Chewy, Inc. Q1 FY2025 earnings call

• Net sales performance was underpinned by strong participation from new and existing customers across various offerings and favorable mix of core consumables and health and wellness categories. - 12.3% year-over-year growth in hard goods due to ongoing efforts to refresh assortment and improve customer experience. - Auto-ship subscription program continues to be a pillar of strength, with first quarter auto-ship customer sales growth outpacing overall top-line growth. - Ended Q1 with 20.8 million active customers, driven by strength in gross additions and improvement in gross churn. - Gross margin expanded by approximately 60 basis points year over year when adjusting for one-time items. - Adjusted EBITDA margin increased approximately 50 basis points year over year. - Strategic initiatives: Chewy Vet Care has 11 locations across four states, on track to open 8 - 10 new clinics in fiscal year 2025; sponsored ads business continues to perform well with successful migration to first-party platform and expansion of off-site ads; Chewy Plus membership program has transitioned out of beta phase.

Q1 net sales exceeded the high end of the guidance range, increasing by over 8% to $3.12 billion. First quarter auto-ship customer sales of $2.56 billion represented approximately 82% of Q1 net sales, reaching a record high. There were 20.8 million active customers, reflecting 3.8% year-over-year growth. Gross margin came in at 29.6% for the quarter. Adjusting for one-time items, gross margin expanded by approximately 60 basis points year over year. Adjusted EBITDA was $192.7 million, representing a 6.2% adjusted EBITDA margin and a year-over-year increase of approximately 50 basis points. Nearly $50 million of free cash flow was generated.

• Second-quarter 2025 net sales expected to be between $3.06 billion and $3.09 billion, or approximately 7% to 8% year-over-year growth. - Full-year 2025 net sales outlook between $12.3 billion and $12.45 billion, or approximately 6% to 7% year-over-year growth when adjusted to exclude the impact of the fifty-third week in fiscal year 2024. - Full-year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%. - Second-quarter adjusted diluted earnings per share expected to be in the range of $0.30 to $0.35. - Anticipate share-based compensation expense, including relating tax, to be approximately $315 million in 2025, and weighted average diluted shares outstanding to be approximately 430 million. - Expect 2025 net interest income of approximately $25 million to $30 million, and effective tax rate to be in the range of 20% to 22% for the year.

We encourage you to review our SEC filings, including the section titled “Risk Factors” in our most recent Form 10-K, for a discussion of these risks. Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements. Except as required by law.

Q: Could we just dig into net customer ads exceeded expectations pretty nicely in Q1. Is most single-digit growth still the right framework for customer growth for the full year?

A: Hey, Curt. This is Sumit. Good morning. We were super pleased with the rate and the momentum that has continued from last quarter through Q1. Importantly, these results, as I have mentioned in previous quarters, are predominantly due to our strength in execution and efforts. As the market continues to normalize, this should serve as a tailwind, which is not incorporated in our guidance. Everything we're delivering and what's incorporated in guidance is primarily our execution and efforts. I believe it’s a good baseline to take the low single-digit rate, although we’re starting to operate at the higher end of that. This is due to our addition of more customers on the gross ad side and improving retention, which has led to decreased gross churn. The algorithm is effectively producing a valuable cohort of higher-quality customers compared to what we've seen coming out of the pandemic. We are pleased with both the rate and quality of customer acquisitions, driven by our efforts in recent quarters.

Q: Understood. Maybe just a quick update in terms of how you think about the industry's growth this year. You pointed to expecting a normalization, but in terms of growth, household formation, any updates since last quarter?

A: Sure. There are a few data points we’re triangulating. When looking at industry growth, it primarily stems from adoptions and relinquishments; net household formation has been flat but hasn’t regressed from where we were at the year’s onset. It’s trending relatively flat, which is encouraging. Overall, we estimate industry top-line growth at roughly 3% to 4% based on available sources, with our guidance indicating a share-gaining trajectory, growing at roughly twice the industry’s growth. Pricing-wise, no notable inflationary intake is planned throughout the year, although tariff implementations may prompt industry reactions around price adjustments in hard goods or discretionary categories. Our guidance reflects structural growth, chiefly reliant on growing active ads and increasing wallet share. Anything to add, Dave?

A: Karen, I believe everything has been covered. Thank you.

Q: Thanks so much for taking the question. Just want to build on some of the comments in the prepared remarks regarding the advertising opportunity. How are you guys viewing the investment that needs to be made, particularly with off-site advertising opportunities, not just across 2025, but over a multiyear view? Can you give us more insights into how conversations with advertisers are evolving both on and off-site and what that might mean for ads as a percentage of future business?

A: Maybe I'll start with overall progress on sponsored ads. Both in 2024 and as we’ve entered 2025, we’ve seen substantial advancement. Previously, I mentioned migration to our first-party platform at the start of the year. This transition completes the suite of offerings we intend to provide to suppliers. It enables support for new content formats, including video, and expands both on-site, as done primarily last year, and off-site, which sees increasing demand this year. It offers a more comprehensive sponsored ad experience to our partners. We’re pleased with its performance, and the past year's trends continue strong into 2025. Sumit, any additional comments?

A: Certainly. Building upon Dave's insights, our outlook on this considers both demand and supply sides. Last year involved expanding on-site offerings and supply in consumables; now, we extend this into social and off-site categories. Rapid supply expansion sees internal teams working closely with partners, engaging more partners, and securing more investment. This coordination strives to optimize website utilization rates. Between partners and us stands a transparent, high-quality discussion on anticipated ROI, consistently exceeding expectations. Couple this with our first-party platform elevating bottom line flow-through and supplier experience, including enhanced analytics, enhances our confidence in the bespoke product that’s currently being refined. We're within the guiding one-to-three percent ranges, and while the shift from on-site to off-site may slightly reduce margins, we anticipate high flow-through. Thank you, Eric.

Q: Can you elaborate on the sustainability of active customer growth? Specifically, what is driving retention increase for existing customers, and are there new sources of gross additions being tapped now that were previously inaccessible?

A: Certainly, Mark, thank you. We are confident in our sustainability; bullish, one might say. We're in the early phases of notable momentum gains as demonstrated in the past three quarters. Internal endeavors, primarily revolving around widening marketing funnels and novel strategies, are yielding favorable results. Product refinements, be it storefront enhancements or app developments, are prevalent. In particular, the quality of customers breeds confidence for sustained retention and revenue loopback. As a data point, when reviewing Q1 2025 cohort, new customer Nespac trends slightly higher in single digits year-over-year compared to Q1 2024. This mirrors the increasing mix towards repeatable categories, such as consumables and health—which constitute around 85% of revenue. These inputs show improved reorder rates, reinforcing structure-driven initiatives’ role. As we internally control and refine operations, we're not merely riding potential external trends; that's our strategy for the remainder of the year.

Q: Hey, everyone. Congratulations on the strong quarter. I wanted to delve into the nitrile Plus program, now out of beta. Any insights on the adoption rates achieved for this tier, and how do changes in unit economics or wallet share manifest once members join the program?

A: Sure, Nathan. Expanding on Chewy Plus, following a successful 2024 beta phase, we transitioned to full availability in early 2025. While still in its infancy, ongoing broad expansion presents promising membership growth and positive feedback. Active session metrics surpass those of standard users, higher order frequencies, and heightened cross-category penetration all speak to the program fostering greater discoverability and attachment rates. Comparisons to non-members show a notable uptick both year-over-year and across similar demographic cohorts. Metrics indicate sustained net sales growth with net pack steadily rising faster than those of non-members. Costs align with expectations, supporting incremental profit contributions. While specific confidential details are withheld, expansion features program visibility throughout our shopping funnel and continuous growth on the member front partnered with profit contribution awareness. Dave, additional thoughts?

A: Broadly speaking, along with Chewy Plus, consolidated loyalty efforts including the AutoShip program contribute towards heightened customer engagement. With AutoShip achieving 460-basis-point growth year-over-year, and increased convenience and attractiveness to customers—and new customers converting and re-engaging through these initiatives—drives the uplift in various endeavors. These improvements synergize, resulting in robust active customer growth and beneficial financial outcomes.

Q: Good morning. Following up on AutoShip, noting its evolution from about 66% at IPO to 82% today, how has the customer journey toward becoming an AutoShip member changed over time? Also, for hard goods, what’s driving the 12% growth and assortment improvements?

A: Good morning, Doug. Regarding AutoShip, we focus on acquisition, sustained engagement, and retention. Known internally as "brilliance in the basics," assortment, availability, and personalized experiences cornerstones our distinct offering, resulting in stronger customer affinity, interaction, and therefore conversion. Over the years, added assortment and experience improvements have paved a clear path from 66% to 82%. On hard goods, team execution excels with assortment freshness, better inventory lifecycle management, and discoverability. A personalized approach enhances the website experience, and collectively, improvements underlie hard goods growth. Further thoughts, Dave?

A: Evaluating hard goods at a granular level shows category-wide year-over-year uplift, with notable achievements in assortment refreshes and customer engagements cumulatively reinforcing performance. This promising Q1's momentum appears firmly rooted.

Q: Good morning, thank you for addressing my inquiry. Where do you believe you're gaining market share, and are there any changes from prior quarters?

A: Yes, there's undeniable market share gain evident from our guidance. Analyzing the industry's 3%-4% growth at a $140 billion scale, anticipated sector expansion sees approximately $4 billion added this year. With around 30% to 35% online penetration juxtaposed with Chewy's revenue implies a gain of approximately 50 cents per dollar online, up from 40-42 cents previously stated. Assuredly, we have a share acquisition plan in place, and execution reflects this strategy.

Q: Hi, thank you for addressing my questions, Dave. Regarding gross margins, understanding the impact of a 70-basis-point one-time benefit last year, are core business margins experiencing any shifts? And on operating expenses, despite automation initiatives, what explains lower OpEx leverage in Q1, and projected improvements later in the year?

A: Thanks, David. On gross margins, we’re pleased with Q1 results; normalized growth expanded by 60 bps year-over-year, even accounting for last year’s one-time gains. We expect sequential gross margin rises from Q1 to Q2, attributing majority EBITDA growth to gross margins. Key drivers remain sponsored ads alongside product mix accretion, with standard cost absorption mechanics expected to persist. Moving to OpEx, reduced advertising expenses correlate with campaign timings, though a consistent 6.7%-6.8% forecast over net sales remains. Quarter-to-quarter variations can occur, yet annual projections align steadily.

Q: Thanks for taking my question on CVC expansions. With 11 locations now across four states, what’s the scale potential for CVC, particularly in terms of demand generation and anticipated expansion in one to three years?

A: We’re taking a measured approach to CVC expansion, steadily rolling out vet clinics with promising outcomes from 2024's batch, aiming for around ten additions in 2025. Performance metrics continue robust use and booking trends, plus unexpected highs in new customer introductions and subsequent brand purchases shortly after clinic visits affirm demand generation outcomes. CVC aligns with our ecosystem's long-term goals, tapping into the over $20 billion U.S. vet services market while simultaneously enhancing our pharmacy business. Expansion is happening progressively, reflecting strong adoption and ecosystem advantages. Sumit, any additional insights?

A: Encouragingly, envisioning future CVCs alongside comprehensive offerings in pet health and beyond—telehealth, insurance, and data management enhances overall value contingently and broadens TAM relevance. Combining these moats with aligned engagement strategies, such as AutoShip, positions us solidly within the veterinary frontier, yielding fiscal advantages and diversified customer interactions.

Q: Good morning. Two quick questions from me, starting with pricing—how do tariff impacts reflect on 2025 views? Second, regarding categories, specifically within dogs versus cats, we're hearing cats are faring better this year. Has this trend manifested within your company?

A: Pricing-wise, like-for-like inflation is minimal, whereas premiumization persists through customer preferences for holistic pet health products. Despite tariff implications, hard goods remain largely unaffected at present due to domestic inventories managing immediate supply. Only minimal tariff-imbued changes exist in our 2025 guide, mainly because 85% of our consumables rely on domestic sources. Sumit, any insights on dogs versus cats?

A: Both are thriving, particularly concerning cat dynamics receiving attention, thereby reinforcing overall growth stability across consumables, which accounted for roughly half of Chewy’s expansion. Enjoying robust engagement, both felt evenly prioritized.