Is the 10% EBITDA Margin Target Finally Within Reach for Chewy?

Core Insights - Chewy, Inc. (CHWY) demonstrated a year-over-year profitability improvement in Q3 2025, aiming for a long-term target of a 10% adjusted EBITDA margin [1][5] - The company’s initiatives, including Chewy Vet Care and Chewy+ membership, are designed to enhance customer engagement and support margin growth [1] - The acquisition of SmartEquine is anticipated to positively impact margins upon completion [1] Financial Performance - Adjusted EBITDA rose 30% year-over-year to $180.9 million in Q3, with the adjusted EBITDA margin increasing by 100 basis points to 5.8% [2][9] - Management is optimistic about consistent EBITDA expansion, with less than 450 basis points remaining to achieve the 10% margin target [2] Margin Guidance - For fiscal 2025, Chewy has narrowed its adjusted EBITDA margin guidance to 5.6%-5.7%, reflecting a year-over-year expansion of approximately 90 basis points [3] - About 60% of the margin improvement is expected from gross margin enhancements, driven by high-margin contributors like sponsored ads and premium categories [3] - Gross margin increased by around 50 basis points year-over-year to 29.8% in Q3, supported by growth in sponsored advertising and a favorable category mix [3] Cost Management - Chewy achieved 20 basis points of SG&A leverage year-over-year in Q3, indicating improved cost discipline and efficiencies from its automated facility in Houston [4] - The company is positioned to close the gap towards its 10% adjusted EBITDA margin target with accelerating margin expansion and multiple structural profit drivers [5] Competitive Landscape - Petco reported a 3.1% year-over-year decline in net sales to $1.5 billion in Q3 2025, but adjusted EBITDA increased to $98.6 million, reflecting improved profitability [6] - BARK, Inc. experienced a 22.1% decline in total revenues to $98.4 million, with an adjusted EBITDA loss of $1.6 million [7] Stock Performance - CHWY shares have decreased by 25.6% over the last three months, compared to a 10.3% decline in the industry [8] - The company currently holds a Zacks Rank 3 (Hold) [8] Valuation Metrics - CHWY trades at a forward price-to-earnings ratio of 30.5, which is higher than the industry average of 21.58 [11]