Apple Launches New Products in Time for New CEO

Tyler Crowe (0:03)

Does it have a new corporate direction? Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time Fool contributors, Jon 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 we've been talking through earnings results.

We could have done this for a few companies that have reported in the past 36 hours or so, but let's focus on two. Online pet retailer Chewy and good old brick and mortar convenience store, CASY'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 CHWY first. And what did the market see that they didn't like? And did it line up with your thoughts on the earnings report?

Jon Quast (1:11)

Well, Tyler, you look at CASY's, you look at CHWY's, and I think these stocks are down for different reasons, even though the narrative is pretty much the same as somewhere between OK and good.

Starting with CHWY, 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 OK for CHWY, 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 CHWY, it had decent sales growth on a year over year basis, but you look at the quarterly numbers.

Compared to last quarter, CHWY did experience a small pullback in its sales, and in particular, the auto ship sales. A lot of its customers just have it set up where they're going to receive a shipment from CHWY on a schedule. Those are supposed to be these locked in loyal members. Seeing a 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 CHWY sales on a quarterly basis is a little bit concerning.

Matt Frankel (2:33)

Yeah, and I mean, to that, one number that stood out to me there, 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 CHWY 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. People spend money on that. So it's a kind of a recurring theme this earnings season that we're seeing 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, that's a discretionary expense. And we're seeing people pull back on that. So that's the number that really concerned me.

It's not profitability, as Jon said. The stock's down big year to date because investors are not willing to pay for CHWY's exceptional margins at a time when top line growth is decelerating.

Tyler Crowe (3:42)

So, the theme here for CHWY, and this has been pretty common with a lot of...

It's hard to say CHWY is discretionary retail. Like you said, people spend money on their pets. Maybe they're going from the premium cat food down to the 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 CASY's General Stores. So what is the common thread here, at least in the earnings report for CASY's, that we saw a similar earnings reaction for what I would say is kind of like staple purchases in the form of convenience stores gas, takeout pizzas and things like that for CASY's versus, to your point, this slight discretionary aspect to what CHWY does.