Chewy Inc. (NYSE:CHWY) on Wednesday reported a second-quarter adjusted earnings of 33 cents per share, beating the consensus of 14 cents and the management guidance of 30-35 cents.
Below are the transcripts from the Q2 earnings call.
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OPERATOR
Hello everyone and thank you for standing by. Today’s call will begin in one minute’s time. We thank you for your patience.
OPERATOR
Hello everyone and welcome to the TUI second quarter 2025 earnings call. My name is Emily and I’ll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing Start followed by the number one on your telephone keypad. I would now like to hand over to Natalie Nowak, Director of Investor Relations. Natalie, please go ahead.
Director of Investor Relations
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 respected 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@investor.chuy.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 and Our most recent Form 10K 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 (CEO)
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 15% 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 Chewy 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 NASPAC 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 continued to expand customer share of wallet in the quarter, with nest pack reaching $591, representing 4.6% year-over-year growth. Moving down the P and 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 1. $83.3 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 CHUY’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 NASPAC curves for Chui. Additionally, we remain on Track to open eight 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 Chui, our paid membership program. As a reminder today, Chewy members received 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 membership program is rapidly strengthening in indicating a strong product market fit. In the month Of July, roughly 3% of Chui’s total monthly sales were to Chewy members. Importantly, we are observing strong incrementality in spend, nest pack, and positive contribution profit per customer across Chewy customers compared to non-members. 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 Chui members relative to non-members. All of this is leading to both higher and accelerated Nest pack curves for Chui customers compared to non-members, 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 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 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 three different pup-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 thaw 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 one-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 Chuwi-branded product innovations 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 Hue 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 market and position Chewy for even greater long-term success. With that, I will turn the call over to Will.
Will Billings (Chief Accounting Officer and Interim Principal Financial Officer)
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% year over year to 3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported a second-quarter gross margin of 30.4% 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 hard goods to ensure we have the right assortment of 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 1.41.1 million, representing a 34.8% increase year over year and we delivered 33 cents 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 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 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% adjusted EBITDA flow-through …