Chewy(CHWY) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Q2 net sales grew by nearly 9% year over year to $3.1 billion, exceeding the high end of guidance range [5][17] - Gross margin reached 30.4%, expanding by nearly 90 basis points year over year [7][17] - Adjusted net income was $141.1 million, representing a 34.8% increase year-over-year [18] - Adjusted EBITDA was $183.3 million, with a margin of 5.9%, reflecting an 80 basis points year-over-year margin expansion [8][19] - Free cash flow for Q2 was nearly $106 million [8][19] Business Line Data and Key Metrics Changes - Autoship customer sales reached $2.58 billion, representing 83% of Q2 net sales and growing nearly 15% year over year [5][6] - Hardgoods business grew over 15% in Q2, driven by structural volume growth [6] - Active customers increased to 20.9 million, reflecting 4.5% year-over-year growth [7] Market Data and Key Metrics Changes - The overall industry is experiencing low to mid-single-digit growth, while Chewy is gaining market share [5][21] - NESPAC (Net Effective Sales Per Active Customer) reached $591, representing 4.6% year-over-year growth [7] Company Strategy and Development Direction - Chewy is focused on expanding its Chewy+ membership program and private brands, including the launch of a new fresh dog food line called Get Real [9][12] - The company plans to open 8 to 10 new Chewy Vet Care practices in fiscal year 2025 [9] - Chewy aims to mitigate tariff-related costs and invest in growth initiatives while maintaining a strong customer experience [15][22] Management's Comments on Operating Environment and Future Outlook - Management expects the second half of 2025 to be dynamic, with a focus on growth despite potential inflationary pressures [15] - The company anticipates continued share gains in the U.S. market and a strong long-term outlook [15][22] - Management remains optimistic about the performance of the Chewy+ program and its contribution to net sales [10][74] Other Important Information - The company repurchased approximately 3 million shares for about $125 million in Q2 [19] - Chewy ended the quarter with approximately $592 million in cash and cash equivalents, remaining debt-free [20] Q&A Session Summary Question: Can you talk more about the investments required in the back half and into 2026? - Management indicated that investments will focus on enhancing customer discoverability and increasing participation in Chewy+ without significant external marketing spend [26] Question: How should we think about the leverage path into the back half? - Management expects SG&A leverage to improve in the back half of the year, driven by the ramp-up of fulfillment centers and structural growth [34][39] Question: Can you unpack the Q2 gross margin improvement? - Management attributed gross margin expansion to product mix, increasing Autoship penetration, and a rational promotional environment [43] Question: What are your expectations regarding net household formations? - Management expects pet households to remain stable or slightly increase, with Chewy continuing to gain market share [61] Question: How is Chewy positioned against retail giants? - Management emphasized Chewy's unique value proposition, combining e-commerce efficiency with personalized service, allowing for continued market share growth [72][74] Question: Can you elaborate on the quality of cohorts improving year-over-year? - Management noted that improved customer engagement through programs like Autoship and Chewy+ is leading to higher NESPAC and retention rates [78]