Chewy, Inc. Q2 FY2027 earnings call

• Market Position & Consumer Trends: Chewy continues to outperform the broader pet market by approximately 2x to 3x despite a pressured consumer environment that has stabilized rather than recovered. The company is gaining share across both consumables (mid-single-digit growth) and hard goods (mid-teens growth).
• Customer Growth: Active customers reached 21.7 million (+3.8% YoY). Net Sales Per Active Customer (NSPAC) rose to $602, driven by cohort maturation and cross-category adoption, though partially offset by pressure on discretionary attachment and premiumization.
• Chewy Health Expansion: Chewy Vet Care delivered triple-digit revenue growth. The integration of Modern Animal performed ahead of expectations, reinforcing the strategic combination of scale and complementary capabilities. SmartPak also performed ahead of expectations.
• AI Deployment: AI initiatives are transitioning from development to scaled deployment with measurable financial impact. The AI assistant 'Kai' resolved ~30% of chats via self-service. Internal tools in pharmacy and customer care are reducing manual work. Expected savings are low tens of millions in FY2026, scaling to ~$50 million annualized in FY2027.
• Operational Efficiency: Structural improvements continue to drive margin expansion. Automation now handles over 50% of volume. Variable cost to serve is being lowered through automation, process improvements, and AI-enabled productivity.
• Capital Allocation: Free cash flow was $90 million. The company completed the $400 million acquisition of Modern Animal, raised $600 million via term loan, and repurchased $200 million worth of shares (9.9 million shares), resulting in a 2% reduction in diluted shares outstanding.

Chewy reported total enterprise net sales of $3.33 billion, representing 7.3% year-over-year growth. Excluding the SmartPak and Modern Animal acquisitions, organic net sales increased by 5.7% year-over-year. Autoship customer sales grew 9.3% year-over-year, accounting for 84.6% of total net sales. The company ended the quarter with 21.7 million active customers, a 3.8% year-over-year increase. Adjusted EBITDA reached $227 million, yielding an adjusted EBITDA margin of 6.8%. Gross margin was 30.4%, flat year-over-year but up 30 basis points sequentially. Non-GAAP SG&A was $612 million, or 18.4% of net sales, demonstrating 70 basis points of year-over-year leverage.

• Full Year 2026 Net Sales: Raised range to $13.46 billion - $13.57 billion (6.8% - 7.7% YoY growth), including organic net sales growth of 5.5% - 6.3%. The narrowing of the range reflects increased visibility and better-than-expected performance from SmartPak and Modern Animal.
• Full Year 2026 Adjusted EBITDA Margin: Raised low end by 10 basis points to 6.7% - 6.8% (from 6.6% - 6.8%). This implies >100 bps of YoY expansion at the midpoint.
• Q3 2026 Net Sales: Expected between $3.323 billion and $3.358 billion (6.6% - 7.7% reported YoY growth; 5.3% - 6.2% organic YoY growth).
• Q3 2026 Adjusted EBITDA Margin: Expected between 6.6% and 6.7% (~85 bps YoY expansion at midpoint).
• Q3 2026 EPS: Expected around $0.39.
• Other Full Year Metrics: Share-based compensation expected to remain flat; weighted average diluted shares ~410 million; net interest expense $10M-$15M; CapEx 1.5%-2% of net sales; effective tax rate 24%-26%.

• Consumer Discretionary Pressure: Continued moderation in discretionary spending affects treat sales more sharply than core food, reflecting broader macroeconomic pressures on household budgets.
• Category Specifics: Dog adoptions and related pet spend remain under pressure due to correlations with household formation and real estate trends, while cat spend is strengthening.
• Fuel Costs: Fuel costs represent a mid-single-digit million dollar headwind expected to persist through the balance of the year.
• Integration Risks: While Modern Animal and SmartPak are performing well, there are inherent risks associated with integrating acquired businesses and converting their customer bases to the Chewy ecosystem.
• Macro Volatility: The outlook does not assume a meaningful consumer recovery, leaving the business exposed to potential renewed deterioration in the operating environment, although the severe downside scenario has been deemed less likely.

Q: Steven Forbes asked about the composition of discretionary spending within consumables and how treat sales moderation compares to other categories.

A: Sumit Singh explained that treats and toppers are the primary discretionary components, whereas core food and meds are prioritized. He noted that consumers are experimenting with many treat types, leading to dynamic behavior, and emphasized that Chewy is gaining share because it captures demand effectively even when overall market growth is flat.

Q: Nathan Feather inquired about balancing margin expansion with growth reinvestment, specifically asking about levers like Chewy Plus and marketing spend.

A: Sumit Singh stated that Chewy has credible levers to self-fund growth, including a refreshed Chewy Plus program design launching soon, targeted marketing investments to improve acquisition efficiency, and brand building ahead of the holidays. He emphasized that any reinvestment will be grounded in attractive long-term returns and calibrated against earnings objectives without disrupting the margin algorithm.

Q: Dylan Carden asked about industry stabilization regarding pricing and the impact of agentic AI on product discovery.

A: Chris Deppe clarified that guidance assumes no consumer recovery, but trends have stabilized, allowing them to narrow the growth range. Sumit Singh added that they view agentic surfaces as a net tailwind, leveraging their strong search aggregation and unique product innovations to maintain leadership in customer engagement and capture outsized demand despite shifting discovery behaviors.

Q: Douglas Anmuth sought clarification on the confidence level of AI-driven cost savings and the multiyear headroom in lowering cost to serve.

A: Sumit Singh expressed high confidence in AI efficiencies, noting that 'Kai' and internal agent tools are structurally lowering fulfillment and service costs. He clarified that AI savings should offset normal cost pressures (like wage inflation) rather than mechanically layering onto margins, providing flexibility to reinvest. Chris Deppe confirmed that automation covers over 50% of volume, supporting a robust roadmap for continued variable cost reduction.

Q: Benjamin Black asked for early takeaways from the AI assistants 'Kai' and 'Callie' and their evolution.

A: Sumit Singh described 'Kai' as a chat-based assistant handling top contact drivers like order status and autoship management with high self-service resolution, tailored for younger demographics preferring digital interaction. 'Callie' is a voice-based agent for appointment scheduling. Both are built on first-party infrastructure, aiming to deepen engagement and offer holistic solutions beyond simple transactional support.