CHWY - NYSE

Good morning, everyone, and a warm welcome to Chewy, Inc.'s First Quarter 2025 Earnings Call. My name is Emily, and I will be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do at any time by pressing star followed by the number one on your telephone key. I will now hand over to our host, Natalie Nowak, Director of Investor Relations, to begin. Natalie, please go ahead.

Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2025. Joining me today are Chewy, Inc.'s CEO, Sumit Singh, and CFO, David Reeder. 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 investors.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. 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 site shortly. And with that, I would like to turn the call over to Sumit Singh.

Thanks, Natalie, and good morning, everyone. The momentum at Chewy, Inc. continues. Our team delivered a strong start to 2025, achieving top-line results, continued growth in active customers, and solid profitability and free cash flow generation. Our Q1 results are a testament to the hard work and dedication of every Chewy team member and Chewy's ability to continue to take market share amidst a resilient pet category. Now let's review the specifics. Q1 net sales exceeded the high end of our guidance range, increasing by over 8% to $3.12 billion. Net sales performance was underpinned by strong participation from new and existing customers across a variety of Chewy's offerings and our favorable mix of core consumables and health and wellness categories. Also notable this quarter was the 12.3% year-over-year growth we delivered within hard goods. Over the last several quarters, we have focused on our ongoing efforts to refresh our assortment and improve the overall customer experience, and we believe that customers appreciate the new offerings available in this category. Additionally, our auto-ship subscription program continues to be a pillar of strength and differentiation for Chewy, enabling high visibility and predictability in our business while also enhancing customer loyalty. First quarter auto-ship customer sales of $2.56 billion represented approximately 82% of Q1 net sales, reaching a record high for the company. Growth in auto-ship customer sales once again outpaced overall top-line growth, increasing by nearly 15% in the first quarter. Moving on to the topic of active customers, the momentum we spoke about last quarter continued through Q1, and we ended the quarter with 20.8 million active customers, reflecting 3.8% year-over-year growth and an increase of approximately 240,000 customers sequentially. Active customer growth was driven by continued strength in gross additions along with improvement in gross churn. Moving down the P&L, gross margin came in at 29.6% for the quarter. Recall that last year, we highlighted approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L. Adjusting for these one-time benefits in the comparable prior year period, we expanded gross margin by approximately 60 basis points year over year. Dave will provide more detail on our gross margin performance. We generated $192.7 million of adjusted EBITDA in the quarter, representing a 6.2% adjusted EBITDA margin and a year-over-year increase of approximately 50 basis points. Accounting for the previously mentioned one-time items, which positively impacted first quarter 2024, adjusted EBITDA margin increased approximately 120 basis points year over year. Our adjusted EBITDA performance in Q1 reflects our continued OpEx discipline and the timing of certain marketing campaigns resulting in modest advertising and marketing leverage inside the quarter. Lastly, we generated nearly $50 million of free cash flow and deployed $23.2 million towards share repurchases in the quarter, aligning with our internal expectations. Now, I would like to provide an update on some of Chewy's strategic initiatives. Starting with Chewy Vet Care, or CVC, since our last earnings call, we have opened three additional Chewy Vet Care practices, bringing our current CVC count to 11 locations across four states. The encouraging signs of success we've spoken about over the last several quarters remain strong through Q1. Our current footprint continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits as customers deepen their commitment to Chewy. Additionally, we continue to gain valuable insight and learnings from each of our CVC locations as they ramp, allowing us to apply those learnings to our recently opened and future clinics as we drive more efficient unit economics. We remain on track to open 8 to 10 new clinics in fiscal year 2025, and we look forward to keeping you updated on our progress as we continue to build this business. Our sponsored ads business continues to perform well and grew sequentially quarter over quarter. The successful migration to our first-party platform that I spoke about last quarter has enabled us to broaden our suite of ad products and content capabilities, including the expansion of off-site ads. We are thoughtfully ramping off-site across search and social, with demand exceeding internal expectations. We're excited about our sponsored ads business. Elsewhere, I am thrilled to share that we have transitioned our Chewy Plus membership program out of the beta phase, following a successful testing period. While still in its nascent stage, we are excited about our ability to drive even stronger loyalty as we expand access and engagement with the Chewy Plus paid membership program. Before I wrap up, I'd like to briefly share my perspective on Chewy's long-term outlook. We have growing confidence in our ability to deliver on the strategic roadmap and long-term financial model that we outlined at Capital Markets Day in December 2023. That confidence is grounded in our execution to date and the meaningful progress we are making towards those goals. Achieving the midpoint of our FY2025 adjusted EBITDA margin guidance range would represent over 220 basis points of margin expansion, from 3.3% to approximately 5.6% in just two years. Importantly, consistent with last year, approximately 80% of that profitability is expected to convert into free cash flow, translating to approximately $550 million, all while continuing to fund our strategic growth initiative through the P&L. Key verticals like health, sponsored ads, and private brands remain early in their life cycles, and programs such as AutoShip, our retail business, and broader competitive modes continue to scale. These developments support our path to achieving our long-term adjusted EBITDA margin target of 10%. As you know, earlier this month, we announced that David Reeder, our CFO, will be leaving Chewy, Inc. to pursue a CEO role in the semiconductor industry. David will remain in his role for the next several weeks to ensure a smooth transition. We thank him for his contributions and wish him continued success. With strong internal talent, a differentiated strategy, and solid momentum, we remain confident in our ability to deliver a share-gaining FY2025 and sustained long-term value for our shareholders. With that, I will turn the call over to David Reeder.

Thank you, Sumit, and thank you all for joining us today. Our strong first quarter results showcase the resilience of the pet industry, the durability of Chewy, Inc.'s business model, and continued momentum in the business. First-quarter net sales grew 8.3%, exceeding the high end of the Q1 guidance range we provided last quarter. We saw continued momentum and active customer growth, ending Q1 with 20.8 million active customers, reflecting a year-over-year increase of approximately 3.8%. Once again, we outperformed internal expectations and delivered year-over-year improvement across all elements of the active customer equation. New customers and reactivations grew year over year, while gross churn improved over the same period. Auto ship customer sales increased by 14.8% to $2.56 billion in the first quarter, with growth in auto ship customer sales outpacing overall top-line growth by approximately 650 basis points. Additionally, auto ship customer sales represented 82.2% of our total net sales in Q1, a new high for the business. Net pack reached $583 as of Q1, representing an increase of 3.7% year over year. Moving to profitability, we reported first-quarter gross margin of 29.6%. As Sumit mentioned, last year in our first-quarter 2024 earnings script, we identified approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L resulting in a normalized gross margin of approximately 29% in the first quarter of 2024. Adjusting for these one-time benefits in the comparable prior year period, we expanded first-quarter 2025 gross margin by 60 basis points year over year. Sponsored ads continue to be the largest driver of gross margin improvement year over year. Combined with a strong auto ship base load and a product mix shift into margin-accretive categories, we have maintained consistency. Shifting to operating expenses, note that my discussion of SG&A excludes share-based compensation expense and related taxes. In the first quarter, SG&A was $575.1 million or 18.5% of net sales. For fiscal year 2025, we expect to deliver modest SG&A leverage driven by at-scale fixed-cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll. First-quarter advertising and marketing expense was $193.8 million or 6.2% of net sales. Based on the timing of certain marketing campaigns, this expense category delivered modest leverage benefit in the first quarter. For the year, we continue to expect advertising and marketing expense to be largely in line what we've delivered in the last two years, or approximately 6.7% to 6.8% of net sales in fiscal years 23 and 24, respectively. This remains consistent with our previously stated long-term target range of 6% to 7% of net sales. First-quarter adjusted net income was $148.9 million, representing an 8.6% increase year over year. We delivered $0.35 per share of adjusted diluted earnings, the high end of our guidance range. First-quarter adjusted EBITDA came in at $192.7 million, representing a 6.2% adjusted EBITDA margin which equated to approximately 50 basis points of year-over-year margin expansion. Excluding the 70 basis points of one-time benefits and first-quarter 2024 gross margin, our adjusted EBITDA flow-through for Q1 2025 was approximately 21%. In the first quarter, we reported free cash flow of $48.7 million, which reflects $86.4 million of net cash provided by operating activities, and $37.7 million of capital expenditures. For the full year 2025, we expect approximately 80% of adjusted EBITDA to convert into free cash flow and that CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales. We continue to reinvest back into the business using our free cash flow while also returning capital to shareholders. We continue to periodically execute open market repurchases pursuant to the $500 million share repurchase authorization we announced at this time last year. In the first quarter, we repurchased approximately 665,000 shares for a total of $23.2 million under our existing program. At the end of the first quarter, we had approximately $383.5 million of remaining capacity under our existing program for future repurchases. We ended the quarter with approximately $616 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 second quarter and full-year 2025 outlook. We expect second-quarter 2025 net sales to be between $3.06 billion and $3.09 billion, or approximately 7% to 8% year-over-year growth. We are maintaining our full-year 2025 net sales outlook of between $12.3 billion and $12.45 billion, or approximately 6% to 7% year-over-year growth when adjusted to exclude the impact of the fifty-third week in fiscal year 2024. Our first-quarter results and second-quarter net sales guidance indicate we are trending towards the upper half of our full-year net sales guidance range. However, given we still have much of the year ahead of us, we are reserving the flexibility to adjust the range upward as we continue to progress throughout the year. Moving to profitability guidance, we are maintaining our full-year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%. The midpoint of our guidance range indicates approximately 75 basis points of year-over-year margin expansion, consistent with our comments last quarter and what we delivered in fiscal year 2024. We expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin. As such, and given our Q1 results, we expect to deliver sequential improvement in gross margin in the second quarter. Additionally, consistent with our comments last quarter pertaining to the 2025 quarterly progression of adjusted EBITDA margin, we expect first-quarter results to represent the high point and anticipate modest sequential declines throughout the year due to typical seasonality and the timing of investments. We also expect second-quarter adjusted diluted earnings per share to be in the range of $0.30 to $0.35. For the full year 2025, we also anticipate share-based compensation expense, including relating tax, to be approximately $315 million, and weighted average diluted shares outstanding to be approximately 430 million. We expect 2025 net interest income of approximately $25 million to $30 million, and our effective tax rate to be in the range of 20% to 22% for the year. Finally, as we discussed on our earnings call last quarter, we continue to embed in our guidance minimal expected impact from tariffs. In closing, I echo Sumit's perspective on Chewy's long-term outlook. The company has a clear, differentiated strategy and a strong leadership team focused on delivering exceptional customer experiences. These strengths position Chewy well to execute its roadmap, drive strong financial performance, and continue to enhance shareholder value. Leaving Chewy is a bittersweet decision; I'm grateful for the opportunity to work alongside Sumit and the talented team here. Thank you to all the Chewy team members for all your dedication and discipline. I wish the company continued success in the years ahead. With that, I will turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. Our first question today comes from Curtis Nagel with Bank of America. Curtis, please go ahead.

Great. Maybe just sort of first one. Could we just dig into net customer ads exceeded expectations pretty nicely in Q1. Is most single-digit growth still the right framework for customer growth for the full year?

Hey, Curt. This is Sumit. Good morning. We were super pleased with the rate and the momentum that has continued from last quarter through Q1. Importantly, these results, as I have mentioned in previous quarters, are predominantly due to our strength in execution and efforts. As the market continues to normalize, this should serve as a tailwind, which is not incorporated in our guidance. Everything we're delivering and what's incorporated in guidance is primarily our execution and efforts. I believe it’s a good baseline to take the low single-digit rate, although we’re starting to operate at the higher end of that. This is due to our addition of more customers on the gross ad side and improving retention, which has led to decreased gross churn. The algorithm is effectively producing a valuable cohort of higher-quality customers compared to what we've seen coming out of the pandemic. We are pleased with both the rate and quality of customer acquisitions, driven by our efforts in recent quarters.

Got it. Understood. Maybe just a quick update in terms of how you think about the industry's growth this year. You pointed to expecting a normalization, but in terms of growth, household formation, any updates since last quarter?

Sure. There are a few data points we’re triangulating. When looking at industry growth, it primarily stems from adoptions and relinquishments; net household formation has been flat but hasn’t regressed from where we were at the year’s onset. It’s trending relatively flat, which is encouraging. Overall, we estimate industry top-line growth at roughly 3% to 4% based on available sources, with our guidance indicating a share-gaining trajectory, growing at roughly twice the industry’s growth. Pricing-wise, no notable inflationary intake is planned throughout the year, although tariff implementations may prompt industry reactions around price adjustments in hard goods or discretionary categories. Our guidance reflects structural growth, chiefly reliant on growing active ads and increasing wallet share. Anything to add, Dave?

Karen, I believe everything has been covered. Thank you.

Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Just want to build on some of the comments in the prepared remarks regarding the advertising opportunity. How are you guys viewing the investment that needs to be made, particularly with off-site advertising opportunities, not just across 2025, but over a multiyear view? Can you give us more insights into how conversations with advertisers are evolving both on and off-site and what that might mean for ads as a percentage of future business?

Maybe I'll start with overall progress on sponsored ads. Both in 2024 and as we’ve entered 2025, we’ve seen substantial advancement. Previously, I mentioned migration to our first-party platform at the start of the year. This transition completes the suite of offerings we intend to provide to suppliers. It enables support for new content formats, including video, and expands both on-site, as done primarily last year, and off-site, which sees increasing demand this year. It offers a more comprehensive sponsored ad experience to our partners. We’re pleased with its performance, and the past year's trends continue strong into 2025. Sumit, any additional comments?

Certainly. Building upon Dave's insights, our outlook on this considers both demand and supply sides. Last year involved expanding on-site offerings and supply in consumables; now, we extend this into social and off-site categories. Rapid supply expansion sees internal teams working closely with partners, engaging more partners, and securing more investment. This coordination strives to optimize website utilization rates. Between partners and us stands a transparent, high-quality discussion on anticipated ROI, consistently exceeding expectations. Couple this with our first-party platform elevating bottom line flow-through and supplier experience, including enhanced analytics, enhances our confidence in the bespoke product that’s currently being refined. We're within the guiding one-to-three percent ranges, and while the shift from on-site to off-site may slightly reduce margins, we anticipate high flow-through. Thank you, Eric.

Thank you. Our next question comes from Mark Mahaney with Evercore ISI. Please go ahead, Mark.

Thank you. Can you elaborate on the sustainability of active customer growth? Specifically, what is driving retention increase for existing customers, and are there new sources of gross additions being tapped now that were previously inaccessible?

Certainly, Mark, thank you. We are confident in our sustainability; bullish, one might say. We're in the early phases of notable momentum gains as demonstrated in the past three quarters. Internal endeavors, primarily revolving around widening marketing funnels and novel strategies, are yielding favorable results. Product refinements, be it storefront enhancements or app developments, are prevalent. In particular, the quality of customers breeds confidence for sustained retention and revenue loopback. As a data point, when reviewing Q1 2025 cohort, new customer Nespac trends slightly higher in single digits year-over-year compared to Q1 2024. This mirrors the increasing mix towards repeatable categories, such as consumables and health—which constitute around 85% of revenue. These inputs show improved reorder rates, reinforcing structure-driven initiatives’ role. As we internally control and refine operations, we're not merely riding potential external trends; that's our strategy for the remainder of the year.

Thanks, Sumit, I appreciate it.

Thank you. Our next question comes from Nathan Feather with Morgan Stanley. Please go ahead.

Hey, everyone. Congratulations on the strong quarter. I wanted to delve into the nitrile Plus program, now out of beta. Any insights on the adoption rates achieved for this tier, and how do changes in unit economics or wallet share manifest once members join the program?

Sure, Nathan. Expanding on Chewy Plus, following a successful 2024 beta phase, we transitioned to full availability in early 2025. While still in its infancy, ongoing broad expansion presents promising membership growth and positive feedback. Active session metrics surpass those of standard users, higher order frequencies, and heightened cross-category penetration all speak to the program fostering greater discoverability and attachment rates. Comparisons to non-members show a notable uptick both year-over-year and across similar demographic cohorts. Metrics indicate sustained net sales growth with net pack steadily rising faster than those of non-members. Costs align with expectations, supporting incremental profit contributions. While specific confidential details are withheld, expansion features program visibility throughout our shopping funnel and continuous growth on the member front partnered with profit contribution awareness. Dave, additional thoughts?

Broadly speaking, along with Chewy Plus, consolidated loyalty efforts including the AutoShip program contribute towards heightened customer engagement. With AutoShip achieving 460-basis-point growth year-over-year, and increased convenience and attractiveness to customers—and new customers converting and re-engaging through these initiatives—drives the uplift in various endeavors. These improvements synergize, resulting in robust active customer growth and beneficial financial outcomes.

Thanks for the clarification.

Our next question comes from Doug Anmuth with JPMorgan. Please go ahead.

Good morning. Following up on AutoShip, noting its evolution from about 66% at IPO to 82% today, how has the customer journey toward becoming an AutoShip member changed over time? Also, for hard goods, what’s driving the 12% growth and assortment improvements?

Good morning, Doug. Regarding AutoShip, we focus on acquisition, sustained engagement, and retention. Known internally as "brilliance in the basics," assortment, availability, and personalized experiences cornerstones our distinct offering, resulting in stronger customer affinity, interaction, and therefore conversion. Over the years, added assortment and experience improvements have paved a clear path from 66% to 82%. On hard goods, team execution excels with assortment freshness, better inventory lifecycle management, and discoverability. A personalized approach enhances the website experience, and collectively, improvements underlie hard goods growth. Further thoughts, Dave?

Evaluating hard goods at a granular level shows category-wide year-over-year uplift, with notable achievements in assortment refreshes and customer engagements cumulatively reinforcing performance. This promising Q1's momentum appears firmly rooted.

Thanks to both of you for the insight.

Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning, thank you for addressing my inquiry. Where do you believe you're gaining market share, and are there any changes from prior quarters?

Yes, there's undeniable market share gain evident from our guidance. Analyzing the industry's 3%-4% growth at a $140 billion scale, anticipated sector expansion sees approximately $4 billion added this year. With around 30% to 35% online penetration juxtaposed with Chewy's revenue implies a gain of approximately 50 cents per dollar online, up from 40-42 cents previously stated. Assuredly, we have a share acquisition plan in place, and execution reflects this strategy.

Great, all clear. Dave, best of luck moving forward.

Our next question comes from David Bellinger with Mizuho. Please go ahead, David.

Hi, thank you for addressing my questions, Dave. Regarding gross margins, understanding the impact of a 70-basis-point one-time benefit last year, are core business margins experiencing any shifts? And on operating expenses, despite automation initiatives, what explains lower OpEx leverage in Q1, and projected improvements later in the year?

Thanks, David. On gross margins, we’re pleased with Q1 results; normalized growth expanded by 60 bps year-over-year, even accounting for last year’s one-time gains. We expect sequential gross margin rises from Q1 to Q2, attributing majority EBITDA growth to gross margins. Key drivers remain sponsored ads alongside product mix accretion, with standard cost absorption mechanics expected to persist. Moving to OpEx, reduced advertising expenses correlate with campaign timings, though a consistent 6.7%-6.8% forecast over net sales remains. Quarter-to-quarter variations can occur, yet annual projections align steadily.

Excellent, very informative. Thank you.

Our next question comes from Shweta Khajuria with Wolfe Research. Please go ahead.

Thanks for taking my question on CVC expansions. With 11 locations now across four states, what’s the scale potential for CVC, particularly in terms of demand generation and anticipated expansion in one to three years?

We’re taking a measured approach to CVC expansion, steadily rolling out vet clinics with promising outcomes from 2024's batch, aiming for around ten additions in 2025. Performance metrics continue robust use and booking trends, plus unexpected highs in new customer introductions and subsequent brand purchases shortly after clinic visits affirm demand generation outcomes. CVC aligns with our ecosystem's long-term goals, tapping into the over $20 billion U.S. vet services market while simultaneously enhancing our pharmacy business. Expansion is happening progressively, reflecting strong adoption and ecosystem advantages.

Encouragingly, envisioning future CVCs alongside comprehensive offerings in pet health and beyond—telehealth, insurance, and data management enhances overall value contingently and broadens TAM relevance. Combining these moats with aligned engagement strategies, such as AutoShip, positions us solidly within the veterinary frontier, yielding fiscal advantages and diversified customer interactions.

Thanks for the detailed perspective, Sumit and Dave. All the best.

Thank you. Our last question comes from Steven

Good morning. Two quick questions from me, starting with pricing—how do tariff impacts reflect on 2025 views? Second, regarding categories, specifically within dogs versus cats, we're hearing cats are faring better this year. Has this trend manifested within your company?

Pricing-wise, like-for-like inflation is minimal, whereas premiumization persists through customer preferences for holistic pet health products. Despite tariff implications, hard goods remain largely unaffected at present due to domestic inventories managing immediate supply. Only minimal tariff-imbued changes exist in our 2025 guide, mainly because 85% of our consumables rely on domestic sources. Sumit, any insights on dogs versus cats?

Both are thriving, particularly concerning cat dynamics receiving attention, thereby reinforcing overall growth stability across consumables, which accounted for roughly half of Chewy’s expansion. Enjoying robust engagement, both felt evenly prioritized.

Thanks, appreciated.