Two years ago, my daughter surprised my wife and I by walking through our door with a puppy. She had been wanting a dog of her own for a long time and finally decided the time was right.

When it comes to raising dogs, some things never change. As puppies, they require constant attention. Having raised several dogs over the course of my life, I had a good idea of what she was in for.

However, some things have changed. Instead of driving to a store like I did to get the food, medications, toys, and all the other things a dog needs, she can have it all delivered to her home.

She also had some of it delivered to my home for when I watch Fiona. That is how I became acquainted with Chewy (NYSE: CHWY).

The company was founded in 2010 just as ecommerce was taking off. In June 2019, Chewy went public. That day, its share price soared more than 60% above its IPO price of $22.

Turns out, that was as high as it would get for the rest of the year. By the last week of December, it was below $30.

However, Chewy’s fortunes changed for the better with the arrival of COVID-19 a few months later. Pet adoptions spiked at the same time social distancing restrictions temporarily closed stores during the height of the pandemic.

The result was a huge increase in online shopping for pet supplies. By the end of 2020, CHWY was trading above $100.

Going to the Dogs

At that time, Chewy was regarded as one of the “must own” retail stocks during the pandemic. Even though the company was unprofitable, Wall Street was looking to the future and liked what it saw.

The company decided to focus on expanding its market share while the going was good. During 2020, Chewy’s net sales increased nearly 50% over the previous year. However, it reported a loss of $92.5 million at the same time.

The following year, Chewy lost $73.8 million while increasing net sales by 24%. In 2022, Chewy recorded its first full-year profit of 12 cents per share.

By then, it was too late. In October 2023, CHWY fell below its IPO price. The pandemic was over, and pet adoptions dropped while full-service stores were back in business.

That year, Chewy’s earnings fell to 9 cents per share. The company was, pardon the pun, Going to the dogs.

As a result, short interest in CHWY was growing. Speculators were selling borrowed shares of the stock they did not own on the belief that they would be able to buy them back later at a lower price.

Until six weeks ago, that strategy was working pretty well. On May 28, CHWY closed below $17.

That day, Chewy released its fiscal 2024 Q1 results that included a profit of 10 cents per share. In fact, most of Chewy’s operating metrics for the first quarter came in better than expected.

And just like that, the speculators that shorted the stock started buying it back to close out their positions. That drove its share price above $22 on very high volume.

The Return of Roaring Kitty

Someone else has also been buying a lot of Chewy stock. He is Keith Gill, aka “roaring kitty,” the same person that ignited a short squeeze in GameStop (NYSE: GME) a few years ago.

On July 1, Mr. Gill disclosed that he bought 9 million shares of CHWY during the second quarter of this year. He was required to make that disclosure public since he now owns more than 5% of the company’s common stock.

All that buying drove CHWY above $30 during the last week of June (circled area in chart above). At that price, the company is valued at 84 times forward earnings. That is roughly four times the same multiple for the S&P 500 Index.

Say what you will about Mr. Gill, but he has a nose for opportunity. He also knows how to use social media to influence other investors to follow his lead.

In short, Chewy is now in play. If Mr. Gill has his way, he and his followers will induce a short squeeze that will drive the stock above $40.

If the short sellers have their way, the stock will soon reverse direction and drop back below $20. If that happens, Mr. Gill will suffer a huge loss.

To further complicate matters, on June 26 Chewy announced that it agreed to buy 17.55 million of its shares from a large shareholder for $500 million. The company will retire that stock so that its per share operating metrics improve proportionately.

Suddenly, it seems like everyone on Wall Street wants a piece of Chewy. Meanwhile, Fiona and all the other dogs in the world just want what’s inside the bright blue boxes delivered to their homes.

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