Chewy, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Financial and Customer Performance: Net sales growth driven by unit volume, Autoship sales up 13.6%, active customers at 21.2 million, up nearly 5% year-over-year. Marketing efficiency improving, mobile app functionality lifting direct traffic.
• Profitability and Free Cash Flow: Gross margin expanded, adjusted EBITDA up, free cash flow strong, enabling share repurchases and strategic investments.
• Ongoing Initiatives: Chewy Vet Care expansion, acquisition of Smart Equine, Chewy+ performance and growth potential.

Segment Performance

• Net Sales: Q3 net sales grew over 8% year-over-year to $3.12 billion. Autoship customer sales increased 13.6% to $2.61 billion, representing a significant portion. Net sales per active customer reached $595, up nearly 5% year-over-year.
• Gross Margin: Expanded roughly 50 basis points year-over-year to 29.8%, driven by sponsored ad growth, strong Autoship baseline, and favorable category mix.
• Adjusted EBITDA: Reached $181 million, up 30% year-over-year, with a margin of 5.8%, a 100 basis points year-over-year expansion.
• Free Cash Flow: Generated approximately $176 million in the quarter, up nearly $70 million sequentially.
• Chewy Vet Care (CVC): Exceeding expectations, with 14 locations across five states, plans to open 8-10 this fiscal year. Acquisition of Smart Equine to enhance health and nutraceutical assortment.
• Chewy+: Outperforming expectations, driving higher order frequency, broader category engagement, higher mobile app adoption, and stronger auto ship participation. Raised annual fee to $79, early data shows growth.

Guidance

• Full Year 2025: Narrowed net sales outlook to $12.58 billion to $12.6 billion, 8% year-over-year growth (excluding 53rd week in 2024). Adjusted EBITDA margin outlook 5.6% to 5.7%, 90 basis points expansion. Fourth quarter net sales expected $3.24 billion to $3.26 billion, 7%-8% growth (excluding 14th week in 2024). Adjusted diluted EPS $0.24 to $0.27, including ~$10 million closing costs for Smart Equine acquisition. Advertising and marketing expense expected 6.5%-6.6% of net sales. Share-based compensation ~$315 million, weighted average diluted shares ~430 million. Net interest income ~$15 million to $20 million. Effective tax rate 16%-18%.

Risks

• Market and Operational Risks: Factors that could cause actual results to differ from forward-looking statements, including industry trends, competitive pressures, and execution risks related to initiatives like Chewy+ and acquisitions. Need to review SEC filings for detailed risk factors.

Question and Answer

• Q: Curious as the team continues to scale offerings like Autoship and Chewy+ how you continue to evolve your learnings about the lifetime value of customers on the platform. And the second part of the question would be how does those learnings feed back into your strategic initiatives in support of growth given the commentary right there towards the end of the call can submit on some of your priorities over the next 12 to 18 months.
  • **A: Sumit Singh discussed the intersecting flywheels of Autoship, Chewy+, and CVC built on a personalized mobile app, highlighting how these programs compound NSPAC curves, increase retention, and drive profitability. Priorities include leveraging these programs, automation, and AI to enhance fulfillment, customer care, and scalability.
• Q: The active customer growth was the strongest it's been in a few quarters. Can you just talk about some of the drivers there and then just how you're thinking about that in 4Q and into '26 along with just health of the industry. And then just a follow-up on the investment levels in '26.
  • **A: Active customer growth driven by higher direct traffic, mobile app engagement, improved conversion, and stronger retention. Q4 implied moderation due to comps, '26 expects durability in net adds. Investment levels in '26 focus on structural investments like automation and health services, with a shift towards operating leverage.
• Q: On gross margins, can you please talk about the trends in gross margins and how we should be thinking about it going forward, especially as we think of 2026 and just the puts and takes, how much of 2025 will actually apply for 2026 when we think about gross margin trends? And second, is when you think about the customer adds for '26 and the durability of customer adds, how should we be thinking about how much of retention is a driver versus gross adds?
  • **A: Gross margins expected to continue expanding structurally with levers like Autoship, premium categories, and health ecosystem. Customer adds expected durable with market resembling '25, retention and gross adds both important, focusing on acquiring and retaining customers across the ecosystem.