracting the novel coronavirus, they were spending more money online. In fiscal 2020, Chewy’s sales increased 47% year over year.

However, in recent months, millions more people have been vaccinated against COVID-19 and the economic reopening has picked up pace. Investors are understandably concerned, therefore, that increasing consumer mobility could hurt the online pet retailer’s sales. Even if customers don’t spend money at another pet store when they go out, they’ll reassign the money elsewhere, leaving less income for their pets.

Bottlenecks in the supply chain

It seems like supply chain bottlenecks exist in all parts of the current economy. Customer demand for products is higher than it was before the pandemic. Meanwhile, fewer people are willing to work at prevailing wages while a deadly virus is still floating around. This has resulted in bottlenecks in everything from materials to truck drivers to dock workers.

Chewy has a high percentage of out-of-stock items that its customers typically purchase from the website. This results in it missing out on sales and potentially losing customers who could go to another retailer who has procured a shipment of the desired product.

Overall, this is a significant headwind and investors are entitled to be concerned about its impact on Chewy’s business. However, Chewy reiterated its sales and earnings outlook for the year when it released its second quarter results. In addition, as persistent as they are, the challenges are temporary and should diminish as global economies emerge from the coronavirus-related disruptions.

While Chewy stock was expected to decline, a drop from $ 120 to $ 63 could be an overshoot.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.


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