Why Chewy Stock Got Chewed Up Today

Key Points

• Chewy met analyst forecasts for sales and earnings this morning.

• Earnings per share took a big hit because Chewy had to pay taxes last quarter.

• It paid taxes, though, because Chewy was profitable.

• 10 stocks we like better than Chewy ›

Online pet food store Chewy (NYSE: CHWY) reported earnings this morning, and investors think Chewy is a very bad boy. The stock fell 12.6% through 9:50 a.m. ET despite hitting analyst forecasts for $0.33 per share in adjusted earnings, and beating (barely) the forecast for less than $3.1 billion in Q2 sales.

Chewy's actual sales for the quarter hit $3.1 billion on the nose, a year-over-year increase of nearly 9%. The company earned a 30.4% gross profit margin on these sales, up 90 basis points from a year ago. And yet the news was not all good.

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Image source: Getty Images.

Chewy Q2 earnings

Chewy's earnings "beat," recall, was on non-GAAP "adjusted" earnings. But actual earnings as calculated according to generally accepted accounting principles (GAAP) were less than half those adjusted profits -- only $0.14 per share -- representing a near-80% decline in profits year over year.

The good news for Chewy is that its business is pretty much on autopilot at this point, with repeat customers using Autoship for their pet supply needs, representing 83% of the company's net sales for the quarter. The other good news is that the company's big loss is easily explained.

Is Chewy stock a buy?

How? Well, the main reason profits took a hit in Q2 was the reversal of a large, $253 million income tax credit that Chewy received in Q2 last year. This time around, Chewy got no credit, but rather paid $12 million in taxes. Over time, I expect this to translate into growing profits for the pet supplier.

Still, at a valuation of 32 times free cash flow, and nearly 100 times trailing earnings, I think Chewy's stock is too expensive. Investors are right to sell -- just not for the reason they may think.

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Rich Smith 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.