Chewy's Q1 Earnings: A Subscription-Driven Moat and Healthcare Play Fueling Long-Term Growth

Chewy (CHWY) delivered a Q1 earnings report that reaffirmed its position as a leader in the pet commerce ecosystem. With AutoShip sales accounting for 82.2% of net revenue and a 15% YoY growth outpacing overall sales, the company's subscription model remains its crown jewel. But beyond the recurring revenue stream, Chewy's strategic push into veterinary care and its disciplined customer retention tactics are painting a picture of a business primed to capitalize on structural industry tailwinds. Here's why investors should take notice—and whether the stock's valuation reflects its potential.

The AutoShip Advantage: The Engine of Predictable Growth

Chewy's AutoShip program is not just a convenience—it's a moat. With $2.56 billion in Q1 AutoShip sales, up 14.8% YoY, the program now represents the lion's share of revenue. CEO Sumit Singh highlighted that AutoShip growth outpaced overall sales growth by nearly double, a testament to its role in reducing churn and locking in customer loyalty. The program's dominance is clear: 82.2% of net sales are now recurring, a metric that suggests Chewy's customer base is increasingly transactional and predictable.

This recurring revenue structure insulates Chewy from the volatility of one-time buyers, a critical edge in a competitive market. Competitors like Amazon or Walmart may offer lower prices, but Chewy's ability to automate reordering for consumables (pet food, medications) creates a habit-forming advantage.

Customer Quality and Retention: A Shift from Quantity to Value

While Chewy's active customer count grew 3.8% YoY to 20.8 million, the real story lies in customer quality. Management emphasized that newer cohorts are “higher-quality,” with lower churn and higher net sales per customer ($583 annually, up 3.7% YoY). This is no accident:

• Product Mix: Strong performance in consumables (e.g., food, wellness products) and health services (e.g., prescription medications) drives higher reorder rates.
• Reactivation Efforts: Chewy is successfully wining back lapsed customers, a costly endeavor for most retailers.
• Chewy Plus Membership: The program, now fully rolled out, is boosting engagement. Members spend 2x as much as non-members, according to internal data.

The absence of explicit customer acquisition cost (CAC) metrics is notable, but the focus on retention and higher spend per customer suggests CAC efficiency is improving. Unlike its early days of aggressive discounting, Chewy now leans on sponsored ads (growing 30% YoY) and first-party data to acquire customers at lower costs.

Vetcare: A Healthcare Play with Long-Term Upside

Chewy's Vetcare clinics are a bold move into healthcare, a sector with $100 billion in annual pet spend. With 11 clinics open and plans to add 8–10 more in 2025, the initiative is already delivering:

• Customer Acquisition: New customers from clinics are surpassing internal models, with clinics acting as “loss leaders” to drive engagement across Chewy's ecosystem.
• Cross-Selling: Clinic patients are more likely to buy Chewy's core products (e.g., prescription food, medications).
• Unit Economics: While clinics require upfront investment, their scalability improves as they mature. Management sees this as a long-term play to deepen customer relationships and capture more of the pet lifecycle.

Valuation: Is Chewy Undervalued?

Chewy's current valuation—~1.6x trailing sales—is modest compared to peers like Instacart (3.2x sales) or Peloton (2.8x sales), but its metrics are improving. Key takeaways:

• Margin Expansion: Adjusted EBITDA margins rose to 6.2%, up 50 bps YoY, driven by gross margin gains (29.6%) and lower fulfillment costs.
• Balance Sheet: $616 million in cash, no debt, and $383 million remaining on a $500 million buyback.
• Growth Outlook: Management reaffirmed 6–7% revenue growth, outpacing the industry's 3–4%.

At current levels, Chewy trades at a discount to its growth rate, making it a compelling bet for investors willing to look past short-term volatility. However, risks remain: competition, potential overexpansion of clinics, and macroeconomic pressures on discretionary spending.

Investment Thesis: Buy the Subscription Moat and Healthcare Play

Chewy's Q1 results underscore a fundamental shift: it's no longer just a pet e-commerce disruptor but a full-stack pet ecosystem. The AutoShip flywheel ensures recurring revenue, Vetcare adds a healthcare layer, and customer retention metrics suggest pricing power.

While the stock has underperformed the S&P 500 over the past year, the structural tailwinds of pet ownership growth (up 10% in the U.S. since 2020) and Chewy's share gains make it a buy for the long term.

Recommendation: Accumulate positions on dips. A target price of $28–32 (1.8–2.0x sales) reflects Chewy's margin trajectory and Vetcare's scalability.

In a market obsessed with short-term wins, Chewy's focus on recurring revenue and vertical integration is a playbook for durable growth. The question isn't whether it can sustain momentum—it's whether investors will finally recognize the moat.