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Most portfolios are faring pretty well these days. The major market indexes hit fresh highs on Friday, but not every stock is playing along. Chewy (CHWY -2.27%) is one of the former market darlings that didn’t get the memo.

The online retailer of pet supplies has seen its shares sent to the doghouse. Chewy stock has plummeted 55% over the past year, down a blistering 85% from the all-time high it hit three years ago. This might seem to be a lousy time to warm up to this out-of-favor investment, but with a telltale financial report coming later this month this could also be the sound of a food bowl filling up. Let’s see why Chewy could finally turn things around in March.

Its bite is worse than its bark

Business has slowed considerably for Chewy. Net sales rose just 8% in its fiscal third quarter, ended Oct. 29, just shy of market expectations. Chewy’s CEO would point out how the platform grew market share relative to the industry’s growth in the low single digits, but it wasn’t enough. After seven consecutive quarters of posting top-line growth in the teens — and much headier year-over-year gains before that — it’s the first time that Chewy failed to deliver a double-digit increase in net sales.

It gets worse. Chewy closed out the fiscal third quarter with 20.3 million active customers, slightly below where it was three months and a year earlier. The news wasn’t better on the other end of the income statement where a prior year’s profit swung to a loss. Chewy also hosed down its fiscal year guidance, eyeing fiscal fourth-quarter net sales below where the analysts were perched.

There were bright spots in the brutal report. Net sales rose despite the dip in customers because trailing net sales per active customer have risen 14% over the past year. Gross margin also improved. The percentage of sales using Chewy’s Autoship feature — where orders set to ship automatically at set intervals are discounted — has widened to 76.4% of the revenue mix.

The bad news outweighs the good news. There’s no sugarcoating that coarse coat. Chewy stock still deserves a better stock chart.

Two dogs smiling on a grassy field surrounded by chew toys.

Image source: Getty Images.

An investor’s best friend

We’re now three months removed from Chewy’s brutal third-quarter report. The market has rallied 13%, but Chewy continues to sink. It hit a fresh all-time low less than two weeks ago.

Chewy announcing last week that it would be serving up fresh financials on March 20 sent some investors scrambling for a human-sized Thundershirt to cope with the anxiety. Expectations are lousy. Analysts and Chewy’s own guidance call for the continuing deceleration in net sales. Wall Street pros are bracing for a 2% increase in net sales, possibly the first time in Chewy’s history that it yields industry market share. They see another small quarterly deficit reversing a prior-year profit.

I’m not going to predict a miraculous turnaround here. The report will be bad. Analysts who keep tabs on online traffic trends and other channel checks haven’t chimed in with a positive note in nearly two months. However, the depressed share price finds us at a point where the stock could still begin to recover just on the whiff of a report that isn’t horrendous.

Chewy has potential catalysts working in its favor. International expansion and the December launch of its pet health practices offering won’t move the needle in this month’s report. However, early strength on either front could lead to a rosier outlook for the fiscal 2025 year that began last month. Analysts already see a return to profitability and a 5% increase in net sales for the new year. What if Chewy affirms those targets or feels even more confident? The long-term outlook for the industry is strong as all of the dogs and cats we adopted early in the pandemic are only larger, hungrier, and more active now. It’s time for Chewy and other pet food stocks to come back to the market’s feeding dish.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.

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