Chewy’s Margin Gains Fail to Impress as Consumer Spending Stays Selective

Chewy Raises Its Outlook, but the Market Wanted More

Chewy (CHWY) reported fiscal second-quarter net sales of $3.33 billion, up 7.3% year over year and roughly in line with Wall Street expectations. Adjusted earnings were $0.36 per share, matching consensus, while adjusted EBITDA of $226.7 million exceeded expectations and produced a 6.8% margin.

The pet retailer also raised and narrowed its full-year sales and profitability outlook. Yet CHWY stock fell more than 7% Wednesday. Beneath the headline numbers, organic sales growth was 5.7%, discretionary pet spending remained pressured, and management said essentially all of the quarterly margin outperformance relative to its expectations came from timing-related and discrete benefits.

Key Points

• Chewy's second-quarter sales increased 7.3% to $3.33 billion, while adjusted EPS of $0.36 matched Wall Street expectations.
• Adjusted EBITDA rose to $226.7 million, producing a 6.8% margin, although management said essentially all of the outperformance versus guidance came from timing-related and discrete benefits.
• Chewy raised and narrowed its fiscal 2026 outlook to $13.46 billion to $13.57 billion in sales, while active customers and Autoship sales continued to grow.

Customer Growth and Autoship Support Chewy’s Sales

Chewy's second-quarter results showed continued growth in both its customer base and recurring sales.

Active customers increased 3.8% year over year to 21.7 million, slightly above the analyst average estimate of 21.662 million. Net sales per active customer reached $602.

Autoship remained central to the company's revenue base. Sales through the recurring-delivery program increased 9.3% to approximately $2.82 billion and accounted for 84.6% of total net sales during the quarter.

That recurring business helped Chewy produce 7.3% overall revenue growth even as the broader pet market remained pressured. Excluding contributions from acquired businesses SmartPak and Modern Animal, organic net sales increased 5.7%.

Performance also varied across product categories. Hardgoods sales increased 14.4% year over year to $395.8 million, while Consumables increased 3.9% to $2.23 billion. Management said consumers continued to prioritize core food, medications and health-related products while discretionary areas such as treats and toppers faced greater pressure.

Chewy CEO Sumit Singh said the broader pet market did not experience a meaningful consumer recovery during the quarter, although conditions also did not deteriorate from trends seen at the end of the first quarter.

Why Did Chewy Stock Fall After Earnings?

The earnings reaction came despite several positive operating metrics and an increased full-year outlook.

Revenue of $3.33 billion was essentially in line with the $3.32 billion analyst consensus, while adjusted EPS of $0.36 exactly matched expectations. Chewy's adjusted EBITDA provided the more significant upside, reaching $226.7 million versus the $212.1 million analyst estimate.

Adjusted EBITDA increased $43.4 million from a year earlier, and the margin expanded 90 basis points to 6.8%. However, management explained that essentially all of the outperformance relative to its own margin expectations came from timing-related and discrete items.

Approximately $10 million came primarily from tariff refunds received earlier than expected and rebates that shifted from the second half into the second quarter. Chewy also recorded more than $5 million of benefits from gift-card breakage, inventory adjustments and vendor-funded merchandising activity.

Gross margin was unchanged year over year at 30.4%. Meanwhile, non-GAAP selling, general and administrative expenses declined to 18.4% of sales from 19.1% a year earlier. Chewy attributed the 70 basis points of leverage to factors including better fulfillment-center utilization, lower variable costs, headcount discipline, automation and AI-enabled productivity.

Free cash flow was approximately $90 million, representing a 2.7% margin. That was similar to the comparable period a year earlier but below Chewy's two-year average free cash flow margin of 4.1%.

With headline revenue and earnings largely matching expectations and some of the margin upside tied to discrete benefits, CHWY shares fell more than 7% Wednesday.

Guidance, Health and AI Shape What Comes Next

Chewy raised and narrowed its fiscal 2026 outlook, with full-year net sales now expected between $13.46 billion and $13.57 billion, representing growth of 6.8% to 7.7%. Organic net sales are projected to increase 5.5% to 6.3%.

The company also expects a full-year adjusted EBITDA margin of 6.7% to 6.8%, compared with its previous forecast of 6.6% to 6.8%. At the midpoint, the outlook implies adjusted EBITDA of $912 million and more than 100 basis points of year-over-year margin expansion.

For the third quarter, Chewy projects net sales of $3.323 billion to $3.358 billion, adjusted EBITDA margin of 6.6% to 6.7% and adjusted diluted EPS of approximately $0.39.

Beyond its core retail operations, Chewy continues to expand its pet-health businesses. Chewy Vet Care generated triple-digit revenue growth, while Modern Animal performed ahead of company expectations following its $400 million acquisition. SmartPak recorded its seventh consecutive quarter of mid-double-digit year-over-year sales growth.

Artificial intelligence is another area of investment. Chewy launched its AI-powered customer assistant, Kai, to a select group of mobile-app users, with approximately 30% of chats resolved through self-service for common customer requests.

AI tools are also being deployed in customer care, pharmacy workflows and veterinary operations. Chewy expects those initiatives to produce cost savings in the low tens of millions of dollars during fiscal 2026 and approximately $50 million on an annualized basis in fiscal 2027. Management cautioned that those savings should not be viewed as flowing directly to profit because efficiencies can offset normal cost pressures or fund additional growth investments.

What It Means for Investors

Chewy's earnings reaction highlights the distinction between improving operations and results that materially exceed market expectations.

The company continued adding customers, expanded Autoship sales faster than overall revenue, delivered higher adjusted EBITDA and raised its full-year outlook. Its recurring Autoship business now represents 84.6% of sales, providing a large base of repeat customer spending.

At the same time, the quarter showed that consumer pressure within the pet market has not disappeared. Management reported continued weakness in discretionary purchases and said the midpoint of its updated annual forecast does not assume a meaningful improvement in consumer conditions.

The quality of margin expansion is another factor to follow. Chewy exceeded its second-quarter adjusted EBITDA margin guidance, but management attributed essentially all of that specific outperformance to timing-related and discrete items. Longer-term operating improvements were also present, including lower SG&A expenses as a percentage of sales and benefits from fulfillment efficiency, automation and AI.

Health services and acquisitions are becoming a larger part of the company's growth strategy, while organic sales growth provides a clearer measure of performance excluding those acquired businesses. Organic net sales increased 5.7% during the quarter compared with 7.3% reported growth.

Conclusion

Chewy's fiscal second quarter delivered growth without a major upside surprise in its headline numbers.

Revenue rose 7.3% to $3.33 billion and adjusted EPS matched expectations at $0.36. Customer growth continued, Autoship sales increased 9.3%, and adjusted EBITDA exceeded estimates as the company raised its full-year revenue and profitability outlook.

The stock's decline nevertheless reflects the other side of the report: organic growth remained below reported growth, discretionary pet spending stayed pressured, and much of the quarterly profitability outperformance relative to management's expectations came from timing-related and discrete benefits.

The next results will provide another measure of whether customer growth, recurring Autoship revenue, health expansion and operating efficiencies can continue supporting Chewy's growth while broader consumer conditions remain selective.

FAQs

Why did Chewy stock fall after earnings?

Chewy shares fell more than 7% after second-quarter revenue and adjusted EPS were largely in line with expectations, while management said essentially all of the adjusted EBITDA margin outperformance relative to its expectations came from timing-related and discrete benefits.

How much did Chewy's revenue grow in the second quarter?

Chewy reported second-quarter net sales of $3.33 billion, an increase of 7.3% year over year. Excluding contributions from SmartPak and Modern Animal, organic net sales increased 5.7%.

How important is Autoship to Chewy's business?

Autoship customer sales increased 9.3% to approximately $2.82 billion and represented 84.6% of Chewy's total net sales during the quarter.

What is Chewy's fiscal 2026 guidance?

Chewy expects fiscal 2026 net sales of $13.46 billion to $13.57 billion, representing growth of 6.8% to 7.7%, with an adjusted EBITDA margin of 6.7% to 6.8%.

How is Chewy using artificial intelligence?

Chewy is deploying AI across customer service, pharmacy and veterinary operations and expects the initiatives to generate cost savings in the low tens of millions of dollars in fiscal 2026 and approximately $50 million on an annualized basis in fiscal 2027.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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