Chewy, Inc. (CHWY) Earnings

Management highlights

- Core Business Performance - Delivered solid results in Q1 2026, outperforming the broader pet category and gaining consistent market share, despite weakening consumer demand in the latter part of the quarter. - Added ~200,000 net new customers, ending the quarter with 21.5 million total active customers, up 3.6% year-over-year. Net sales per active customer (NESPAC) increased 4.6% year-over-year (normalized for the prior year extra week) to $597. - Expanded adjusted EBITDA margin by 130 basis points year-over-year to 7.5%, with EBITDA flow-through of over 25%, driven by structural margin drivers including sponsored ads growth, favorable category mix, supply chain efficiencies, marketing productivity, and operating expense discipline. Management reaffirms the long-term target of reaching a 10% adjusted EBITDA margin. - Chewy VetCare Strategic Update - Pet healthcare is a $54 billion total addressable market (TAM), with over $40 billion from in-clinic products and veterinary services alone, representing a large long-term growth opportunity. - CVC clinics deliver strong standalone unit economics, and act as a powerful customer acquisition and retention tool for the broader Chewy ecosystem: ~40% of CVC customers are new to Chewy, with new CVC customers reaching $900 NESPAC in year one, and existing Chewy customers that use CVC grow share of wallet meaningfully faster than other cohorts. Technology and AI-enabled workflows deliver industry-leading veterinarian productivity and retention, a key structural advantage amid widespread vet labor shortages. - Post-quarter-end, Chewy closed the acquisition of Modern Animal, which adds a complementary 29 clinics with strong unit economics and a aligned technology-enabled model, accelerating CVC expansion. The combined business will reach ~60 clinics by the end of fiscal 2026. - AI Initiative Progress - AI is being deployed across customer service, pharmacy operations, fulfillment, and marketing workflows, with the dual goal of improving customer experience and structurally lowering cost to serve. Management continues to expect AI-driven efficiencies will deliver a low tens of millions of dollars total benefit in fiscal 2026, with a larger ramp in benefits starting in 2027 and beyond. - Capital Allocation Update - In Q1, Chewy deployed $200 million for share repurchases and completed the acquisition of SmartPak, consistent with prior guidance. Post-quarter-end, Chewy closed the Modern Animal acquisition and launched a $600 million term loan. Management notes adding modest leverage is an appropriate evolution of Chewy's capital structure, with a target of maintaining net leverage below 2x adjusted EBITDA, and the transaction enhances financial flexibility for strategic investment, acquisitions, and continued shareholder returns.

Guidance

- Full-year 2026 net sales guidance is lowered to $13.40–$13.55 billion, representing 6.3–7.5% year-over-year growth, from original prior guidance, reflecting a more conservative outlook for consumer spending amid ongoing macro pressures. The guidance includes $80 million in net sales contribution from SmartPak and $70 million from Modern Animal. - Full-year 2026 adjusted EBITDA margin guidance is maintained at 6.6–6.8%, representing ~100 basis points of year-over-year expansion at the midpoint, equal to ~$900 billion total adjusted EBITDA at guidance midpoints. The stable full-year margin guidance offsets an expected modest margin rate drag from Modern Animal in 2026 with broader structural earnings improvements across the business. - Quarterly net additions of active customers are now expected to trend toward the lower end of the prior 150,000–250,000 per quarter range, driven by softer new customer demand amid the challenging macro environment, while churn and reactivation rates remain healthy. - Q2 2026 guidance introduced: net sales expected between $3.30–$3.33 billion (6–7% year-over-year growth), and adjusted EBITDA margin expected between 6.3–6.4% (~50 basis points of year-over-year expansion at the midpoint). Adjusted diluted EPS is expected to be ~$0.36 for Q2. - Sequential margin expansion in the back half of 2026 is expected driven by lapping non-recurring MAP pricing benefits that boosted gross margin in Q2 2025, after more muted year-over-year margin expansion in Q2 2026. Gross margin is expected to expand full-year 2026 despite the Q2 comparison headwind. - Full-year 2026 weighted average diluted shares outstanding are lowered by 5 million to ~420 million, with expected net interest expense of $10–15 million from the new term loan, and an effective tax rate of 24–26%. - Management reaffirms the long-term expectation that Chewy will grow 2x or faster than the overall pet industry, driven by ongoing share gains, with no changes to the core long-term growth algorithm.

Segment performance

Chewy does not break out formal separate product segments in this call, but key operational and revenue contribution data is as follows: 1) Core e-commerce product sales (including consumables and hard goods): Total Q1 net sales was $3.36 billion, up 7.7% year-over-year. Autoship customer sales, the core recurring revenue stream for the core business, reached $2.83 billion, up over 10% year-over-year, and represented 84.4% of total net sales. 2) Chewy Health / Chewy VetCare (CVC): Following the post-quarter-end closing of the Modern Animal acquisition, Chewy operates 47 clinics as of Q1 end, with a plan to reach ~60 total clinics by the end of fiscal 2026, with expected steady-state embedded annual revenue contribution of ~$290 million. SmartPak, acquired in Q1, is on track to contribute $80 million in full-year 2026 net sales, while Modern Animal is expected to contribute $70 million in full-year 2026 net sales. Sponsored ads, a high-margin adjacency to the core platform, is a growing contributor to gross margin expansion, and was on track to reach 70% bottom-line conversion of its 3% long-term revenue contribution target as of Q1. Overall profitability: Q1 adjusted EBITDA was $253 million, with a 7.5% margin, 130 basis points of year-over-year expansion. Q1 adjusted net income was ~$180 million, or $0.43 adjusted diluted EPS. Free cash flow was $71 million, up over 45% year-over-year.

Risks & headwinds

- Weakened macroeconomic conditions have created incremental pressure on consumer premiumization and discretionary product attach rates on the Chewy platform, creating a short-term NESPAC headwind that has led to downward revision to full-year revenue guidance. - Elevated and persistent fuel prices have created ongoing cost headwinds, with mid-single-digit million dollar fuel surcharge headwinds expected in Q2, and similar headwinds factored into full-year 2026 guidance. - Chewy operates in a competitive retail pet market, and sustained macro weakness could lead to increased promotional intensity that pressures margins. - Scaling the CVC / veterinary business depends on retaining qualified veterinarian staff, though Chewy notes its technology-enabled model delivers better vet retention than peers amid an industry-wide labor shortage. - While long-term initiatives around product attachment and digital advertising are expected to deliver growth over time, their near-term impact has been muted by the current weak consumer demand environment.

Analyst Q&A

• Q: What drivers explain the expected sequential margin improvement in the back half of 2026 after a muted Q2 expansion? /

  A: The Q2 margin dynamic is purely a phasing effect from easier year-over-year comparisons. Q2 2025 saw outsized, non-recurring gross margin gains from MAP pricing benefits that created difficult 2026 comparisons. Structurally, SG&A continues to deliver leverage from lower fulfillment and corporate costs, while gross margin expands from sponsored ads growth, premiumization and rational promotions, and this underlying improvement will show through more clearly in the back half after the Q2 comparison headwind passes.

• Q: How can you confirm current sales pressures are macro-driven, not company-specific share loss? What is the status of planned AI cost savings? /

  A: Multiple data points confirm Chewy is still gaining share: industry-wide pet category trends weakened in Q1, but Chewy's customer clicks grew mid-single-digits year-over-year across all categories, churn remains lower and reactivation rates remain healthy, and recurring core categories like consumables and healthcare continue to perform very strongly. There is no evidence of a changed competitive landscape. Management confirmed the prior AI savings guidance is unchanged, still expecting 50 million+ dollars in AI-driven savings in fiscal 2027 after a low tens of millions benefit in 2026.

• Q: What are your clinic expansion goals for 2026 following the Modern Animal acquisition? /

  A: Chewy closed fiscal 2025 with 18 clinics, and added 29 clinics from Modern Animal to reach 47 clinics post-acquisition. Chewy will stick to its existing plan of 10–12 new organic clinic openings in 2026, bringing the total to ~60 clinics by year end. The current priority is integrating Modern Animal into Chewy's operating and technology stack to unlock synergies, before accelerating further expansion in 2027. Management continues to view CVC as a compelling long-term revenue and earnings driver.

• Q: What is the latest update on sponsored ads growth, a key gross margin driver? /

  A: Sponsored ads growth remains on track, and management is pleased with progress. At exit of 2025, the business was at the midpoint of its 1–3% long-term revenue contribution target, with 70% of that contribution expected to flow to the bottom line long-term. The new CMAX product launch, which improves onboarding for new and smaller advertisers, saw strong adoption with 40% of advertisers trying the product and positive feedback. Sponsored ads growth is already helping offset ongoing fuel cost pressures, and management continues to ramp up off-site ads expansion to drive further growth.

• Q: What is the CVC-acquired customer acquisition cost compared to traditional digital channels, and what is the Modern Animal margin headwind in Q2? /

  A: CVC customer acquisition costs have been better than expected, driven by strong existing Chewy brand awareness that draws high-quality new customers to clinics with minimal local marketing spend. 40% of CVC customers are new to Chewy, and this trend has held across all new clinic openings to date. For the margin headwind, Modern Animal is expected to be EBITDA dollar neutral for full-year 2026, on $70 million in net sales contribution, creating a modest margin rate drag for the full year. The drag is slightly larger in Q2, and will wane through the second half of the year.