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Chewy Shares Active As IPO Lock-Up Expiry Overshadows Solid Q3 Revenues

Chewy shares could get bitten when the lock-up from its June 14 IPO expires Wednesday even as investors cheer solid third quarter results.

Chewy Inc  (CHWY) - Get Chewy Inc. Class A Report shares slipped in and out of positive territory Tuesday ahead of a deadline for early investors in the pet food specialists to exit their holdings that looks to offset stronger-than-expected third quarter revenues.

Chewy posted a wider-than-forecast third quarter loss of 20 cents per share late Monday, but noted that overall sales rose 40% from the same period last year to $1.23 billion and its customer base grew 33% to 12.7 million. 

Looking into the final months of the year, Chewy said it sees full-year sales in the range of $4.82 billion to $4.84 billion, with adjusted operating profit margin improvement of between 4.4% and 4.6%.

"We believe that there is significant market opportunity ahead of us and remain focused on our strategy of sustainable top-line growth at scale and margin expansion," CEO Sumit Singh told investors on a conference call late Monday. "Recent investments in both private brands and chewy pharmacy, two pillars of our growth and margin strategy, contributed positively to both our year-over-year increase in net sales and gross margin expansion in the quarter."

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Chewy's so-called lock up expiry, however, arrives tomorrow, allowing some 83% of the outstanding shares to be freely traded, giving early investors a chance to cash out from the June 14 IPO that raised more than $1 billion. 

Chewy shares were marked 0.17% lower in early Tuesday to change hands at $24.24 each. That would trim the stock's post-IPO gain to around 8%. 

"With its shares off 31% since its June 14th IPO closing price of $35 (against an 8.6% gain for the S&P 500) Chewy should regain momentum on the latest evidence of continued robust customer and sales growth," said Credit Suisse analyst Erin Wilson-Wright, who carries an outperform rating with a $29 price target on the stock. 

"Chewy currently trades at only 1.6x CY20E EV/Sales, a de minimis premium to its $22 listing price and a notable discount to a broader peer group of e-commerce retail platforms (4.6x), animal health products and services (3.4x), as well as healthcare IT services companies (3.7x), not fully reflecting its rapid growth trajectory and longer-term profit opportunity," she added.