Apple Launches New Products in Time for New CEO

Motley Fool Hidden Gems Investing

This episode of Motley Fool Hidden Gems Investing examines recent earnings reports from Chewy and Casey's General Stores, both of which saw stock declines despite solid

Key takeaways

• Chewy's stock declined despite strong profitability due to slowing sales growth and a drop in net sales per active customer below inflation rates, indicating reduced consumer spending on discretionary pet items.
• Casey's General Stores saw earnings beat driven by soaring fuel margins, but same-store sales for non-fuel items decelerated, signaling weakening demand for discretionary convenience store purchases.

Main topics

• Chewy's earnings report and declining discretionary spending trends
• Casey's General Stores' earnings and decelerating non-fuel sales growth

Notable quotes

"People treat their dogs like they're their babies. Even when it comes to discretionary purchases, we can't get out of there without buying three bags of treats every time we go to PetSmart."

Conclusion

While both Chewy and Casey's General Stores face headwinds from shifting consumer spending, the hosts believe Chewy has stronger

Transcript preview

Speaker 4 (0:01) Apple has a new product. Does it have a new corporate direction? Motley Fool Hidden Gems Investing starts now. Speaker 4 (0:12) Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, John Quast and Matt Frankel. Guys, we're going to get into, obviously, we have the new product relaunch as Apple. We're going to get into the mailbag. But before we get started, stop me if you've heard this story already. A company posts results somewhere between okay and good, and the stock falls precipitously after. It's been a pretty common theme this... particular quarter, I feel like, Wes, we've been talking through earnings results. And we could have done this for a few companies that have reported in the past, I don't know, 36 hours or so. But let's focus on two. Online pet retailer Chewy and good old brick and mortar convenience store Casey's General Stores. Both of them saw at their peaks about double digit declines after reporting earnings. So, guys, we're going to start with Chewy first. And what did the market see that they didn't like? And did it line up with your thoughts on the earnings report? Speaker 3 (1:11) Well, Tyler, you look at Casey's, you look at Chewy's, and I think that these stocks are down for different reasons, even though the narrative is pretty much the same as somewhere between okay and good. Starting with Chewy, I mean, you do look at the bottom line numbers. That's not the problem here. These bottom line numbers look pretty good. The profitability, the margins, that looks okay for Chewy. Nothing really to worry about. in this area. It's maintaining that gross margin in particular, and that's really key for a low margin marketplace such as this. But Chewy, you know, it had decent sales growth on a year over year basis, but you look at the quarterly numbers. So compared to last quarter, Chewy did experience a small pullback in its sales. And in particular, the auto ship. So a lot of its customers just have it set up where they're going to receive a shipment from Chewy on a schedule. Those are supposed to be kind of these locked in loyal members. Seeing a slight quarterly or quarter over quarter dip in those numbers is somewhat concerning because there really isn't seasonality. in the pet care business. Your cat needs to eat food regardless of the quarter, right? So to see that small pullback in the Chewy sales on a quarterly basis is a little bit concerning. Speaker 2 (2:33) Yeah. And I mean, to that, one number that stood out to me, their net sales per active customer, it was up 1.9 % this quarter. That's down from a growth rate of 4.6 % in the first quarter. And not only that, 1.9%, that's lower than the rate of inflation. So on a real basis, You can say that Chewy sales actually declined. So customers are not spending more. And that's concerning to me more on a macro level. I don't know about you guys. I have two dogs. There are a lot of things I would cut back on before I stopped buying treats and all kinds of goodies for my dogs that, you know, people spend money on that. So it's a kind of a recurring theme this earning season that we're seeing, you know, a more discount heavy environment. We've seen that with a lot of the apparel companies. We've seen consumers pulling back on discretionary spending. Now, obviously your pets have to eat, but things like getting them a new leash every few months is that's a discretionary expense. And we're seeing, you know, people pull back on that. So that that's one, that's the number that really concerned me. It, you know, it's not profitability. As John said, the stock's down big year to date because investors are not willing to pay for Chewy's exceptional margins at a time when top line growth is decelerating. Speaker 4 (3:42) So the theme here for Chewy, and this has been pretty common with a lot of, it's hard to say Chewy's discretionary retail. Like you said, people spend money on their pets. Maybe they're going from the premium cat food down to the, you know, kind of bulk warehouse cat food, I guess would be the way of putting it to kind of pull back on spending a little bit. But it is slightly more discretionary than say like food convenience store purchases and things like that. And we saw something similar at Casey's General Stores. What is the common thread here, at least in the earnings report for Casey's, that we saw a similar earnings reaction for what I would say is kind of like staple purchases in the form of like convenience stores, gas, takeout pizzas and things like that for Casey's versus, to your point, this slight discretionary aspect of what Chewy does? Speaker 2 (4:31) Yeah, and I mean... With Casey's numbers, the headline numbers are really deceptive. You wouldn't realize how similar these companies' earnings reports were. So on the headlines, I mean, Casey's revenue was up 23 % year over year. Earnings were up 28 % year over year. It was all fuel. Tyler, you're an energy guy. You know how much fuel prices have soared. You know, that's the real non-discretionary part of Casey's business. People have to put gas in their cars no matter what. So fuel margins exploded year over year. That's where that earnings beat came from. When you look inside the stores, same store sales on the inside sales, that's like food and things like that. That was up by 3.2 % year over year. That was a deceleration from a 4.3 % growth rate a quarter ago. You can make a case that that's a little bit ahead of inflation. But people aren't spending as much on the discretionary side of the business. And kind of like with Chewy, there's some discretionary components. There's the non-discretionary fuel and... you know, certain convenience items, but there is a lot where when we stop at a convenience store, my kids want candy. We don't have to buy that. But people are cutting back on those type of expenses more and more. And that's really what is worrying investors with both of these companies. Speaker 3 (5:45) Well, and to that, I would add that Chewy actually looks like a decent value here, trading at roughly 14 times forward earnings. But a big reason that Casey's is down, Matt, as you mentioned, kind of more what has been the historic profit driver is the inside sales, the food business that it has. But you look at the stock since the year 2000. Casey's has only touched. 30 times earning, a valuation of 30 times earnings a handful of times. And that's just brushed up against that 30 times. Usually it trades around 20 times its earnings or even less. In 2026, it has traded above 40 times earnings and has even touched 48 times earnings right before it released this earnings report. That is roughly double. It's long-term valuation average. So a lot of expectations running high, high, high with Casey's stock. And then to kind of have that softness in what is traditionally the profit driver of the business, it's not surprising to see the stock get cut big time here. Speaker 4 (6:53) I think you kind of hinted at it a little bit in your answer, but I want to put you both