Chewy Inc Earnings - Q1 2026 Analysis & Highlights
Chewy Inc reported solid Q1 2026 results with continued market share gains and record profitability, though management acknowledged a more challenging consumer environment emerging in the latter part of the quarter, prompting a moderation of full-year guidance while maintaining confidence in long-term structural advantages and strategic initiatives including health services expansion, AI-driven efficiencies, and fulfillment optimization.
Key Financial Results
Net sales reached $3.36 billion, representing 7.7% year-over-year growth, reflecting strength in the recurring revenue base and balanced contribution from customer growth and net sales per active customer (NSPAC) expansion.
Active customers ended the quarter at 21.5 million, up 3.6% year-over-year, with nearly 200,000 net customer additions despite a weakened consumer environment in the latter part of the quarter.
NSPAC increased to $597, up approximately 4.6% year-over-year on a normalized basis, reflecting continued customer cohort maturation, growth in health and wellness penetration, and increasing cross-category engagement.
Autoship customer sales reached $2.83 billion, increasing over 10% year-over-year and representing 84.4% of total net sales, further reinforcing the predictability and durability of the recurring revenue model.
Gross margin reached 30.1%, representing approximately 50 basis points of year-over-year expansion, driven primarily by continued growth in sponsored ads, favorable category mix, and continued operating discipline.
Adjusted EBITDA reached approximately $253 million in the quarter, representing a 7.5% adjusted EBITDA margin, up approximately 130 basis points year-over-year, with adjusted EBITDA flow-through of greater than 25%.
Adjusted net income was approximately $180 million, translating into adjusted diluted earnings per share of $0.43.
Free cash flow for the quarter was approximately $71 million, increasing over 45% year-over-year, reflecting approximately $109 million of net cash provided by operating activities and approximately $38 million of capital expenditures.
Business Segment Results
Chewy Vet Care (CVC) clinics are delivering strong standalone economics while simultaneously acting as a powerful customer acquisition and retention engine, with approximately 40% of CVC customers being new to Chewy and reaching a year-one NSPAC of approximately $900.
Existing Chewy customers who engage with CVC increase share of wallet meaningfully faster than other cohorts following their first visit.
Veterinary teams deliver industry-leading productivity metrics supported by technology-enabled workflows and AI-assisted tools, resulting in vet retention and employee satisfaction that outperforms peers.
SmartPak acquisition closed in the first quarter as planned with revenue contribution in line with the previously communicated $80 million net sales expectation for the full year 2026.
Capital Allocation
Approximately $200 million of share repurchases were deployed under the existing program during the quarter, reflecting continued confidence in the long-term opportunity.
Capital expenditures were approximately $38 million in Q1, supporting fulfillment network optimization and strategic infrastructure investments.
The company ended the quarter with approximately $520 million of cash, cash equivalents and marketable securities and over $1 billion of total available liquidity inclusive of the revolving credit facility.
A $600 million Term Loan B debt transaction was launched earlier today, with the company targeting net leverage below 2x adjusted EBITDA over time while maintaining a conservative balance sheet.
The acquisition of Modern Animal closed shortly after quarter end, accelerating the expansion of CVC with a highly complementary and well-established footprint with above-industry unit economics.
Industry Trends and Dynamics
Pet remains a resilient category driven by recurring non-discretionary needs and strong emotional attachment, despite consumers becoming more discerning driven by elevated fuel prices and broader macroeconomic pressures.
Chewy continues to steadily gain share despite a more challenged backdrop, with the company's value proposition remaining exceptionally strong through industry-leading convenience, highly competitive pricing, trusted service, deep assortment, and a recurring Autoship ecosystem.
Pet healthcare represents approximately $54 billion of TAM, including over $40 billion associated with in-clinic products and veterinary services alone, representing one of the largest and most compelling long-term opportunities for Chewy.
E-commerce continues to take strength in the pet category, with Chewy continuing to hold onto customers and not seeing indicators suggesting a meaningful change in the competitive environment.
Competitive Landscape
Chewy's ability to continue expanding earnings and free cash flow in a challenging environment further reinforces confidence in the structural durability of the model and share-gaining posture.
The company's unique and differentiated operating model combines a leading recurring revenue engine with a highly scaled fulfillment and health platform, positioning Chewy to reach its 10% adjusted EBITDA margin target over time.
Chewy's structural advantages include the expansion of sponsored ads, product mix shift into higher margin categories including health, and operating expense leverage from automation and scale, which do not require outsized industry growth or significant pricing inflation to expand margins.
The primary source of share gain in the pet industry remains within large e-commerce players such as Chewy, with the company continuing to pull away relative to the innovation being driven in pet categories.
Pricing and promotional intensity in the broader retail environment remains rational and consistent with what has been seen for quite some time, with Chewy maintaining disciplined management of the business while delivering strong customer experience.
Macroeconomic Environment
The consumer pet environment has become incrementally more challenged since the company initially established its fiscal 2026 outlook earlier this year, with the updated guidance reflecting a more appropriately conservative view of the consumer environment and broader category growth assumptions.
A modest level of incremental pressure on premiumization and product attach rates is being observed amongst the current customer base, resulting in what management views as a short-term NSPAC headwind.
Consumers are growing more discerning, driven in part by elevated fuel prices and broader macroeconomic pressures, though pet remains a more resilient category relative to other parts of the consumer landscape.
More pressure on discretionary attachment and premiumization behavior is being seen across portions of the customer base, resulting in slower NSPAC growth than originally anticipated.
The consumer backdrop has become more challenged as the company moved through Q1, with modest pressure on NSPAC driven by attach rates, particularly on the discretionary side as well as premiumization headwinds.
Growth Opportunities and Strategies
Chewy health and Chewy vet care represent one of the largest and most compelling long-term opportunities, with the company planning to operate approximately 60 clinics exiting fiscal 2026 with embedded revenue contribution approaching approximately $290 million at a steady state.
The Modern Animal acquisition accelerates the expansion of CVC and unlocks multiple avenues to accelerate clinic growth, combining CVC's organic growth with Modern Animal's existing footprint and development pipeline.
AI represents a meaningful opportunity for Chewy both from a customer experience perspective and from an operational efficiency standpoint, with AI being embedded across multiple layers of the business including customer service, pharmacy operations, fulfillment and marketing workflows.
AI-driven efficiencies are expected to contribute a low tens of millions of dollars benefit in fiscal 2026, with a more meaningful ramp expected into 2027 and beyond.
Improved go-to-market initiatives including better CRM efforts resulting in greater conversion, increased engagement via the mobile app, continued success in reactivating lapsed customers, and ongoing success in driving down churn are supporting an ongoing healthy trajectory for customer net additions.
Strategic initiatives across health, AI, fulfillment and customer experience continue to strengthen the moat around the Chewy ecosystem.
Sponsored ads continue to be a key driver of margin expansion, with the company exiting last year at roughly 2.5% and continuing to mix into off-site ads as the program grows, with entitlement expected at 3%.
The company expects to continue growing share and to grow 2x or more relative to the market, with the value proposition of how Chewy is going to market only strengthening across broader initiatives where TAM and profitability expand on a sustainable basis.
Financial Guidance and Outlook
For fiscal 2026, the company now expects net sales of between approximately $13.40 billion and $13.55 billion, representing approximately 6.3% to 7.5% year-over-year growth, including an expected net sales contribution of approximately $80 million from SmartPak and approximately $70 million from Modern Animal.
The company is maintaining its full-year fiscal 2026 adjusted EBITDA margin guidance range at 6.6% to 6.8% or approximately 100 basis points of year-over-year expansion at the midpoint, implying approximately $900 million of adjusted EBITDA for the year.
Active customer additions are now expected to trend towards the lower end of the previously stated range of approximately 150,000 to 250,000 net adds per quarter, with the Chewy customer funnel remaining healthy with consistent churn gains and extremely healthy reactivation rates.
For the second quarter of fiscal 2026, the company expects net sales between approximately $3.30 billion and $3.33 billion, representing approximately 6% to 7% year-over-year growth.
For the second quarter, adjusted EBITDA margin is expected to be between 6.3% and 6.4%, representing approximately 50 basis points of year-over-year expansion at the midpoint.
Second-quarter profitability will be impacted by more difficult year-over-year gross margin comparisons associated with non-recurring MAP pricing benefits realized in the prior-year period as well as elevated fuel surcharge cost flowing through the quarter, which is expected to represent a roughly mid-single-digit million dollar headwind.
Adjusted diluted earnings per share for the second quarter is expected to be approximately $0.36.
For the full year 2026, share-based compensation expense including related taxes is expected to remain broadly flat year-over-year, with the company lowering its weighted average diluted shares outstanding by 5 million shares and expecting to end the year with approximately 420 million shares.
Net interest expense is expected to be approximately $10 million to $15 million, given the interest expense on the recently launched term loan, with an effective tax rate in the range of approximately 24% to 26%.
The low end of the guidance range assumes the current consumer backdrop worsens relative to the trends observed at this point, while the high end assumes spending patterns improve from current levels as the company moves through the second half.
Second-quarter gross margin is expected to contract modestly year-over-year, driven primarily by difficult comparisons associated with non-recurring MAP pricing benefits realized during the second quarter of fiscal 2025, though the company continues to expect gross margin expansion on a full-year basis.
SG&A leverage is expected to remain relatively consistent throughout the balance of the year as the company continues investing behind strategic growth initiatives while also realizing ongoing operational efficiencies.
More muted adjusted EBITDA margin expansion is expected during the second quarter relative to the first quarter, with stronger year-over-year expansion expected across the back half of the year.
