Chewy Inc Earnings - Q2 2027 Analysis & Highlights
Chewy Inc. delivered strong Q2 2026 results with continued market share gains and profitability expansion despite a pressured pet market, driven by recurring revenue growth, health ecosystem scaling, and AI-enabled productivity improvements.
Key Financial Results
Total enterprise net sales reached $3.33 billion, representing 7.3% year-over-year growth, delivered at the high end of guidance.
Organic net sales increased 5.7% year-over-year, excluding SmartPak and Modern Animal acquisitions.
Active customers reached 21.7 million, up 3.8% year-over-year with 208,000 sequential net additions.
Net sales per active customer (NSPAC) increased to $602, up 1.9% year-over-year on a reported basis and 3.8% on a normalized basis accounting for the extra week in the prior year.
Autoship customer sales reached $2.8 billion, increasing 9.3% year-over-year and representing 84.6% of total net sales.
Adjusted EBITDA reached $227 million with a 6.8% adjusted EBITDA margin, exceeding guidance of 6.3% to 6.4%.
Gross margin was 30.4%, flat year-over-year and up 30 basis points sequentially.
Non-GAAP SG&A was $612 million or 18.4% of net sales compared with 19.1% in the prior year period, delivering 70 basis points of year-over-year SG&A leverage.
Adjusted diluted earnings per share was $0.36.
Free cash flow for the quarter was $90 million compared with $106 million in the prior year period.
Business Segment Results
Chewy Vet Care continues to scale with the total clinic portfolio delivering triple-digit revenue growth in the second quarter, in line with the economic framework outlined at the recent investor event.
Fresh & Frozen portfolio is meaningfully outpacing the broader category, delivering triple-digit unit growth.
Equine, Farm, and Exotics business delivered its seventh consecutive quarter of mid double-digit year-over-year sales growth.
Modern Animal performed ahead of expectations in the quarter following its acquisition, with early results reinforcing conviction in the strategic combination with Chewy Vet Care.
SmartPak performed ahead of expectations, reinforcing conviction in the opportunity ahead as a foundational year for strengthening the business's core operating drivers.
Pet health and specialty products delivered strong organic growth, underscoring momentum across the expanding suite of health-related offerings.
Consumables market is broadly flat year-over-year, with Chewy's mid-single-digit growth representing healthy outperformance.
Hard goods growth was mid-teens, substantially outpacing the broader market despite continued pressure on discretionary spending.
Capital Allocation
Completed acquisition of Modern Animal for $400 million.
Raised $600 million through inaugural term loan issuance.
Deployed $200 million towards share repurchases, repurchasing 9.9 million shares during the quarter after accounting for shares issued in employee equity programs.
Share repurchases resulted in a 2% sequential reduction in weighted average diluted shares outstanding.
Capital expenditures were $48 million for the quarter.
Management believes Chewy shares are undervalued at current levels and expects to remain opportunistic in repurchase activity.
Industry Trends and Dynamics
Chewy continues to outperform the broader pet category by roughly 2x to 3x.
The pet market environment has broadly stabilized to the trends observed exiting the first quarter, with no meaningful recovery but also no further deterioration.
Dog category softness is tied closely to macroeconomic factors, with dog formation closely linked to household formation and less linked to a renter's market.
Cat category is strengthening, with more cat innovation occurring than in the past decade and cats being more friendly and economical from a real estate standpoint.
Online continues to pull share from the overall industry, with traffic stabilizing and strengthening towards Chewy.
Treat sales growth slowed more sharply than growth in core food, reflecting moderation in discretionary purchases and broader macroeconomic pressures.
Competitive Landscape
Chewy continues to gain meaningful share across categories despite macroeconomic pressures.
Chewy's position in search aggregation and search demand traffic is strong, with the company leading with product innovation on agentic surfaces.
Chewy is positioned to lead and capture an outsized portion of demand as aggregation shifts to agentic surfaces.
Macroeconomic Environment
Consumer environment remains pressured with no meaningful recovery expected for the balance of fiscal year 2026.
Discretionary attachment and premiumization continue to face pressure, affecting both consumables and hard goods categories.
Fuel represents a mid-single-digit million dollar headwind through the balance of the year.
Double-digit inflation occurred for several years post-pandemic, with pricing now stable for several quarters but other factors pressuring consumer mindset including fuel, gas, and grocery costs.
Cost of ownership is a headwind for consumers, with retailers and e-tailers trusted in delivering value and convenience positioned to durably compound advantages.
Growth Opportunities and Strategies
Chewy+ program redesign is expected to launch shortly, with the refreshed program design expected to strengthen consumer value proposition and deliver compelling product market fit.
Chewy is introducing unique products and experiences designed to deepen engagement, increase attachment across additional categories, and compound NSPAC in the back half of the year.
AI-powered customer assistant Cai launched to select customers in the mobile app, with approximately 30% of chats resolved through self-service across common needs such as orders, returns, Autoship, and account management.
AI-enabled tools deployed across customer care, pharmacy, and Chewy Vet Care to reduce manual work and improve productivity.
Callie, an AI-powered capability, launched at select Chewy Vet Care locations supporting appointment confirmations, scheduling, and routine follow-ups.
AI-related initiatives expected to generate low tens of millions of dollars of cost savings in fiscal 2026, scaling to approximately $50 million on an annualized basis in fiscal 2027.
Chewy Health ecosystem expansion through Modern Animal and Chewy Vet Care integration to improve access to care and connect more customers with the broader health ecosystem.
Marketing investment in brand awareness ahead of holiday season expected to support customer engagement during peak and beyond.
Continued focus on customer acquisition, retention, reactivation, and engagement deepening across the Chewy ecosystem.
Financial Guidance and Outlook
Full-year fiscal 2026 net sales guidance of $13.46 billion to $13.57 billion, representing 6.8% to 7.7% year-over-year growth including organic net sales growth of 5.5% to 6.3%.
Midpoint of sales guidance does not assume any meaningful improvement in the consumer environment, but consistency at levels seen for the last several months.
High end of sales range contemplates either improvement in market backdrop, stronger execution, or a combination of both.
Low end of sales range assumes some renewed deterioration in operating environment, although less pronounced than the downside scenario in prior guidance.
Full-year fiscal 2026 adjusted EBITDA margin guidance raised to 6.7% to 6.8% from 6.6% to 6.8%, narrowing the range.
Midpoint implies over 100 basis points of year-over-year adjusted EBITDA margin expansion and $912 million of adjusted EBITDA for fiscal 2026.
Third quarter fiscal 2026 net sales expected at $3.323 billion to $3.358 billion, representing 6.6% to 7.7% reported year-over-year growth and 5.3% to 6.2% organic net sales growth.
Third quarter adjusted EBITDA margin expected at 6.6% to 6.7%, representing roughly 85 basis points of year-over-year expansion at the midpoint.
Third quarter adjusted diluted earnings per share expected at around $0.39.
Full-year share-based compensation expense expected to remain broadly flat to last year.
Weighted average diluted shares outstanding expected at approximately 410 million shares.
Net interest expense expected at $10 million to $15 million.
Capital expenditures expected at 1.5% to 2% of net sales.
Effective tax rate expected at 24% to 26%.
Full-year free cash flow-through expected at roughly 80%.
Gross margin expected to decline modestly on a sequential basis in Q3, broadly consistent with seasonality experienced last year.
Full-year gross margin expansion expected at a more moderate pace than fiscal 2025, despite continued tailwinds from sponsored ads and mix premiumization.
SG&A leverage in second half expected to remain broadly consistent with first half performance.
Advertising and marketing expense expected to increase in second half relative to Q2, with spending more heavily weighted towards Q3 than Q4.
AI and Automation Strategy
AI strategy progressing from capability development towards scaled deployment with measurable financial impact.
Over 50% of fulfillment volume flowing through automated facilities, with continued growth expected over time.
AI initiatives beginning to translate into tangible financial benefits through improved customer experience, increased team member productivity, and structurally lowered cost to serve.
AI viewed as a durable lever within the earnings model that should help improve productivity, lower variable cost to serve, and create additional flexibility to reinvest behind attractive growth opportunities.
AI benefits expected to help offset normal cost pressures such as wage inflation and other industry trends, with potential reinvestment in attractive growth opportunities.
Confidence in long-term margin path of 10% plus EBITDA strengthening with every quarter and year, supported by AI and automation initiatives.
