Executive Summary / Key Takeaways

• Chewy delivered a strong start to fiscal year 2025, exceeding top-line guidance and demonstrating continued momentum driven by active customer growth and increased spending per customer.
• The Autoship subscription program remains a core differentiator, reaching a record 82.2% of net sales in Q1 FY2025 and providing predictable, high-retention revenue.
• Profitability continues to expand, with adjusted EBITDA margin reaching 6.2% in Q1 FY2025 (120bps expansion adjusted for prior year one-time items), primarily fueled by growth in Sponsored Ads and a favorable product mix shift towards higher-margin categories like Health.
• Strategic investments in Chewy Vet Care (CVC), a first-party Sponsored Ads platform, and mobile app enhancements are driving customer acquisition, engagement, and operational efficiency, reinforcing the company's competitive moat.
• Management maintains confidence in its full-year FY2025 outlook, projecting 6-7% adjusted net sales growth and 5.4-5.7% adjusted EBITDA margin, with expectations for continued share gains in a resilient pet market.

Setting the Scene: A Pet E-tailer's Evolution

Chewy, Inc. was founded in 2011 with a clear vision: to translate the trusted, personalized experience of a neighborhood pet store into a convenient, wide-ranging online platform. As the largest pet e-tailer in the United States, Chewy operates within a substantial and resilient pet products and services market, estimated at around $140 billion, with online penetration currently sitting between 30% and 35%. While the industry is normalizing from pandemic-era dynamics, estimated top-line growth is still in the 3% to 4% range, presenting opportunities for market share leaders.

At the heart of Chewy's business model is its Autoship subscription program, a foundational strength that provides automatic, scheduled delivery of pet essentials. This program has become a powerful engine for recurring revenue and customer loyalty, reaching a record 82.2% of net sales in the first quarter of fiscal year 2025 and consistently growing faster than overall revenue. This high level of predictable, sticky revenue provides a significant competitive advantage and visibility into future performance.

Technological Edge and Operational Excellence

Chewy's e-commerce platform, supported by continuous technological development, is a key differentiator. The company has invested significantly in enhancing its mobile app experience, which is yielding tangible results. In Q2 FY2024, unique customers placing orders via the app increased by approximately 13% year-over-year, with overall app orders rising about 15%. Customers engaging through the app show higher average order values, better retention rates, and increased Autoship adoption, creating a virtuous cycle of engagement and value. While less than 20% of orders currently transact through the app, the company sees a long-term opportunity to significantly increase this penetration.

Operational efficiency is further driven by investments in fulfillment center automation and proprietary supply chain software. Over 40% of order volume now flows through the company's more automated 2G facilities, and over 50% touches some form of automation across the network. The long-term goal is to have 70% to 80% of volume benefit from these processes, which have historically shown improvements of up to 50% in productivity, 30% in volume per square foot, and 60% in ergonomics and safety. This technological and operational backbone allows Chewy to manage costs effectively, optimize inventory placement, and deliver a superior customer experience, contributing directly to margin expansion and competitive positioning. The company is also modernizing its finance IT architecture to enhance scalability, analytics, and enable future AI applications, requiring no meaningful capital investment.

Strategic Expansion and Ecosystem Building

Building on its core e-commerce strength, Chewy is strategically expanding its ecosystem to capture a larger share of the pet parent's wallet and deepen engagement. Chewy Health, encompassing pharmacy services and the nascent Chewy Vet Care (CVC) clinics, represents a significant growth vector targeting the over $20 billion U.S. vet services market. As of Q1 FY2025, Chewy operates 11 CVC locations across four states and plans to open 8 to 10 new clinics in FY2025. Early results from CVC locations are promising, exceeding expectations for new customer acquisition and driving cross-category shopping on chewy.com, demonstrating the power of seamlessly connecting care with commerce.

The Sponsored Ads business is another high-margin initiative gaining traction. It scaled meaningfully in FY2024, reaching approximately 1% of net sales and becoming the largest contributor to gross margin improvement. The successful migration to a first-party platform enables the expansion of ad products, including off-site advertising across search and social, with demand exceeding internal expectations. Management sees a long-term opportunity for Sponsored Ads to reach up to 3% of total net sales with high flow-through, further enhancing profitability. Private brands also remain an area of focus, targeting mid-teens penetration with the potential for up to 500 basis points of higher gross margin.

Chewy Plus, the company's paid membership program, recently transitioned out of beta. While still in its early stages, initial data indicates that members place more orders, exhibit higher cross-category penetration, and show greater engagement with the mobile app and Autoship, signaling a potentially compelling loyalty flywheel effect.

Financial Performance and Profitability Momentum

Chewy's strategic and operational execution is translating into solid financial performance. For the first quarter of fiscal year 2025, net sales grew 8.3% year-over-year to $3.12 billion, exceeding the high end of the company's guidance. This growth was underpinned by a 3.8% increase in active customers, reaching 20.8 million, and higher net sales per active customer, which rose 3.7% to $583. Hardgoods saw notable 12.3% growth, while consumables grew 6.4% and the 'Other' category (including health) grew 13.3%.

Gross profit increased 8.2% to $923.8 million, resulting in a gross margin of 29.6%. While this was a slight decrease of 10 basis points year-over-year, adjusting for approximately 70 basis points of one-time benefits in the prior year period shows a normalized expansion of roughly 60 basis points. This improvement is primarily driven by the scaling Sponsored Ads business and a favorable product mix shift towards higher-margin offerings.

Operating expenses saw increases, with SG&A rising 8.4% to $653.1 million, mainly due to fulfillment and pharmacy network expansion, and advertising/marketing increasing 3.7% to $193.8 million to support customer acquisition and retention efforts. Despite these investments, the company demonstrated operating leverage, contributing to adjusted EBITDA growth of 18.3% year-over-year, reaching $192.7 million. This resulted in an adjusted EBITDA margin of 6.2%, a 50 basis point expansion year-over-year (or 120 basis points adjusted for prior year one-time items). Net income for the quarter was $62.4 million.

Liquidity and Capital Allocation

Chewy maintains a strong liquidity position, with $616.4 million in cash and cash equivalents as of May 4, 2025, and $782.8 million of borrowing capacity under its revolving credit facility. The company primarily funds its operations and capital expenditures through cash flows from operations, which provided $86.4 million in Q1 FY2025.

Capital allocation priorities include reinvestment in strategic growth initiatives and returning capital to shareholders. Capital expenditures in Q1 FY2025 were $37.7 million, focused on expanding fulfillment, CVC, and pharmacy capabilities. The company expects FY2025 CapEx to be at the low end of its 1.5% to 2% of net sales range. Chewy also actively repurchases shares, buying back $23.2 million in Q1 FY2025 under its $500 million authorization, with $383.5 million remaining. The company targets approximately 80% conversion of adjusted EBITDA into free cash flow for FY2025.

Competitive Landscape and Positioning

Chewy operates in a competitive environment, facing large general e-commerce players like Amazon (AMZN) and Walmart (WMT), as well as omnichannel pet specialists like Petco (WOOF). While Amazon and Walmart possess immense scale, broad logistics networks, and significant pricing power, Chewy differentiates itself through its deep pet-centric expertise, superior customer service, and specialized ecosystem. Chewy's Autoship program fosters loyalty and predictable revenue in a way general retailers struggle to replicate.

Chewy's strategic expansion into Health (pharmacy, CVC) directly competes with Petco's integrated vet services model, but Chewy's digital-first approach and technology investments aim for greater efficiency and a seamless online-to-offline experience. The scaling Sponsored Ads business leverages Chewy's specific pet audience, offering a targeted advertising channel that competes for vendor spend against broader platforms. Management believes its execution is driving market share gains, estimating it captures approximately 50 cents of every dollar moving online in the pet category, up from 40-42 cents previously. While facing challenges from larger rivals' scale and pricing, Chewy's focus on a differentiated pet ecosystem, technological advantages, and operational efficiency positions it to continue gaining share in the online segment.

Outlook and Risks

Chewy is maintaining its full-year fiscal year 2025 net sales outlook of $12.3 billion to $12.45 billion (6% to 7% growth adjusted for the extra week in FY2024). Q1 results and Q2 guidance ($3.06 billion to $3.09 billion, 7% to 8% growth) indicate the company is trending towards the upper half of this range. Management expects year-over-year active customer growth in the low-single digits for the year, driven primarily by internal efforts rather than external market tailwinds.

The company is also maintaining its full-year adjusted EBITDA margin outlook of 5.4% to 5.7%, representing approximately 75 basis points of expansion year-over-year. About 60% of this expansion is expected to come from gross margin improvements, with sequential gross margin gains anticipated in Q2. Q1 is expected to be the high point for adjusted EBITDA margin due to seasonality and investment timing. Management remains confident in its long-term target of 10% adjusted EBITDA margin, supported by the scaling of high-margin businesses and continued operating leverage.

Key risks include the impact of evolving macroeconomic conditions on consumer spending, intense competition from larger retailers, potential disruptions in the supply chain, and the ability to successfully execute and scale new strategic initiatives like CVC and Chewy Plus. The departure of the CFO also presents a near-term transition risk.

Conclusion

Chewy's first quarter fiscal year 2025 results underscore the company's resilience and the effectiveness of its strategic playbook. By leveraging its foundational Autoship program, investing in technological differentiation across its platform and operations, and expanding into high-potential areas like pet health and advertising, Chewy is successfully driving both top-line growth and significant profitability expansion. The company's ability to gain market share in a competitive landscape, coupled with disciplined capital allocation and strong free cash flow generation, supports its path towards long-term margin targets. While macroeconomic uncertainty and competitive pressures remain factors to monitor, Chewy's focused execution and expanding ecosystem position it favorably to continue capturing value in the growing pet market.