Chewy's Q3 2026: Contradictions Emerge on Customer Acquisition, Gross Margin Drivers, and Chewy Plus Impact

Date of Call: None provided

Financials Results

• Revenue: $3.12B, up 8.3% year-over-year
• EPS: $0.32 adjusted diluted EPS, up 59.6% year-over-year
• Gross Margin: 29.8%, up ~50 basis points year-over-year
• Operating Margin: 5.8% adjusted EBITDA margin, up 100 basis points year-over-year

Guidance:

• Full-year 2025 net sales narrowed to $12.58B–$12.60B (~8% YOY excluding the 53rd week).
• Full-year adjusted EBITDA margin narrowed to 5.6%–5.7% (~90 bps expansion YOY).
• Q4 2025 net sales guided to $3.24B–$3.26B (~7%–8% YOY excl. the 14th week); Q4 adjusted diluted EPS $0.24–$0.27 (includes ~$10M Smart Equine closing costs).
• FY items: capex ~1.3% of net sales; advertising ~6.5%–6.6% of net sales; share-based comp ~$315M; diluted shares ~430M; net interest income $15M–$20M; tax rate 16%–18%.

Business Commentary:

• Revenue and Customer Growth:
• Chewy's net sales for Q3 2025 grew by over 8% year-over-year to $3.12 billion.

• This growth was driven by unit volume growth, particularly in Autoship customer sales, which increased by 13.6% to $2.61 billion.

• Profitability and Margin Expansion:

• Adjusted EBITDA reached $181 million, up 30% year-over-year, with adjusted EBITDA margin expanding by 100 basis points to 5.8%.

• The profitability improvements were due to strong gross margin execution, disciplined SG&A management, and efficiencies in advertising and marketing.

• Gross Margin and Category Mix:

• Gross margin expanded by approximately 50 basis points year-over-year to 29.8%.

• This expansion was attributed to the growth in sponsored ads, favorable category mix, and a strong Autoship baseline.

• Autoship and Customer Retention:

• Autoship customer sales increased by 13.6%, contributing significantly to overall revenue growth.
• Enhanced mobile app functionality improved direct traffic and order frequency, boosting customer retention and attracting high-quality customers.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted outperforming the category, exceeding the high end of net sales guidance, ~50 bps gross margin expansion to 29.8%, Adjusted EBITDA up ~30% YOY to $181M and free cash flow of ~$176M; reiterated being on track toward a 10% adjusted EBITDA long-term goal.

Q&A:

• Question from Eric Sheridan (Goldman Sachs): How do Autoship and Chewy Plus evolve learnings about customer LTV and feed into strategic initiatives?
  Response: Autoship, Chewy Plus and CVC act as complementary flywheels that compound NSPAC, retention and LTV; mobile personalization and unified data enable targeted acquisition (Chewy Plus aimed at $300–$700 spenders) and early results show stronger penetration in hardgoods/specialty.

• Question from Doug Anmuth (JPMorgan): What drove the stronger active customer growth and how should we think about investment levels in 2026 versus 2025?
  Response: Active customer strength came from higher direct/app traffic, improved SEO and conversion plus better retention; for 2026 Chewy will emphasize strategic, structural investments (automation, health) while self-funding temporary spend and expecting more operating leverage as scale grows.

• Question from Steven Zaccone (Citigroup): Preliminary view on 2026 demand and pricing — will next year be a tailwind?
  Response: At present 2026 looks similar to 2025 (low single-digit industry growth); pricing has been muted but could modestly improve (typical industry 1–2%); management expects 2026 to be more unit-volume driven and will provide more detail with Q4 results.

• Question from Nathan Feather (Morgan Stanley): What’s driving marketing efficiency in acquisition and what are the margin puts/takes into Q4?
  Response: Marketing efficiency reflects mobile-first improvements, CRM/bidding rebuild, stronger SEO and better conversion; Q4 typically bears headwinds — higher promotions, elevated media rates and heavy fulfillment volumes — so margin can moderate sequentially despite year-over-year expansion.

• Question from Shweta Khajuria (Wolfe Research): How should we think about gross margin trends into 2026 and the mix of gross adds versus retention?
  Response: Gross margin expansion is structural (sponsored ads, premium mix, private label, health ecosystem) and expected to contribute meaningfully to long-term targets; growth is driven by both acquisition and retention — it's an 'and' not an 'or' — with a large remaining addressable household opportunity.

• Question from Anna Andreeva (Piper Sandler): Any impact on retention after raising Chewy Plus to $79 and any color on Black Friday/Cyber Week?
  Response: The price increase saw stronger-than-expected conversion with paid members delivering gross margins in line with enterprise (80% of member mix now paid); Black Friday/Cyber Week met expectations with healthy in-stock levels and lower event spend and CAC year-over-year, leaving quarter-to-date momentum ahead of plan.

• Question from Dylan Carden (William Blair): How do Autoship and Plus interact and what are CVC ecosystem benefits?
  Response: Autoship is broadly applicable and predictable; Chewy Plus drives discoverability and basket consolidation for targeted cohorts; CVC is incremental — ~40% of clinic customers are net new to Chewy, ~50% expand purchases to Chewy.com, with high CSAT and continued clinic expansion planned (mid‑teens locations by year-end).

Contradiction Point 1

Customer Acquisition and Retention Strategies

It involves changes in strategy and expectations regarding customer acquisition and retention, which are crucial for business growth and financial performance.

What drove the active customer growth, and what are your expectations for Q4 and 2026? - Doug Anmuth (J.P. Morgan)

2026Q3: Active customer growth was driven by improvements in acquisition and retention. Direct traffic increased due to app engagement and SEO performance. Retention improved with deeper engagement in categories like premium consumables and healthcare. - Sumit Singh(CEO)

What are your expectations for net household formations for the remainder of this year and next year, and how will this impact pricing and customer growth? - Shweta Khajuria (Wolfe Research)

2025Q2: The vast majority of our active customer growth continues to be driven by existing customers. As we're also seeing new customer engagement, obviously when we think about household formation, I mean, we have to think about the existing customer and household formation. - Sumit Singh(CEO)

Contradiction Point 2

Gross Margin Trends and Drivers

It involves changes in the company's expectations regarding gross margin trends and their drivers, which are critical for financial performance and investor expectations.

What will drive gross margin trends after 2025 and customer adds in 2026? - Shweta Khajuria (Wolfe Research)

2026Q3: Gross margins will benefit from ads, premium category mix, private label, and health ecosystem. - Sumit Singh(CEO)

Can you discuss gross margin trends and operating expense leverage? - David Bellinger (Mizuho)

2025Q1: Growth is driven by sponsored ads and product mix. - David Reeder(CFO)

Contradiction Point 3

Impact of Chewy Plus on Retention and Discovery

It highlights differing statements on the impact of Chewy Plus on customer retention and product discovery, which are key initiatives for driving business growth.

Have retention rates changed since increasing Chewy Plus fees, and how to expect penetration next year? - Anna Andreeva (Piper Sandler)

2026Q3: Chewy Plus retention remains strong despite price increase, with conversion better than forecasted. The program is no longer dilutive and is expected to drive discovery and NSPAC consolidation in categories like hard goods. - Sumit Singh(CEO)

What specific investments are planned for the second half of this year and into 2026 as you focus on growth? How are you promoting and raising awareness for new offerings like Chewy+ and Get Real? - Douglas Anmuth (JPMorgan)

2025Q2: We continue to be pleased with the ongoing customer engagement and usage of Chewy+. The customer adoption of Chewy+ has been strong. Over the first 4 months, we anticipate Chewy+ will have an even higher impact for our customers, resulting in more discovery of new products. - Sumit Singh(CEO)

Contradiction Point 4

Customer Acquisition and Retention Strategies

It involves discrepancies in the company's strategies for customer acquisition and retention, which are critical for business growth and market positioning.

What drove the strong active customer growth, and what are your expectations for Q4 and 2026? - Doug Anmuth (J.P. Morgan)

2026Q3: Q4 may see a slight moderation in customer adds due to strong prior year comps, but Q4 is currently ahead of forecast. - Sumit Singh(CEO)

Did Q1 net customer adds exceed expectations? Is low single-digit growth still appropriate for full-year customer growth? - Curtis Nagle (Bank of America)

2025Q1: Pleased with the rate and momentum from last quarter to Q1. This is due to internal efforts rather than market normalization. The framework of low single-digit growth is a good baseline, but we're operating at the higher end due to increased gross adds and retention improvements. - Sumit Singh(CEO & Director)

Contradiction Point 5

Gross Margin Expectations and Drivers

It involves changes in financial forecasts and expectations regarding gross margins, which are critical indicators for investors and key to understanding the company's financial health.

What will drive customer acquisition in 2026 and how should we view gross margin trends beyond 2025? - Shweta Khajuria (Wolfe Research)

2026Q3: Gross margins will benefit from ads, premium category mix, private label, and health ecosystem. Customer adds will be driven by strong marketing and innovation, with retention improving through programs like Chewy Plus and CVC. - Sumit Singh(CEO)

Gross margins in Q4 were lower than expected year-on-year. What caused the margin decline, and what expansion opportunities are expected in 2025? - David Bellinger (Mizuho)

2025Q4: Our 2024 gross margin performance benefited from 60 basis points of contribution from the team's execution against our CAC shift opportunity, 20 basis points from category mix, and 20 basis points from normal efficiencies. - David Reeder(CFO)