Chewy Inc: Short Selling Data

Looking at the short-selling data on Chewy, we see a couple of red flags.

The first is that short interest is very high. At present, around 28.8 million Chewy shares are on loan. That represents 32.5% of the free float.

The second is that the number of shares on loan has risen substantially over the past two months. On November 25, 20.9 million Chewy shares were on loan. Since then, the figure has risen by 35%. This indicates that short sellers are ramping up their downside bets here.

Why Are Short-Sellers Targeting Chewy?

In terms of why short-sellers are targeting Chewy, it’s most likely due to the fact that the company, like most retailers, is experiencing supply chain and cost issues right now.

In December, Chewy posted a larger-than-expected quarterly loss ($32.2 million) for Q3 due to ongoing supply chain disruptions, labor shortages, and higher inflation. On the back of these results, a number of brokers lowered their price targets for the stock.

The fact that the online pet retailer isn’t yet profitable could be another key attraction for the short-sellers. Recently, sentiment towards unprofitable technology companies has deteriorated significantly.

It’s worth noting that there has been a fair bit of insider selling here recently. Over the last year, we have observed large sales (most automated) from a number of top-level insiders including the CEO, the CFO, and the General Counsel. This could also be interpreted as a red flag. Having said that, we also observed a large $1.8 million buy from board member James Star in December. Mr. Star has a background in investment management so he is likely to have a good understanding of Chewy’s intrinsic value.

Given the number of shares on loan, we think caution is warranted towards Chewy stock right now. The high level of short interest indicates that short sellers see downside risk here.