Chewy's Q2 2026: Contradictions Emerge on Growth Investments, Advertising, Margins, and Marketing Spend

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $3.1B, up 8.6% YOY and above the high end of guidance
• EPS: $0.33 adjusted diluted EPS; adjusted net income up 34.8% YOY
• Gross Margin: 30.4%, up ~90 bps YOY and ~80 bps sequentially

Guidance:

• Q3 2025 net sales expected at $3.07–$3.10B (~7–8% YOY).
• FY2025 net sales raised to $12.5–$12.6B (~7–8% YOY ex-53rd week); midpoint +$175M.
• FY2025 adjusted EBITDA margin maintained at 5.4–5.7% (midpoint implies ~+75 bps YOY); ~60% of expansion from gross margin; Q2 is the gross-margin high point.
• Q3 adjusted diluted EPS expected at $0.28–$0.33.
• Expect modest SG&A leverage in FY2025; ~80% EBITDA-to-FCF conversion; CapEx at low end of 1.5–2% of net sales.
• 2025 net interest income ~$25–$30M; effective tax rate 20–22%; ~430M diluted shares.

Business Commentary:

• Revenue Growth and Share Gain:
• Chewy reported net sales of $3.1 billion for Q2 2025, exceeding the high end of their guidance range, with a nearly 9% year-over-year increase.

• The growth was attributed to a strong performance in categories like Consumables and Health, and a 15% increase in Autoship customer sales.

• Gross Margin Expansion:

• Chewy's gross margin reached 30.4% in Q2, expanding both 80 and 90 basis points on a year-over-year basis.

• The expansion was driven by a fast-growing Sponsored Ads initiative and favorable product mix into premium categories, with promotional environments remaining rational.

• Operating Expenses and SG&A Leverage:

• Q2 SG&A, excluding share-based compensation, was $592.8 million or 19.1% of net sales, with 30 basis points of year-over-year deleverage.

• The increase was due to the ramp-up of new fulfillment centers and higher inbound inventory processing costs, though SG&A leverage is expected in the second half of the year.

• Chewy Plus Membership Program:

• Approximately 3% of Chewy's total monthly sales were to Chewy Plus members in July, demonstrating rapid strengthening.
• The program's success is driven by strong incrementality in spend, NESPAC, and positive contribution profit per customer, leading to higher and accelerated NESPAC curves.

Sentiment Analysis:

• “Net sales grew 8.6% year over year to $3.1 billion, exceeding the high end of the Q2 guidance.” “We are raising and narrowing our full year 2025 net sales outlook to $12.5–$12.6 billion.” “Q2 adjusted EBITDA margin was 5.9%, reflecting 80 bps of year-over-year expansion.” “We expect to deliver modest SG&A leverage in fiscal year 2025” and maintain FY adjusted EBITDA margin guidance of 5.4%–5.7%.

Q&A:

• Question from Douglas Till Anmuth (JPMorgan): What investments are required in the back half and into 2026 as you lean into growth, and how are you promoting awareness of Chewy Plus and Get Real?
  Response: Chewy is leveraging its existing customer base and onsite/app experiences, not incremental external marketing; investments focus on product quality, value, curated experiences, and CRM; fresh/frozen capacity already built, and these initiatives are high-NESPAC and high-margin with minimal added marketing spend.

• Question from Nathaniel Jay Feather (Morgan Stanley): Can you size the temporary SG&A costs (FC ramp vs. hardgoods processing) and the leverage path into H2?
  Response: Expect SG&A leverage in H2 as the Houston Gen 2 FC ramps (~6 months); temporary costs include ~$3–$5M higher inbound processing (hardgoods) and ~$2–$3M wage/benefit increases; SG&A costs should moderate in H2 despite unit-driven variable costs.

• Question from David Bellinger (Mizuho): What drove Q2 gross margin gains and how should we think about H2, price investments, and incremental EBITDA flow-through?
  Response: Gross margin gains came from mix (health, premium consumables, hardgoods), higher Autoship, and Sponsored Ads; promotions remain rational; Q2 is the year’s GM high point, but annual GM expansion is still expected; Chewy will reinvest much of the incremental flow-through (~$20–$25M) into Chewy Plus, Autoship, and selective pricing.

• Question from Rupesh Parikh (Oppenheimer): How large can Get Real/fresh-frozen become, and what are early customer characteristics/new-customer mix?
  Response: Fresh/frozen TAM is ~$3–$4B today, potentially $8–$12B over time; Chewy aims for a meaningful share; early mix is ~70% existing and ~30% new customers; expected NESPAC is $2,500+ (full meals) and $800+ (toppers); high gross profit per unit with capacity built through 2028.

• Question from Shweta R. Khajuria (Wolfe Research): Update on advertising environment and outlook for pet household formation, customer growth vs. pricing, and potential acceleration.
  Response: Industry growth is low to low-mid single digits with pet households flat to slightly up; Chewy guides 7–8% growth, driven by low-single-digit active customer growth and 4.5–5.5% NESPAC growth; ad intensity remains high, but traffic (+14%) and app sessions (+25%) are strong; Sponsored Ads continues to grow with a 1–3% long-term target.

• Question from Michael Morton (Towers): What enables Chewy to keep gaining share vs. retail giants, and is hardgoods recovery volume or ASP-driven?
  Response: Hardgoods growth is primarily volume-driven via higher in-stocks, brand onboarding, and exposure; Chewy’s edge is an integrated pet ecosystem—food/supplies with health (pharmacy, compounding), software, CVC, and Chewy Plus—driving durable share gains.

• Question from Dylan Cardin (William Blair): What’s behind improving cohort quality and the sustainability of Autoship outperformance? Will Chewy Plus become a majority and how does it affect margins?
  Response: Cohorts improve as more customers enter Autoship and Chewy Plus; gross adds and settlement rates rose, boosting net retention and NESPAC; Chewy Plus accelerates wallet consolidation; over time, it’s contribution and dollar-margin accretive (though rate dilutive initially) and supports sustained Autoship strength.