Chewy Q1 2026 Earnings Call EPS Beats At $0.43 Fueled By Resilient 10% Autoship Customer Sales Surge

Thank you for joining us on the call today to discuss our first quarter results for fiscal year end 2026. Joining me today are Chewy's CEO Sumit Singh and CFO Chris Deppy. Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our SEC filings, including the section titled Risk Factors in our most recent Form 10-K for 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. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our investor relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2025. Finally, this call in its entirety is being webcast on our investor relations website. A replay of the audio webcast will also be available on our investor relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thank you, Sumit, and thank you all for joining us today. Q1 results reflect continued disciplined execution across the business, highlighted by continued share gains, meaningful margin expansion, and strong free cash flow generation despite a macro environment that softened as we moved through the quarter. Q1 net sales reached approximately $3.36 billion, representing 7.7% year-over-year growth, reflecting the continued strength across our recurring revenue base, balanced contribution from both active customer growth and NESPAC expansion, and ongoing market share gains within the pet category. We closed our acquisition of SmartPak in the first quarter as planned, and the revenue contribution from the business was in line with our previously communicated $80 million net sales expectation for the full year 2026. We continue to grow active customers, ending the quarter with approximately 21.5 million, increasing 3.6% year-over-year. Auto-ship customer sales reached approximately $2.83 billion in the quarter, increasing over 10% year-over-year and representing 84.4% of total net sales. Growth in auto-ship continues to outpace overall company growth, reinforcing the durability and predictability of our recurring revenue model. NEPAC reached $597 in Q1, increasing approximately 4.6% year-over-year on a normalized basis when accounting for the extra week in the prior year comparable period, and reflects continued customer cohort maturation, growth in health and wellness penetration, and increasing cross-category engagement across the platform. Turning to profitability, we reported first quarter gross margin of 30.1%, representing approximately 50 basis points of year-over-year expansion, including a low single-digit million dollar impact from fuel surcharges passed on by our carrier partners. Gross margin performance was driven primarily by continued growth in sponsored ads, favorable category mix, and continued operating discipline. Moving to operating expenses, please note that my discussion of SG&A excludes share-based compensation expense and related taxes as well as transaction and integration-related costs. First quarter non-GAAP SG&A was approximately $593 million, or 17.7% of net sales. Note Q1 non-GAAP SG&A excludes approximately $10 million of transaction-related costs associated primarily with acquisition and integration activities related to SmartPak and Modern Animal. As planned, we delivered approximately 90 basis points of year-over-year SG&A leverage, reflecting continued operating discipline, fulfillment productivity improvements driving down our variable costs, and early benefits from technology and AI-enabled efficiencies across the organization. We continue to lower our cost to serve as we scale. Advertising and marketing expense was approximately $26 million, or 6.1% of net sales, reflecting modest leverage year-over-year. As we have consistently stated, our marketing strategy remains focused on profitable customer acquisition and long-term lifetime value generation, and we continue to see strong returns across both lower and upper funnel investments. Q1 adjusted net income was approximately $180 million, translating into adjusted diluted earnings per share of $0.43. Adjusted EBITDA reached approximately $253 million in the quarter, representing a 7.5% adjusted EBITDA margin, up approximately 130 basis points year-over-year, and reflects adjusted EBITDA flow-through of greater than 25%. This level of profitability expansion reflects the structural strengthening of Chewy's earnings model. We are expanding earnings materially faster than revenue growth while continuing to invest behind strategic initiatives including Chewy Health, Chewy Vet Care, AI infrastructure, and fulfillment network optimization. The power of our underlying profitability profile allows us to both deliver consistent margin expansion while simultaneously investing into core strategic growth drivers that give us an increasing right to win a growing share of the pet parent wallet. Free cash flow for the quarter was approximately $71 million, increasing over 45% year-over-year. Q1 free cash flow reflected approximately $19 million of net cash provided by operating activities and approximately $38 million of capital expenditures. Our continued free cash flow strength reflects the durability of the Chewy model, the recurring nature of our revenue base, and the structural expansion in profitability we continue to drive across the business. During the quarter, we deployed capital across several strategic priorities, including the acquisition of SmartPak and approximately $200 million of share repurchases under our existing program. These actions reflect our continued confidence in the long-term opportunity ahead of us, as well as our disciplined approach to capital allocation. We ended the quarter with approximately $520 million of cash, cash equivalents, and marketable securities and over $1 billion of total available liquidity inclusive of our revolving credit facility. Subsequent to quarter end, we completed the acquisition of Modern Animal, further expanding our presence within the highly attractive and underpenetrated pet healthcare market. In addition, earlier today, we launched a $600 million term loan B transaction. Given the scale of our business, the durability of our earnings profile, and our consistent free cash flow generation, we believe adding a modest amount of leverage is an appropriate evolution of Chewy's capital structure. We intend to maintain a conservative balance sheet and over time target net leverage below two times adjusted EBITDA. Within that framework, the transaction enhances our financial flexibility and positions us to continue investing behind our strategic priorities, pursue attractive growth opportunities, and return capital to shareholders while maintaining significant liquidity. Now turning to our updated outlook. As Sumit mentioned earlier, while the pet category remains resilient overall, the consumer environment has become more challenged since we established our original fiscal 2026 outlook earlier this year. Most notably, we are seeing more pressure on discretionary attachment and premiumization behavior across portions of our customer base, resulting in slower NEPAC growth than we had originally anticipated. Against this backdrop, we are updating our full-year fiscal 2026 net sales outlook to reflect both a softer consumer environment as well as a more conservative set of internal assumptions for the balance of the year. For fiscal 2026, we now expect net sales of between approximately $13.40 and $13.55 billion, representing approximately 6.3% to 7.5% year-over-year growth. Included within this range is an expected net sales contribution of approximately $80 million from SmartPak and approximately $70 million from Modern Animal for fiscal year 2026. As we entered the year, we anticipated several company-specific initiatives would support improving growth trends through the back half of fiscal 2026, including expectations that changes to our auto-ship product flow would accelerate product line attachment rates and enhanced digital advertising bidding algorithms to drive faster levels of customer growth. While we remain confident in the long-term value of these initiatives and both products are delivering strong underlying gains, the impact of both products have been muted by the macro environment. We no longer believe it is prudent to embed a meaningful acceleration in consumer spending into our outlook given the current operating environment. The low end of our guidance range assumes the current consumer backdrop worsens relative to the trends we are observing at this point, while the high end sees spending patterns improve from current levels as we move through the second half. We continue to see healthy active customer trends, ongoing market share gains, and continued strength in auto-ship. That said, given the current environment, we now expect active customer additions to trend towards the lower end of our previously stated range of approximately 150,000 to 250,000 net adds per quarter. The Chewy customer funnel remains healthy with consistent churn gains during the quarter and extremely healthy reactivation rates, but these are being somewhat offset by new-to-Chewy customer softness due to the challenged spending environment. Now turning to profitability guidance. Given the continued strength we are seeing across the earnings profile of the business, we are maintaining our full-year fiscal 2026 adjusted EBITDA margin guidance range at 6.6% to 6.8%, or approximately 100 basis points of year-over-year expansion at the midpoint. That said, as we mentioned as part of the Modern Animal acquisition, while these clinics are highly profitable on a four-wall mature basis, we expect the business to represent a modest margin rate drag in 2026. Thus, our stable total margin guidance speaks to the increasing durability of Chewy's earnings algorithm. At the midpoints of our guidance ranges, this implies approximately $900 million adjusted EBITDA for the year. Importantly, our updated profitability outlook continues to reflect ongoing investment across several strategic priorities, including Chewy Health, Chewy Vet Care, automation initiatives, AI-enabled productivity efforts, and continued customer acquisition investments. Our confidence in the earnings power of the business continues to strengthen, supported by structural improvements across gross margin, sponsored ads, fulfillment productivity, operating discipline, and broader operating leverage throughout the organization. Furthermore, as we look to continue to deliver robust profitability gains in spite of the more challenged consumer backdrop, we are able to action certain efficiency gains that we originally had slated for the back half of 2026 earlier in the year, supporting full-year margin durability. As you think about the cadence of profitability through the balance of the year, there are several important items to keep in mind. First, as we discussed on our prior earnings call, we continue to expect quarterly gross margin cadence in fiscal 2026 to more closely resemble the patterns observed in fiscal 2023 and fiscal 2024. Specifically, we expect second quarter gross margin to contract modestly year-over-year, driven primarily by difficult comparisons associated with non-recurring MAP pricing benefits realized during the second quarter of fiscal 2025. Despite this quarterly dynamic, we continue to expect gross margin expansion on a full-year basis. Second, we expect SG&A leverage to remain relatively consistent throughout the balance of the year as we continue investing behind strategic growth initiatives while also realizing ongoing operational efficiencies across the business. Taken together, these factors are expected to result in more muted adjusted EBITDA margin expansion during the second quarter relative to the first quarter, with stronger year-over-year expansion expected across the back half of the year. Overall, while we are moderating our revenue expectations to reflect the current operating environment, our confidence in the long-term structural margin opportunity and free cash flow generation profile of the business continues to increase. Now turning to second quarter guidance. For the second quarter of fiscal 2026, we expect net sales between approximately $3.30 and $3.33 billion, representing approximately 6% to 7% year-over-year growth. Our second quarter outlook assumes the current operating environment and consumer behavior trends remain generally stable with what we experienced exiting the first quarter. We continue to see healthy active customer engagement, autoship program strength, and continued market share gains, although we expect ongoing pressure on discretionary attachment and premiumization behavior to persist near term. Given the number of moving pieces impacting quarterly profitability cadence, including the gross margin dynamics we discussed earlier, and our desire to be more transparent and clear with quarterly profitability expectations, we are introducing quarterly adjusted EBITDA margin guidance for the second quarter. We expect adjusted EBITDA margin of between 6.3% and 6.4%, representing approximately 50 basis points of year-over-year expansion at the midpoint. As a reminder, second quarter profitability will be impacted by more difficult year-over-year gross margin comparisons associated with non-recurring MAP pricing benefits realized in the prior year period as well as elevated fuel surcharge costs flowing through the quarter, which we expect to represent a roughly mid-single-digit million dollar headwind to the quarter. At the same time, we continue to expect ongoing SG&A discipline and operational efficiency improvements across the business. Furthermore, our updated guidance for adjusted EBITDA margin in fiscal year 2026 contemplates similar levels of fuel cost headwinds for the balance of the year. Thus, while second quarter adjusted EBITDA margin expansion is expected to be more muted relative to the first quarter, we continue to expect stronger year-over-year profitability expansion across the back half of fiscal 2026 as reflected in our full-year guide as we lap this one-time MAP item. We also expect adjusted diluted earnings per share for the second quarter to be approximately $0.36. And finally, for the full year 2026, we continue to expect share-based compensation expense, including related taxes, to remain broadly flat year-over-year. We are lowering our weighted average diluted shares outstanding by 5 million shares and now expect to end the year with approximately 420 million shares, net interest expense of approximately $10 to $15 million given the interest expense on our recently launched term loan, and an effective tax rate in the range of approximately 24% to 26%. In closing, I would like to thank all of our Chewy team members for their continued disciplined execution and focus on operational excellence. Easily, the combination of our recurring revenue model, growing health ecosystem, structural margin expansion opportunities, and strong free cash flow generation position Chewy well to continue delivering long-term profitable growth and shareholder value creation. With that, I will turn the call back over to Sumit for some closing remarks.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Nathan Feather with Morgan Stanley. Your line is open. Please go ahead.

Hey everyone and thanks for taking the question. I appreciate the quarterly guidance. That's really helpful. I can also put a finer point on the puts and takes here that are leading to the sequential margin improvement in the back half year. Thank you.

Yeah, so thanks for the question, Nathan. And so, you know, Q2, I'll just emphasize, is really all about phasing. The SG&A expansion that we expect in Q2 remained broadly flat to what we saw in Q1 and what we'll see for most of the year. But if you look at our gross margin curve from last year, Q2 had a much higher and sort of outsized increase quarter over quarter. That's not our normal seasonal pattern that you can see in our fiscal 2023 and 2024. And so Q2 is really just a phasing of that gross margin where 2026 looks more stable quarter over quarter on gross margin rate. So as you get to the back half of the year, we continue to think back half of the year looks like our full year where SG&A delivers slightly more in the gross margin improvement. Gross margin will continue to expand year over year, but the seasonality of gross margin the back half of the year looks more normal versus what we experienced prior. And so again, Q2 is really all phasing structurally. SG&A continues to leverage with fulfillment costs. We continue to leverage corporate payroll costs. Gross margin will continue to expand with sponsored ads, premiumization in a rational promotional environment.

Very helpful. Thank you.

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open. Please go ahead.

Thanks so much for taking the question. Maybe one and a follow-up if I could. With respect to the comments you made about the consumer, how should we be thinking about going one level lower on consumer behavior? I mean, are you seeing any deviation in behavior relative to age of cohort or income levels that you want to call out in terms of consumer behavior on the platform?

Okay. And just one follow-up if I can against the macro environment you find yourself in. Now, when you think about some of the longer-term platform and product initiatives that you guys highlighted in your prepared remarks, how do you think about either maintaining or accelerating the investment cadence in the business to capitalize on your market share potential relative to the rest of the industry as you look out towards the remainder of this year? Thanks so much.

Your next question comes from the line of Doug Anmuth with JP Morgan. Your line is open. Please go ahead.

Thanks for taking the questions. Sumit, can you talk about just how you get the confidence that the weaker environment late 1Q and into 2Q is macro driven and just weighing on the broader category rather than anything market share specific to Chewy? And then when you think about the AI savings that you talked about, the low tens of millions in fiscal 26, are you still expecting kind of what you've talked about previously like $50 million plus in fiscal 27? Thanks.

Thank you. Appreciate that.

Your next question comes from the line of Kaumil Gajrawala with Wolfe Research. Your line is open. Please go ahead.

Thank you for taking my questions. Let me try two please. So when we think about your mid to longer term growth rate, in your view does anything change in the growth algorithm? Should we be thinking about your growth as sort of 2x the overall industry growth rate driven by the initiatives that you're taking outside of the macro environment? And then the second is on CVC and the veterinarian efforts. Now that the acquisition is closed, could you please remind us what your goals are between now and year end and how we should be thinking about your expansion efforts there? Thank you.

Yeah, on CVC. So, clinics we still believe are a compelling revenue and earnings growth driver for Chewy going forward. We closed the last fiscal year with 18 CVCs and now we have Modern Animal closed. We've added 29 clinics from them, putting us at 47 clinics. We will continue with our plan as stated of 10 to 12 new openings in fiscal 2026 for Chewy Vet Care and focus on integrating Modern Animal into our operating and technology stacks, and then evaluate the business going forward. We'll plan to attack it aggressively for expansion as we move forward and continue to evaluate all of our both organic and inorganic opportunities in the space. So, 2026 we'll stay with our 10 to 12 clinic opening plan of record and go from there.

Okay, thanks.

Your next question comes from the line of Michael Morton with MoffettNathanson. Your line is open. Please go ahead.

Good morning. Thank you for the question. Just wanted some additional clarity on what you're seeing with the consumer. I'm trying to connect some prior comments. So Sumit in May when you were at an industry conference you said you saw gross adds increasing and then churn improving quarter over quarter, but the guidance in the forward commentary talks about customer additions coming in at the low end of the net adds range per quarter. I would just love to get a better understanding maybe of some of the breakdown in consumer behavior over the last 30 to 60 days that seems to be driving such a reset. And then part of that is the question we get a lot if Amazon's push into same day grocery is having an impact in the competitive environment at all. Thank you.

Thank you.

Your next question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Please go ahead.

Great. Thank you so much for taking our question. Good morning and thank you for all the color. Sumit, we just wanted to follow up on the pressure with premiumization on the NEPAC, and I think you mentioned that's more across discretionary. Can you remind us what's the penetration of what you guys consider discretionary on the platform? Are you seeing this more with new or existing customers? And just your thoughts on company specific initiatives to accelerate that NEPAC. I think you mentioned promotional environment is pretty rational for the industry, but do you view higher promotional activity as a lever for Chewy to drive the business as you go through the softer macro? Thank you so much.

Your next question comes from the line of Mark Mahaney with Evercore. Your line is open. Please go ahead.

All right. Thanks. I just wanted to ask about sponsored ads and if you could provide a little bit more of an update on this. I know you've been citing it for a while as a driver of gross margin expansion. If you could be more specific about that and then if there's anything new in terms of the types of advertisers that you've been able to bring on to the platform, any color there would be great. Thank you.

We have time for one more question which will come from the line of Michael McGovern with Bank of America. Your line is open. Please go ahead.

Hey, thanks for taking my question. Given CVC customers are about $900 in year one NEPAC, can you speak to the customer acquisition cost of a clinic acquired customer versus your primary digital channels? And then second question, just more broadly, can you talk about the EBITDA margin headwind from Modern Animal in the Q2 guidance? Anything along the lines of just how much of the quarter-on-quarter margin headwind is a self-directed investment there. Thank you.

Yeah, Mike, on the Modern Animal EBITDA margin headwind, as we shared when we announced the transaction, we expect Modern Animal to be generally adjusted EBITDA dollar neutral in 2026. So we shared there's a $70 million revenue or net sales impact for the year, roughly dollar neutral EBITDA. So that provides a modest margin rate drag for the year. From a timing and curve perspective, perhaps that drag is a little higher in Q2 and wanes through the year, but that's the overall view for Modern Animal.

Got it. Thank you.

Thank you for all your questions. This concludes today's call. You may now disconnect.