Is Chewy's 6.2% Q1 EBITDA Margin a Turning Point Toward Its Target?

Core Insights - Chewy (CHWY) reported a 6.2% adjusted EBITDA margin in Q1 of fiscal 2025, an increase of 50 basis points year over year, with adjusted EBITDA rising 18.3% to $192.7 million from $162.9 million a year ago, indicating disciplined execution and progress toward long-term profitability targets [1][9] Financial Performance - The improvement in margins was driven by a focus on high-margin, recurring revenue streams, particularly the Autoship program, and the expansion of the sponsored ads business, which is the largest contributor to margin gains [2] - Operational discipline was evident as SG&A was maintained at 18.5% of net sales, reflecting tight cost control, while adjusted earnings per share increased 12.9% year over year to 35 cents, highlighting consistent bottom-line growth alongside margin expansion [3] Future Outlook - Management reaffirmed its 2025 adjusted EBITDA margin outlook of 5.4-5.7%, with the mid-point implying a 75-basis-point improvement from 2024, expecting approximately 60% of this expansion to come from gross margin gains [4] - Chewy aims to convert about 80% of adjusted EBITDA into free cash flow for 2025, with confidence in achieving a long-term adjusted EBITDA margin goal of 10% [5] Industry Comparison - Central Garden & Pet (CENT) reported a resilient margin performance in Q2 of fiscal 2025 despite a 7% revenue drop, with gross margin expanding by 180 basis points to 32.8% and adjusted earnings per share rising to $1.04 [6] - Petco Health and Wellness Company, Inc. (WOOF) focused on restoring profitability in Q1 of fiscal 2025, achieving a gross margin expansion of 30 basis points to 38.2% and an adjusted EBITDA margin improvement of 105 basis points to 6% [7] Stock Performance and Valuation - Chewy's shares have gained 23.3% year to date, outperforming the industry's growth of 7.4% [8] - The Zacks Consensus Estimate for Chewy's fiscal 2025 earnings implies year-over-year growth of 23.1%, with upward revisions in estimates for fiscal 2025 and 2026 [10] - Chewy trades at a forward price-to-sales ratio of 1.33X, below the industry's average of 2.02X, with a Value Score of B [13]