10-Q: Chewy Reports Strong Q2 Growth, Adjusted Profit Surges

Chewy, Inc. announced robust second-quarter results for fiscal year 2025, with net sales up 8.6% and adjusted EBITDA increasing by 26.5%, driven by customer growth and higher spending.

Summary

• Net sales for the thirteen weeks ended August 3, 2025, increased by 8.6% to $3.1 billion, up from $2.9 billion in the prior year period.
• Gross profit rose by 11.7% to $942.2 million, with gross margin expanding by 90 basis points to 30.4%.
• Income from operations surged by 117.1% to $69.7 million.
• Adjusted EBITDA increased by 26.5% to $183.3 million, with Adjusted EBITDA margin improving to 5.9% from 5.1%.
• Adjusted net income grew by 34.8% to $141.1 million, and adjusted diluted earnings per share increased to $0.33 from $0.24.
• Active customers grew by 4.5% to 20.9 million, and net sales per active customer increased by 4.6% to $591.
• Autoship customer sales, a key driver of recurring revenue, increased by 14.9% to $2.6 billion, representing 83.0% of net sales.
• Net income for the quarter decreased by 79.3% to $62.0 million, primarily due to a significant deferred tax benefit recorded in the prior year period ($252.6 million benefit in Q2 2024 vs. $12.0 million provision in Q2 2025).
• The company repurchased $152.6 million of common stock during the twenty-six weeks ended August 3, 2025, with $359.8 million remaining under the current repurchase program.

Sentiment

Score: 8

Explanation: The filing indicates strong underlying operational and financial performance, with significant growth in sales, gross profit, operating income, and adjusted profitability metrics. Customer acquisition and retention remain robust, driven by the successful Autoship program. While reported net income declined, this was due to a non-recurring tax benefit in the prior year, masking otherwise excellent results. The company's liquidity position is solid, and share repurchases reflect confidence. Macroeconomic risks are acknowledged but not presented as an immediate threat to the positive trajectory.

Positives

• Net sales increased by 8.6% to $3.1 billion, demonstrating continued top-line growth.
• Gross profit grew by 11.7% to $942.2 million, and gross margin expanded by 90 basis points to 30.4%, indicating improved profitability per sale.
• Income from operations more than doubled, increasing by 117.1% to $69.7 million, reflecting strong operational leverage.
• Adjusted EBITDA saw a significant increase of 26.5% to $183.3 million, with Adjusted EBITDA margin improving by 80 basis points to 5.9%.
• Adjusted net income increased by 34.8% to $141.1 million, and adjusted diluted EPS rose to $0.33, highlighting strong underlying profitability.
• Active customer base expanded by 4.5% to 20.9 million, indicating successful customer acquisition and retention efforts.
• Net sales per active customer increased by 4.6% to $591, showing customers are spending more.
• Autoship customer sales grew by 14.9% to $2.6 billion, and its percentage of net sales increased by 460 basis points to 83.0%, reinforcing recurring revenue strength.
• The company generated $154.6 million in free cash flow for the twenty-six weeks ended August 3, 2025, an increase of 7.3% year-over-year.
• Share repurchases totaling $152.6 million during the twenty-six weeks ended August 3, 2025, demonstrate management's confidence and commitment to shareholder returns.

Negatives

• Reported net income decreased significantly by 79.3% to $62.0 million, primarily due to a large deferred tax benefit in the prior year period that did not recur.
• Interest and other income, net, decreased by 70.1% to $4.3 million, mainly due to lower interest income from cash and cash equivalents and matured marketable securities.
• Selling, general and administrative expenses increased by 8.2% to $671.9 million, driven by higher fulfillment costs, expansion of operations, and increased inbound labor costs.

Risks

• Ability to sustain recent growth rates and successfully manage challenges related to future growth, including introducing new products/services and expanding into new jurisdictions.
• Successfully responding to business disruptions and managing risks related to the macroeconomic environment, such as inflation, tariffs, and high interest rates, which can impact operations, supply chain, and consumer behavior.
• Acquiring and retaining new customers cost-effectively and increasing net sales, improving margins, and maintaining profitability.
• Maintaining positive perceptions of the Company and preserving, growing, and leveraging its reputation and brand value.
• Limiting operating losses as the business continues to expand.
• Strengthening current supplier relationships, retaining key suppliers, and sourcing additional suppliers.
• Mitigating changes in, or disruptions to, shipping arrangements and operations.
• Optimizing, operating, and managing the expansion of fulfillment center capacity.
• Maintaining adequate cybersecurity with respect to systems and retaining third-party service providers that do the same.
• Complying with existing or future laws and regulations in a cost-efficient manner.
• Attracting, developing, motivating, and retaining highly-qualified and skilled employees.
• Successfully competing in the pet products and services health and retail industry, especially in the e-commerce sector.
• Ability to raise capital as needed to fund operations or strategic investments.

Future Outlook

The company expects advertising and marketing expense to be approximately 6.7% to 6.8% of net sales for the 2025 fiscal year. A project to modernize the finance information technology architecture is underway, aiming for completion towards the end of the 2025 fiscal year, which is expected to support scalability, expand data visibility, and enable AI advancements without requiring meaningful capital investment. The company believes its current cash and credit facility will be sufficient to fund operations and capital expenditures for at least the next twelve months.

Management Comments

• We are the largest pet e-tailer in the United States, offering virtually every product a pet needs.
• We believe that we are the preeminent destination for pet parents as a result of our broad selection of high-quality products and expanded menu of service offerings, which we offer at great prices and deliver with an exceptional level of care and a personal touch.
• We continue to monitor macroeconomic conditions closely and adapt aspects of our logistics, transportation, supply chain, and purchasing processes accordingly to meet the needs of our growing community of pets, pet parents and partners.
• Our marketing expenses increased due to additional investment in our lower and upper funnel marketing channels contributing to new customer acquisition and improved customer retention.
• The finance IT architecture modernization project will not require meaningful capital investment and aims to provide the ability to produce financial information across different segments, expanded visibility and analytical capabilities, and an infrastructure that enables the use of artificial intelligence and other system advancements.

Industry Context

The pet products and services market continues to demonstrate resilience, with Chewy's performance indicating strong demand in the e-commerce sector. The company's focus on Autoship, customer retention, and expansion into healthcare and specialty goods aligns with broader industry trends of convenience, personalized services, and premiumization in pet care. The macroeconomic environment, including inflation and high interest rates, remains a factor influencing consumer spending, but Chewy's ability to grow active customers and net sales per active customer suggests it is effectively navigating these challenges, potentially gaining market share in a competitive landscape.

Comparison to Industry Standards

• Chewy's 8.6% net sales growth for the quarter is strong, especially when compared to general retail e-commerce growth rates, which can vary but often face headwinds in mature markets. For instance, while Amazon's North America segment typically reports higher growth, Chewy's specialized focus allows for targeted expansion.
• The 90 basis point improvement in gross margin to 30.4% is a positive indicator, suggesting effective cost management and pricing strategies. This compares favorably to many general merchandise retailers who often operate with tighter margins due to broader product assortments and intense price competition.
• The 4.5% growth in active customers to 20.9 million demonstrates continued market penetration and customer loyalty, a critical metric in subscription-based e-commerce models like Chewy's Autoship program. This growth rate is competitive within the online pet supply sector, where customer acquisition costs can be high.
• Autoship customer sales reaching 83.0% of net sales is a significant achievement, indicating a highly sticky customer base and predictable recurring revenue, which is a benchmark for strong customer lifetime value in subscription-based businesses. This level of recurring revenue is often sought after by investors and is comparable to best-in-class subscription services across various industries.

Management Changes

Corporate Governance

Legal Proceedings

• Various legal claims arise from time to time in the normal course of business. The company believes it has adequately accrued for potential impacts and does not believe the ultimate resolution of any current matters will have a material adverse effect on its results of operations, financial condition, or cash flows.

Related Party Transactions

• BC Partners Advisors LP and its affiliates, along with other Sponsors, control a majority of the company's voting power.
• On October 30, 2023, the company entered into transactions with affiliates of BC Partners, which involved restructuring ownership interests and Chewy Pharmacy KY becoming a wholly-owned subsidiary. Affiliates of BC Partners transferred $1.9 billion to the company to fund tax obligations and expenses, with indemnification for certain tax liabilities.
• The company had a receivable of $22.8 million from affiliates of BC Partners as of August 3, 2025, related to tax indemnification.
• On June 26, 2024, the company repurchased 17,550,000 shares of Class A common stock for $500 million from Buddy Chester Sub LLC, an entity affiliated with the Sponsors.
• On June 20, 2025, the company repurchased 2,395,210 shares of Class A common stock for $100 million from Buddy Chester Sub LLC as part of a concurrent stock repurchase related to a secondary offering by the Seller.

Stakeholder Impact

• Shareholders: Benefit from strong underlying financial performance, increased adjusted profitability, and ongoing share repurchase program. The significant decrease in reported net income due to a prior-year tax benefit might initially appear negative but is clarified by adjusted metrics.
• Customers: Benefit from continued growth in product selection, service offerings, and the convenience of the Autoship program, as indicated by increased active customers and net sales per active customer.
• Employees: The 2024 Omnibus Incentive Plan provides a framework for equity-based compensation, aligning employee incentives with company performance. Increased fulfillment costs suggest ongoing investment in operational staff.
• Suppliers: Continued growth in net sales and inventory suggests strong demand for supplier products, but the company's focus on strengthening supplier relationships indicates ongoing management of these partnerships.
• Creditors: The company maintains a strong liquidity position with $591.8 million in cash and $782.8 million in available borrowing capacity under its ABL Credit Facility, indicating a healthy ability to meet financial obligations.

Next Steps

• Continue to evaluate the impact of the One Big Beautiful Bill Act (OBBBA) on condensed consolidated financial statements throughout the remainder of Fiscal Year 2025 interim and annual reporting periods.
• Conclude the finance information technology architecture modernization project towards the end of the 2025 fiscal year, aiming for scalability, expanded data visibility, and enablement of artificial intelligence.
• Continue to monitor macroeconomic conditions and adapt business operations, logistics, transportation, supply chain, and purchasing processes accordingly.

Key Dates

Recommendation

Chewy's Q2 2025 results demonstrate robust underlying business health, with significant growth in net sales, gross profit, operating income, and adjusted profitability metrics. The expansion of active customers and increased spending per customer, particularly through the sticky Autoship program, highlights strong market position and customer loyalty. While reported net income declined, this was due to a non-recurring tax benefit in the prior year, making the adjusted figures a more accurate reflection of operational performance, which is clearly positive. The ongoing share repurchase program signals management's confidence in the company's valuation. Despite macroeconomic uncertainties, Chewy is executing well on its growth strategy, expanding its service offerings, and improving operational efficiency. The stock appears undervalued given its strong growth trajectory and increasing profitability on an adjusted basis.

Keywords

Pet e-commerce, Online pet supplies, Pet food delivery, Autoship, Pet healthcare, CHWY, Q2 2025 earnings, EBITDA growth, Customer acquisition, Share repurchase