Chewy, Inc. 2027 Q2 Earnings Call

Lee, please go ahead. Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2026.

Joining me today are Chewy's CEO, Sumit Singh, and CFO, Chris Deppe. 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 a discussion of these risks. Reported results should not be considered an indication of future performance. 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. During this call, we will discuss certain non-GAAP financial measures. Reconciliation 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 for fiscal year 2025. Finally, this call in its entirety is being webcast on our Investor Relations website.

A replay of the audio webcast will be available on our Investor Relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thank you, Lee, and good morning, everyone. Chewy delivered strong results in the second quarter, continuing to gain share and expand profitability. Our performance underscores the strength of our business model and disciplined execution. Our recurring revenue base supports durable sales, while our expanding ecosystem and the growing contribution from Chewy Health drive structural wallet share gains. Together, these advantages position us to outperform in the current environment. Our earnings algorithm also provides the capacity to continue investing for long-term growth. During the second quarter, while we did not see a meaningful recovery in the more pressured consumer backdrop for the pet market, importantly, we did not see further deterioration. The environment has broadly stabilized to the trends we observed exiting the first quarter.

Against this backdrop, Chewy continues to outperform the broader pet category by roughly 2 to 3 times, and we continue to generate compelling growth across both scaled areas of our business and newer strategic growth platforms. Chewy Vet Care continues to scale in line with the economic framework we outlined at our recent investor event, with our total clinic portfolio again delivering triple-digit revenue growth in the second quarter. Meanwhile, our fresh and frozen portfolio is meaningfully outpacing the broader category, delivering triple-digit unit growth. Our equine, farm, and exotics business delivered its seventh consecutive quarter of mid-double-digit year-over-year sales growth. Taken together, this momentum demonstrates the breadth of growth opportunities across the Chewy ecosystem and our ability to capitalize on them without relying solely on a recovery in the broader pet market.

We delivered Q2 total enterprise net sales at the high end of our guidance range of $3.33 billion, representing 7.3% year-over-year growth. Excluding the impact of SmartPak and Modern Animal, Q2 organic net sales increased 5.7% year-over-year, driven by active customer growth, NSPAC expansion, and ongoing market share gains. We ended the quarter with 21.7 million active customers, up 3.8% year-over-year, while net sales per active customer increased to $602. Autoship customer sales once again outpaced overall company growth, increasing 9.3% and representing 84.6% of total net sales in the quarter, further reinforcing the predictability, durability, and recurring nature of our revenue base. Importantly, our customer funnel remains healthy. We continue to add customers, improve retention, reactivate lapsed customers, and deepen engagement across the Chewy ecosystem. These dynamics support our ability to continue gaining share within the pet industry. Now, turning to profitability. Q2 adjusted EBITDA margin reached 6.8%.

While the upside relative to our expectation was largely driven by timing and discrete benefits, the underlying business continued to deliver substantial year-over-year margin expansion. Our Sponsored Ads portfolio continues to scale through robust impressions growth, while generally stable pricing, despite rapidly expanding supply, reflects a healthy underlying auction ecosystem. Our retail product mix continues to shift towards high-margin categories such as health, and we continue to lower our variable cost to serve through automation, scale, operating discipline, and increasingly AI-enabled productivity. Importantly, our strengthening earnings profile also gives us the flexibility to reinvest in the business. Where we see opportunities with compelling returns, we will continue to deploy capital behind initiatives that can accelerate growth while maintaining the operating discipline that has driven our margin expansion up until this point. Turning to Chewy Health. We remain highly encouraged by the progress across our Health ecosystem.

Chewy Vet Care continues to demonstrate strong customer satisfaction, attractive veterinarian productivity and retention, compelling four-wall economics, and importantly, the ability to drive incremental engagement across the broader ecosystem. We are also making strong progress integrating Modern Animal, which performed ahead of our expectations in the quarter. These early results reinforce our conviction in the strategic combination of Modern Animal and Chewy Vet Care. Together, the two businesses provide greater scale, complementary capabilities, attractive unit economics, and differentiated telehealth offerings. Collectively, these trends create a powerful foundation from which to expand our veterinary platform, improve access to care, and connect more customers with the broader Chewy Health ecosystem, providing meaningful runway for future growth. Furthermore, while 2026 is intended to be a foundational year for SmartPak as we strengthen the business's core operating drivers and position it for durable growth, our early progress has been encouraging.

SmartPak performed ahead of our expectations, reinforcing our conviction in the opportunity ahead. The early performance of both businesses reinforces our confidence in our ability to use Chewy's scale and capabilities to improve acquired assets and generate compelling returns as we expand the power of the Chewy platform. Now, turning to AI. Our AI strategy continues to progress from capability development towards scaled deployment and measurable financial impact. In Q2, we made strong progress deploying AI across three areas: improving the customer experience, increasing team member productivity, and structurally lowering our cost to serve. On the customer side, we recently launched Kai, our AI-powered assistant, to a select group of customers in the mobile app. Early results are encouraging, with approximately 30% of chats resolved through self-service across common needs such as orders, returns, Autoship, and account management.

To keep true to our Chewy spirit, customers who prefer or require human support are seamlessly connected to a care team member within seconds. At the same time, we are deploying AI-enabled tools across customer care, pharmacy, and Chewy Vet Care to reduce manual work and improve productivity. In customer care, we launched agent-facing AI capabilities, which are helping transform customer signals into intelligent insights, reducing burden on agents, and increasing team member productivity. In pharmacy, AI is helping automate data extraction and validation while improving review consistency. In vet care, at select Chewy Vet Care locations, we launched our AI-powered capability called Callie, which is supporting appointment confirmations, scheduling, and routine follow-ups while reflecting Chewy's brand voice and customers first tone. These initiatives are beginning to translate into tangible financial benefits.

We continue to expect AI-related initiatives to generate low tens of millions of dollars of cost savings in fiscal 2026, scaling to approximately $50 million on an annualized basis in fiscal 2027. Importantly, we view these benefits as another durable lever within our earnings model. As these capabilities scale, they should help us improve productivity, lower our variable cost to serve, and create additional flexibility to reinvest behind attractive growth opportunities. Before I turn the call over to Chris, let me briefly address our outlook. Three months ago, we reset our expectations to reflect a more cautious consumer environment. Since then, the trends underlying that outlook have broadly stabilized. We are not assuming a meaningful consumer recovery for the balance of this fiscal year. Instead, our confidence remains grounded in what we can control: gaining share, growing and retaining customers, scaling Health, and driving structural efficiencies across the business.

At the same time, Modern Animal and SmartPak are collectively contributing above the levels contemplated within our prior outlook, and our profitability performance continues to demonstrate the structural improvements underlying our earnings algorithm. Chewy remains well positioned to gain share profitability, grow earnings and free cash flow, and build the capabilities that will drive long-term shareholder value. With that, I will turn it over to Chris.