Chewy, Inc. (NYSE:CHWY) Q2 2025 Earnings Call Transcript

Chewy, Inc. (NYSE:CHWY) Q2 2025 Earnings Call Transcript September 10, 2025

Chewy, Inc. beats earnings expectations. Reported EPS is $0.33, expectations were $0.1427.

Operator: Hello, everyone, and welcome to the Chewy Second Quarter 2025 Earnings Call. My name is Emily, and I’ll be coordinating your call today. I would now like to hand over to Natalie Nowak, Director of Investor Relations. Natalie, please go ahead.

Natalie Nowak: Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy’s CEO, Sumit Singh; and Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer. Will is a respective leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO. 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. 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 2024. 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.

Sumit Singh: Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year-over-year to $3.1 billion, exceeding the high end of our guidance range. Moreover, against an industry backdrop of low to mid-single-digit growth, our Q2 performance demonstrates a clear share gain outcome. Strength of our Autoship program in categories such as consumables and health anchored Q2 net sales performance. Second quarter Autoship customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in Autoship customer sales once again outpaced overall top line growth increasing by nearly in Q2. We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth.

And finally, a rapidly strengthening CES program exceeded our expectations in the second quarter. I will comment more on our progress with this program in a moment. Moving to customers. We ended the second quarter with 20.9 million active customers, reflecting 4.5% year-over-year growth. Importantly, the strength and quality of our new customers continue to improve. New customer NSPAC for the Q2 2025 cohort strengthened quarter-over-quarter and is trending mid-single digits higher on a year-over-year basis relative to the comparable Q2 2024 cohort. For total Chewy, we continue to expand customer share of wallet in the quarter with NSPAC reaching $591, representing 4.6% year-over-year growth. Moving down the P&L to profitability. Gross margin reached 30.4% in the quarter, expanding on both a sequential and year-over-year basis by nearly 80 and 90 basis points, respectively.

For Q2, main drivers of gross margin were both our fast-growing sponsored ads business and favorable mix into premium categories. Pricing and promotion remained rational and did not have a material impact on gross margins in the second quarter. Continuing on the topic of profitability. We generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year-over-year increase of over 80 basis points. We also generated nearly $106 million of free cash flow in the quarter. Our robust profitability and compelling free cash flow generation enabled us to not only invest in our strategic growth initiatives, but also return meaningful capital to shareholders as reflected by the nearly $125 million we deployed towards share repurchases in the quarter.

Now I would like to provide an update on some of Chewy’s strategic initiatives. The Chewy Vet Care, or CVC network continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits. We are consistently observing that CVC customers drive both the highest and fastest netback curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year-end, and we look forward to keeping you updated on our progress. Shifting gears, let’s talk about Chewy+, our paid membership program. As a reminder, today, Chewy+ members receive the following benefits: free shipping on all orders, 5% rewards to redeem on future orders, limited time seasonally relevant member exclusive offers and a 30-day free trial period.

At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members. As I shared in my remarks earlier, the Chewy Plus membership program is rapidly strengthening, indicating a strong product market fit. In the month of July, roughly 3% of Chewy’s total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, NSPAC and positive contribution profit per customer across Chewy+ customers compared to nonmembers. Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders. Additionally, we are observing incremental Autoship adoption and greater mobile app usage from Chewy Plus members relative to nonmembers.

All of this is leading to both higher as well as accelerated NSPAC curves for Chewy+ customers compared to nonmembers, which in turn is contributing positively to Chewy’s net sales flywheel. As we exit this year, we expect approximately mid-single-digit percentage of our net sales to go through the Chewy P+ program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below Chewy overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members. As we scale, we will remain disciplined in evaluating the program structure, including pricing and member benefits. Moving on. Now let’s talk about Chewy Private Brands.

I am excited to share that in August, we launched Get Real, our new Chewy exclusive private brand of healthy fresh dog food. The fresh and frozen segment represents a fast-growing TAM fueled by trends of humanization and premiumization in pet. Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. Get Real, a new line of minimally processed fresh dog food available only at Chewy comes in 3 different POP-approved recipes, including chicken and Brussels sprouts, beef and sweet potato and Turkey and Cranberry, all available as both full meals and meal toppers made with 10 or fewer ingredients plus vitamins and minerals. Additionally, this premium product is delivered to your doorstep in pre-portioned ready-to-serve meals just tap and serve.

Although the product has only been in market a few weeks customer reception is strong. Customers are pleased with the palatability, quality and overall experience, which includes shopping, delivery and consumption. I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the Fresh Frozen segment broadly, both for Get Real and for our national brand partners while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales. With the capital investment behind us, we are now in process of scaling to a national footprint by leveraging our existing fulfillment center topology. By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a 1-day transit time.

Furthermore, Get Real is exclusively an Autoship subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment. While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond get real, we are working on bringing other Chewy branded product innovation to market in the second half of 2025, and I look forward to keeping you updated on our progress. Before I turn the call over to will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy, reflecting the strength of our differentiated value proposition and the momentum across our business.

Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs on to customers, we believe Chewy is well positioned to mitigate these pressures. Our higher mix of consumables and health and proactive investments in onshoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing while protecting product margins. Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy+ and our private brands. Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment.

Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success. With that, I will turn the call over to Will.

William Billings: Thank you, Sumit, and thank you all for joining us today. Let’s review our financial results and outlook. Second quarter net sales grew 8.6% and year-over-year to $3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported second quarter gross margin of 30.4% and representing approximately 90 basis points of margin expansion year-over-year. Shifting to operating expenses. Q2 SG&A, excluding share-based compensation and related taxes, came in at $592.8 million or 19.1% of net sales, deleveraging approximately 30 basis points year-over-year. Q2 deleverage was driven by the ongoing ramp of our Houston fulfillment center, which launched in April, coupled with the wind down of certain shifts at our Dallas facility.

We also incurred higher inbound inventory processing costs, primarily within hardgoods to ensure we have the right assortment for pet parents as we head into the peak holiday periods, while also allowing us to mitigate impact from tariffs in 2025. Additionally, a smaller contribution came from increases in wage and benefit cost within the period. Importantly, we believe these increases are primarily temporary in nature, and we continue to expect to deliver modest SG&A leverage in fiscal year 2025. Second quarter advertising and marketing expense was $200.6 million or 6.5% of net sales, in line with our expectations and consistent with our previously stated target of 6% to 7% of net sales. Q2 adjusted net income was $141.1 million, representing a 34.8% increase year-over-year and we delivered $0.33 of adjusted diluted earnings per share within the guidance range we provided last quarter.

Second quarter adjusted EBITDA came in at $183.3 million representing a 5.9% adjusted EBITDA margin, which reflects 80 basis points of year-over-year margin expansion. We reported Q2 free cash flow of $105.9 million, which reflects $133.9 million of net cash provided by operating activities and $28 million of capital expenditures. For full year 2025, we reiterate our expectation to convert approximately 80% of adjusted EBITDA to free cash flow and CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales. In the second quarter, we repurchased approximately 3 million shares for a total of approximately $125 million. At the end of Q2, we had $359.8 million of remaining capacity under our existing program for future repurchases.

We ended the quarter with approximately $592 million in cash and cash equivalents, and we remain debt free with an overall liquidity position of approximately $1.4 billion. Now I’d like to discuss our third quarter and full year 2025 outlook. We expect third quarter 2025 net sales of between $3.07 billion and $3.1 billion or approximately 7% to 8% year-over-year growth, and we are raising and narrowing our full year 2025 net sales outlook to between $12.5 billion and $12.6 billion or approximately 7% to 8% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. This represents $175 million increase to the midpoint of our guidance range. Moving to profitability guidance. We are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%.

As Sumit shared in his remarks, we believe it is prudent to remain on the offense in the second half of 2025 and invest to strengthen Chewy’s share position in the pet category. The midpoint of our guidance range indicates 75 basis points of adjusted EBITDA margin expansion year-over-year. Furthermore, at the midpoint of our 2025 net sales and adjusted EBITDA margin guidance ranges, we expect to deliver approximately 15% and adjusted EBITDA flow-through for the year, in line with our previously stated long-term target. Importantly, and consistent with our comments last quarter, we continue to expect approximately 60% of of our adjusted EBITDA margin expansion to be driven by improvements in gross margin, confirming that we expect to continue to deliver healthy gross margin expansion year-over-year in fiscal 2025 with Q2 being the high point for the year.

And finally, we also expect Q3 adjusted diluted earnings per share in the range of $0.28 to $0.33. For the full year 2025, we are also reiterating our previously stated expectations related to share-based compensation expense, including related taxes, of approximately $315 million and weighted average diluted shares outstanding of approximately $430 million. 2025 net interest income of approximately $25 million to $30 million, and we continue to expect our effective tax rate to be between 20% to 22% for 2025. Before we open the call for questions, I’d like to reiterate that our strong Q2 results underscore the continued momentum in the business and strength of execution by our Chewy team members. We believe that Chewy remains exceptionally well positioned to continue to deliver share gaining growth and enhanced shareholder value.

With that, I will turn the call over to the operator for questions.

Q&A Session

Operator: Our first question today comes from Doug Anmuth with JPMorgan.

Douglas Anmuth: Sumit, can you talk more about the investments that are required in the back half and into 2026 just as you lean into growth, a little bit more detail on those? And then also just how are you promoting and increasing awareness of some of the new offerings like Chewy+ and Get Real?

Sumit Singh: So let’s start with the second question first because it will give you a sense for the investments that we’re thinking about. So as you know, we have a very large base of customers, which continues to grow. This customer base is sticky and the programs like Chewy+ allow us to enhance the process of discoverability and get customers to attach both explore, discover and then attach even a greater set of product or a greater range of products and services offered by Chewy. So our first attack strategy is to essentially expose Chewy+ to existing members. And so far, we have not spent any incremental dollar on marketing the program externally, and we don’t intend to do so as we ramp the program up. We’re seeing really good participation of existing 2 members converting to become Chewy+ members.

So the marginal cost of that acquisition is 0 or nearly 0 to us, and most of the exposure is being provided by on-site and funnel shopping experiences. Now coming to Get Real, our approach is very similar. Large audience, we have what we believe really good recognition of what looks like premium cohorts and consumables for us. So our strategy is much more leaning into the broader value proposition of Chewy externally as the place, which is a destination for you to take care of your pets and providing food supplies, health and other services and really gearing ourselves for conversion, right, rather than consideration building when customers come to our website. And so from that standpoint, the inputs that we’ve been really focused on is getting the quality of the product, the palatability of the product exactly where we want it.

And we’re pleased to see the customer response. Number two, we’re price competitive. There are many products out there that are priced much higher. And we believe the value prop or the balance of quality and price that we deliver really passes good value to the consumer. Third, if you explore this product in the way that we’ve built it, this is not a standard product listing page experience. We’ve built a curated experience that allows customers to engage with this category in a manner that it allows them to seek the education, have the content at their fingertips. We’ve paired that up with really high CRM capability internally. And that will be our strategy moving forward as well. So from that standpoint, we’re not — you shouldn’t expect us to lean very heavily in marketing dollars.

Currently, we’re pairing get real with a strong acquisition offer, but candidly, Get Real customers or fresh and frozen customers are high NSPAC customers, you’re looking at plus $2,500 spend full meal customers and running into the high hundreds for topper customers. But these customers are also really propense towards health and wellness and other high spend categories. So broadly, we see tremendous potential for this category being the highest gross profit per unit category in the company. The fact that we’ve already spent the money in building CapEx or capacity should essentially make you comfortable to the point that we don’t have incremental CapEx investments coming up through 2028. Of course, if the program exceeds our expectation in a major manner, then that’s a high-quality problem to have, and we’ll talk about it at that particular point.

But broadly speaking, these are high-margin sales, high sales, high-margin verticals, and we’re excited to be finally leaning into them. and driving even stronger netback consolidation.

Operator: Our next question comes from Nathan Feather with Morgan Stanley.

Nathaniel Feather: [indiscernible] encouraging momentum here a question on the SG&A deleverage. And you may to put some guardrails on the magnitude of temporary costs here and how much maybe we can attribute to some of the FC changes versus the hard good processing costs. And because of that, how should we think about the leverage path into the back half?

Sumit Singh: Yes. Nathan, me provide broader commentary on SG&A and also answer your question very specifically. So First of all, as we discussed on the call, we expect roughly 60% of our adjusted EBITDA margin expansion to come from gross margin and 40% to come from OpEx leverage. So we do expect to deliver SG&A leverage in 2025. And by inference of our first half performance, you can expect that, that leverage will come in the back half of the year. Number two, yes, the amount of SG&A leverage on a year-over-year basis in ’25 will be lower than 24%. But I think that’s the ebb and flow of SG&A, right? Let me kind of elaborate on that a bit. So this will ebb and flow in cycles a bit. As we elaborated in our Capital Markets Day in December ’23, we set a target of roughly 200 basis points to deliver.

So far, roughly 2 years out, we’ve already delivered 100 basis points or 50% of that target. The majority of that leverage has come from us ramping 4 fulfillment sites, which are automated 2G sites and roughly flowing 40-plus percent of the volume through these states of automation within the company, right? By Q2 of next year, we expect nearly 50% of our volume will be automated, especially as Houston ramps up. Now let me talk about the specifics in the quarter. So there’s a couple of things that are happening in the quarter and in ’25, right? So we launched Houston in April of this year, and it takes roughly 6 months for a Gen 2 facility to ramp sufficiently to start delivering leverage. And I went back and checked my notes from Q1 and perhaps we should have been a little more clear on that point upfront, right?

So this facility is ramping well. It’s ramping as expected, but it takes about 6 months for a Gen 2 facility to ramp for it to deliver sufficient leverage. As such, we do expect to see leverage out of the facility beginning in the second half of this year. Now the second thing that’s going on in SG&A is, look, the faster we grow in 2025. And as you can infer, we’re growing purely on the basis of units. Its structural growth, which is comping first half growth where we had pricing benefit. And so what you’ll see is that SG&A that is a variable cost element, right, will essentially be enhanced, the faster we grow on the basis of units. But that’s a high-quality problem to have because it builds density. It allows us to extract more cost out and get the economies of scale as our facilities fully ramp up.

So again, that’s a transitory thing and we expect this to be a lot easier and better as we step out from ’25 into ’26. Now let’s talk about the onetime elements. So we picked up incremental inventory in hard goods because as you can see from the commentary in the market, prices are expected to rise in the back half of the year, right? And so we wanted to both shore up the inventory to deliver and immaculate customer experience from an in-stock point of view. But you know what, we might invest in price, right? We may invest in price to take share while everybody else is raising price, Chewy becomes another destination for pet parents to really extract the maximum value. So temporarily, we believe this is a situation which is opportunistic and we should lean in and improve our share position.

You talked about — and so roughly, we spent about $3 million to $5 million in this particular element in higher inbound processing cost, right? And the last component that we talked about in the script was higher wages and benefits and higher wages and expenses, which was a smaller element, which is sometimes cyclical, and that was about $2 million to — $2 million to $3 million per se. The important takeaway is that you can expect SG&A costs to moderate in the back half of the year relative to the first half, and we expect to deliver SG&A leverage in ’25.

Operator: Our next question comes from David Bellinger with Mizuho.

David Bellinger: Let me just squeeze a few together here. Maybe if we could just start on the Q2 gross margin improvement. You mentioned the premium products. That seemed like somewhat of a shift also maybe talking about some of this price investment in the back half. So can you unpack all that for us and how we should think about the drivers of gross margin expansion in Q3 and Q4? And then also just on the new OpEx investments, can you help us understand, is all this fully in your control and making decisions to further accelerate the top line and share gains versus something more reactionary or something changing in the external marketplace is forcing you to do this. Can you just help us understand that split in chewy+ and fresh and frozen, this might impact the 15% incremental EBITDA margins for the business?

Sumit Singh: Yes. Sure. No, it’s a good question. Let’s dive into it. So there’s a couple of questions built into that. So let’s carry on the part. So gross margin first. We’re pleased with the gross margin expansion that we’ve delivered this quarter, right? And the drivers of gross margin, David, have remained very consistent over the past few quarters and overall in line with our story or the narrative that we brought to the street, right? They include product mix across our merchandising led businesses. So you’ve heard us talk about health, premium consumables. Now hard goods is starting to grow double digit, albeit at a smaller contribution, but still were encouraged to see kind of where this goes. So that’s kind of why we use the word product mix across merchandising led businesses because it isn’t just pharmacy, which has continued to contribute.

It is health and wellness supplements, it’s premium consumables. It’s hard goods growth, et cetera, et cetera, et cetera. So number 2 — so the drivers of gross margin include product mix across merchandising led businesses, increasing auto ship penetration and scale that provides economies of scale and our ramping sponsored ads initiative, right? So that’s very consistent commentary. For Q2, the promotional environment remained highly rational, right? And we don’t expect the promotional environment to be irrational in the back half of the year. So as Will mentioned in his remarks, the high point of gross margin for the year, and I especially want to note that gross margin will fluctuate on a quarterly basis, right? And that would be helpful to remember.

This is the case because while we pride ourselves on being disciplined, we also pride ourselves in being able to run the business dynamically each quarter. So for example, we will lean into opportunities where we believe July will benefit long term. For instance, we may lean into Autoship subscription growth if we’re seeing the right conditions that signals from our marketing teams or on the program ramp supplier ramp, the ramp of phasing the suppliers and sponsored ads may lead to 1 quarter being more meaningful than the other in terms of contribution. The important point to remember for 2025 and in general, is that we plan on delivering a healthy level of gross margin expansion on an annualized basis. So specific to ’25, if you recall our guidance, we expect approximately 60% of 25% EBITDA margin expansion to cover gross margin.

So clearly, the inferring here is that we do expect to deliver meaningful gross margin expansion this year as well. So where are we investing in the back half. So if you look at our guidance, I’ll just sort of like plan mass it out for us, right? At the midpoint, our guidance is expanding by roughly $175 million, 15% of flow-through, you’d expect call an incremental $20 million, $25 million to flow to the bottom line. But we’re choosing, right, to invest that back into the growth of the company. whether that’s growing the Chewy+ membership program that we believe is going to be super incremental. And part of that incremental incrementality is reflected in our top line guidance or whether it’s continuing to grow autoship stronger or whether it’s opportunistically evaluating the market in the back half and seeing if there is selective pricing lean and opportunity?

If there isn’t, then great, we’ll take it to the bottom line. But we’ve sort of left ourselves open to play the marketplace. And SG&A, structurally, this is all within our control. So these are 2 different things that are happening in the way that we will invest in the growth of the business. And the SG&A story, which is a very standardized certain onetime elements, but generally the ramp of our fulfillment facility.

Operator: Our next question comes from Rupesh Parikh with Oppenheimer.

Rupesh Parikh: So just going back to Get Real and some of your fresh frozen efforts at this juncture, how big do you think the business can go over time? And then I know it’s early, but just any characteristics of the initial customers that you’re getting into the franchise. And in this sense, are you getting sense of — do you have a sense of whether you’re actually getting new customers just given that launch?

Sumit Singh: Sure. Yes. So if we look at the TAM of the category today, we believe it’s somewhere in the $3 billion, $4 billion range. And over the next several years, we expect this category to be north of $8 billion, so somewhere in the $8 billion to $12 billion range. The category is growing at mid-teens levels. It was growing faster up until last year. Now it’s growing at mid-teens level. And that’s a really healthy growth rate for us to be able to get excited about, right? Number three, there is a lot of interest in this category from around the industry, right? You’ve seen some de novo players already leaning in. You’ve seen national branded players start announcing their announcement or their product offerings. We’re really excited to be partnering with the national branded partners as they bring their products to life in the back half of this year.

And alongside that, right, get real we expect to have a meaningful amount of share as the category grows. What is meaningful? We would consider roughly a share position commensurate to Chewy’s share position in the industry to be a meaningful share outcome, right? Now given that we’ve built the capacity, given that we’ve built the topology to be a 1-day network, right, and given the sophistication that we have in our supply chain, we expect, right, the high gross margin possibility of the vertical to efficiently translate into high EBITDA as well, right? And alongside, you asked about the quality of the customer. Let me answer that now. So, so far, it’s early days. We’ve been at it, what, less than 4 weeks, 5 weeks. And so far, we’re seeing roughly 70% of the customers are existing customers, 30% of the customers are net new customers.

And that is — as my earlier comments to Doug indicated, we’d expect that, right? So we’re benefiting from the general traffic that the industry will create in marketing the product and we are priming ourselves for conversion using our site experience with Get Real. We’d expect the net pac of this customer to be north of $800 for toppers because we believe they will attach 2 or 3 more categories. And for full meals, we expect this to be a plus $2,500 customer on an annual basis. So we’re excited about it.

Operator: The next question comes from Curtis Nagle with Bank of America. Curtis, your line is opened, please proceed with your questions. We are not receiving a response, and so I will move on to the next question, which comes from the line of Shweta Kajaria with Wolfe Research.

Shweta Khajuria: Okay. Let me try 2, please. Sumit, could you please talk about the advertising environment is the conversations you’ve had through the quarter? And what is top of mind across advertisers as we think about the back half of this year and potentially even next year? And how it is and how ad revenue is trending or I guess, advertising business, not revenue is trending for you versus your expectations? And then the second question is, generally, what are your expectations as we think about the macro in terms of net household formations for the remainder of this year and also next year. And I asked because there could be inflationary pressure. So how are you thinking about the mix of customer growth versus pricing? Do you still expect it to be call it, low to mid-single-digit percentage growth rate in the back half? Or is there potential for acceleration in the back half of this year?

Sumit Singh: Okay. There are 3 questions there. State of the industry and key inputs, our composition of new customers and NSPAC and then 3 [indiscernible] pricing. So let’s take them 1 by 1. So in terms of the lay of the land, so let’s start with pet household formation trends. Overall, the trends that we spoke about last several quarters have remained consistent, and we’re not seeing notable changes relative to those comments, right? With respect to data, the shelter channel, net adoptions remain stable and relinquishments continue to trend down year-over-year. And so overall, we expect at households to be broadly flat to slightly up in 2025, right? So the point on industry continues to normalize, seems to be holding true.

Now across the conversations that we’re having with our suppliers and interpreting the market from a consumer standpoint, we believe the back half of the year or generally for 2025, the industry remains in low single digit to kind of perhaps the low end of the mid-single-digit range in terms of growth. And so we are clearly taking share, growing on a 52-week basis between 10% and 8% and 53-week basis, the 6% range or so. which we’re excited about. And this is on top of the fact that we have tougher comps that we’re comping as we move into the back half of the year. So we’re excited about that. Now let’s talk about our composition. So our growth algorithm, as we’ve guided long term is a combination of active customers growing low single digit to mid-single digit and NSPAC growing mid-single digits, right?

And so we’re pleased to essentially maintain that for the rest of the year. We’re encouraged by the steady and consistent return to active customer growth that we have delivered over the past several quarters and we expect that to continue on a sequential basis, right? I would remind you that we will be lapping our return to active customer growth in which will result in modestly tougher comps for us in Q4. And even with the tougher comps, we continue to expect to grow active customers at the high end of the low single-digit range in 2025, right? And then when you look at NSPAC, we delivered 4.5% growth in Q2. That is in a normalized environment, which would — where there is some pricing benefit. Right now, there is no pricing — or no material pricing benefit flowing through.

So we’re growing netback at 4.5%, and we would expect, right, NSPAC to continue to trend in that 4.5% to 5%, 5.5% range as we move into the back half. And again, this is through stronger auto ship, stronger product mix, programs like Chewy+ that are driving consolidation. So it makes a lot of sense for us to lean in and continue to capitalize on the growth that we’re seeing. And then your final question on advertising, the market — competitive intensity is side. We don’t see generally from a lean end point of view, either suppliers nor competitors lean out. So competitive intensity remains high. We are really pleased with the metrics that we are seeing on our side. For example, our net traffic was up 14% in the quarter, number of sessions.

And then on the mobile app side, right, sessions were up over 25% year-over-year. And so broadly speaking, we’re attracting customers, and we like that translation layer. When we think about sponsored ads, that continues to resonate really loudly. And we feel good about the continued progress that the business made on ads this quarter, which, again, grew sequentially and we have strong conviction in our long-term target of the 1% to 3% that we have brought to the table.

Operator: Our next question comes from Michael Morton with Towers.

Michael Morton: Question for Sumit. Bigger picture and then maybe a more near-term one. But Chewy has done an excellent job kind of disproving the fears around competing with retail giants and there are the obvious competitive advantages like customer service. But we were wondering if you could maybe speak to some of the aspects that are missed by us on the outside, where you think your real opportunity is to continue gaming incremental share? And then maybe just internally how this is reflected in your outlook as pet household formation continues to improve? And then just on the hard goods recovery, maybe just a little bit details on volume versus ASP would be helpful.

Sumit Singh: So let’s start with the second question. It’s all primarily volume. There is a very little ASP benefit right now in the hard goods recovery. The primary drivers of hard goods recovery are, as you’ve heard me talk about it last quarter, I will reiterate that a rapid acceleration and expansion of in stock, higher more products for customers to choose from. We’ve onboarded over 1,500 brands this year already, and customer reception on the freshness of that inventory is really encouraging for us to see. Number two, our in-stock levels have remained really high, and we want to keep them high and hence, the investment in inventory in Q2 as we move into the back half of the year. Number three, continued exposure for hard goods customers in the way that we’re communicating with them, both on-site and off-site.

And so overall, we’re encouraged by what we are seeing in hard goods and don’t expect it to slow down as we’ve played Q3 so far. So a good story there. And then you — your higher order question around differentiation. And look, we really always interpreted the playing field as much broader than food and supplies. And when you essentially interpret $140 billion, $150 billion TAM, right, which is increasingly online. The value prop that we are bringing to the market, which is credibly connecting food suppliers, the entire health ecosystem alongside B2B or B2B2C type services options. And then really keeping customers in our funnel and building that layer cake. We do it, in my opinion, in 1 of the most efficient and powerful ways relative to anybody out there.

And so there are reasons for that, right? So in the food and supply side, you would think that we are a scaled e-commerce player, but with the personalized service you would expect in a local neighborhood pet store. And that combination is very hard to achieve. And we continue to achieve and outperform and are never satisfied with our performance when you think about it at the scale that we’re operating. Then next to it, we have stood up a very large and compelling health TAM, which now we’re playing in nearly 100% of the $50 billion Health TAM that is growing at 2x the rate of food and supplies and within that, we’ve built a very credible set of offerings. So whether it’s the fact that less than 1/4 of our customers are interacting through verticals like pharmacy which gives us tremendous headroom to continue to grow in pharmacy, particularly as the vertical continues to move more and more online or whether it’s the growth of our compounding business.

We haven’t talked about compounding for a while. That — the gross margin — the compounding — there’s only 2 credible compounders in the country, and we stepped into compounding to offer the first B2C offering for customers, but we’re also becoming a more and more choice product for veterinarians who want to lead into compounding services. And the gross margins for compounding are even higher than gross margins for pharmacy and the barriers to entry are really high, right? Next to it, we’ve built a very credible B2C and B2B software business, which continues to ramp. And so broadly speaking, and now with CVC ramping higher than expectation, it’s only excitement that we can sort of project moving in the future. Chewy+ is a program we’re excited about, and that’s why we believe it was important to inform you that the program is quickly ramped up to become 3% of net sales, exiting the last month of last quarter, and we expect it to continue, right?

We see this program in line with the Amazon Prime or Costco membership or a Walmart Plus with similar benefits and similar returns. And so our job is to position it as the best cat membership program in the industry. We’re excited about that. So there’s lots — there’s lots in front of us that allows us to compete without really being concerned about competitive intensity, that’s always — we are observant of that, but we’re really obsessed over our customers.

Operator: We have time for 1 final question. And our last question today comes from the line of Dylan Carden with William Blair.

Dylan Carden: Sumit, curious, you had some earlier comments about sort of the quality of cohorts improving year-over-year. And I was just wondering if you could elaborate on that. Is that just sort of simply the industry itself stabilizing and improving? Are you doing things to kind of stimulate that? And the growth maybe sort of a related topic, but the growth in auto ship and the outperformance there, which has been relatively sustained over the last 3 quarters. How long do you think that runs?

Sumit Singh: So the quality of the cohorts improving is a result of 2 different things, Dylan, and they’re both complementing us. One is — the more customers we push into programs like AutoShip or bring in through programs like Chewy+, the more our ability to keep them in the funnel get them more opportunities we have to talk to them to get them to consolidate their NSPAC and the faster netback consolidation that we see from them. So within the program itself, then we have worked towards improving settlement rates. So for example, if you think about auto ship, there’s a — it’s a 2-sided far, right? We’re bringing in growth subscription and then we’re retaining net subscribers. So we will grow book — our rate of gross subscription add to autoship has increased, and our second order, third order, fourth order settlement rates into autoships has improved, which then means that the net retention in auto ship is much better.

And you see that layer cake building pretty effectively that continues to push a greater portion of our sales moving through ownership. With Chewy+, we’re seeing a similar effect, right? Chewy+ members are engaging with and adding and on an average, 3 more categories than nonmembers to their baskets, right? And the mix of cohort is really interesting to us because it opens up Chewy right, to all of the low spending cohorts where we can rapidly consolidate baskets and it’s opening us up for high-spend cohorts to expand and discover other products, which are also expanding basket size. So on an average, we see really strong incrementality and the quality of cohorts of the Chewy+ program is healthy. Then we have a large and growing health business and a premium consumables business.

Remember, every time I’ve talked about this in the past, we’ve mentioned that when it comes to the low-end value segment of the market, which is roughly, in our opinion, 12% of the market or customers it’s slightly not the place for Chewy, but everybody else, right, Chewy is the place. And then the final thing is more and more people move in online. So clearly, online is consolidating share from off-line and once we lock these customers in, which we were not doing as well, in my opinion, in ’22, ’23, you’re seeing the results sort of come through here.

Dylan Carden: And just curious, Chewy+, I get that it’s early days as far as sort of mid-single-digit revenue penetration. But for a lot of loyalty programs, you mentioned Prime, as kind of the majority of the business. Is that part of the intention here. And just from a margin standpoint, let’s assume it’s the majority of the business, that would be margin accretive.

Sumit Singh: So look, I mean, I think we’ve shared the stat in the fact that in the past that at some point, we did the survey not so long ago, 3/4 of our customers are prime members, right? And so I think that’s probably well understood, given how broad the penetration of that program is. But candidly, what we’re observing is what we’ve also shared in the past is that our — generally, it is well understood that we retain a very high percentage of our customers from going into year 2, right? And so our attrition is de minimis, past kind of a 30-month mark. And you saw that in the way that our pandemic cohorts have settled out, right? And so what happens is that once we have a customer past the 30-month mark, in the past, right, they would rapidly consolidate their share of wallet over to Chewy, right, regardless of whether they are a prime member or not.

And now with Chewy+, we’re seeing that, that consolidation is happening even faster, right? With Autoship, we’re seeing that, that consolidation happens even faster because we’ve improved the proposition on the Autoship program itself. So that was my point on why we’re seeing it both accelerated as well as credibly built netback curves on the back of these 2 programs. And then your other question was around margin. Yes, we expect Chewy+ to be margin accretive right? So as the program ramps, obviously, we’re leaning in into the 30-day free trial period. There is the mix of new members to paid members. It will take a few months for the netback consolidation to start coming through. But broadly so, yes, the program will be gross margin rate dilutive, but on a dollar basis, it will be highly accretive and on a contribution profit basis, it will be highly accretive.

And so I think you would essentially underwrite a business case where we came to you and said, “Hey, we’re investing x basis points, but we get 6x the return in top line, okay? I think that [indiscernible] something that we will underwrite.

Operator: Thank you. Those are all the questions we have time for today. And so this concludes our call. Thank you all for your participation. You may now disconnect your lines.