Chewy (CHWY  ) was one of the winners of the past year as the pandemic led to a sharp uptick in e-commerce orders. This year, it's underperformed along with many of the winning stocks from the past year.

Some of the challenges that Chewy will face this year are elevated comps from last year, the rotation from growth stocks to value stocks, rising interest rates putting downwards pressure on high-multiple stocks, and a potential mean-reversion away from e-commerce to in-person retail. Therefore, investors will pay close attention to the company's earnings report to get a better idea of Chewy's trajectory.

Inside the Numbers

In Q1, Chewy posted its second straight profitable quarter but missed expectations in terms of revenue. It reported a profit of $0.09 in earnings per share and revenue of $2.04 billion. This was a 32% improvement from last year when the company also posted a loss of $0.12 per share. Analysts were expecting a loss of $0.04 per share and revenue of $2.1 billion.

At the end of the first quarter, Chewy had 19.8 million active customers, a 32% increase from 2020's Q1. The company noted growth in customers and in average order size. Analysts will be closely watching retention numbers to determine what percent of added customers during the pandemic will stick with the company rather than returning to pre-coronavirus buying habits.

Another area to watch is the growth of its higher-margin products and services such as health care services for pets. Currently, consumables make up the bulk of Chewy's revenues at about 70%. The company is also planning to roll out a veterinary, telehealth service including expansions into pharmacies, gift cards, and personalized products.

Stock Price Outlook

Currently, Chewy is down about 38% from its high in mid-February. However, over the past year, it is up 58%. Despite its recent correction, shares remain pricey on a price-to-sales basis at 4.2. Further, operating margins are not too great given the company's focus on growth and potential competition.

For Chewy's stock to reward buyers at current prices, the company will have to be successful in retaining new customers and also continue growing in terms of newer categories such as telehealth and health care services for pets including insurance. These are areas with higher margins and amounts of recurring revenue.