Chewy stock is charging ahead with explosive momentum. Why are CHWY shares rallying?
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Operator
Hello everyone and thank you for standing by. The Chewy third quarter 2025 earnings call will be beginning in one minute’s time. We thank you for your patience. We will begin soon.
Emily (Moderator)
Hello and welcome to the Chewy third quarter 2025 earnings call. My name is Emily and I’ll be coordinating your call today. After the presentation you will have the opportunity to ask any questions which you can do so by pressing Start followed by the number one on your telephone keypad. I will now hand over to our host Natalie Nowak to begin. Please go ahead.
Natalie Nowak (Unknown)
Thank you for joining us on the call today to discuss our third quarter results for fiscal year 2025. Joining me today are Chewy’s CEO Sumit Singh, Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer, and Chris Depe, our Head of commercial finance and FP&A. Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our On our call today we will be making forward looking statements, including statements concerning Chewy’s financial results and performance, industry trends, strategic initiatives, share repurchase program and the environment in which we operate. Such statements are considered forward looking statements under the Private Securities Litigation Reform act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to differ materially from our forward looking statements. We encourage you to review our SEC filings, including the section titled Risk Factors in Our most recent Form 10K, for a discussion of these risks. Reported results should not be considered an indication of future performance. Also note that the forward looking statements on this call are based on information available to us as of today’s date. We assume no obligation to update any forward looking statements except as required by law. Also, during this call we will discuss certain non GAAP financial measures. Reconciliations of these non GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release. These non GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today’s call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be available on our Investor Relations website shortly and with that I’d like to turn the call over to Sumit.
Sumit Singh (CEO)
Thanks Natalie and good morning everyone. Chewy continues to outperform the PET category and expand market share, with profits once again growing faster than sales. We are delivering consistent year over year profitability gains and remain firmly on track toward our long term objective of 10% adjusted EBITDA margin. Q3 results build on the momentum from the first half of fiscal 2025 and highlight the structural resilience of our model as well as the efforts and execution quality of every team member. At Chewy, we exceeded the high end of our net sales guidance, expanded margins and accelerated free cash flow generation. Let’s get into the details. First, our financial and customer performance Q3 net sales grew over 8% year over year to $3.12 billion, primarily driven by unit volume growth, not price growth in autoship. Customer sales outpaced total company growth, increasing 13.6% to $2.61 billion. As we have discussed before, autoship revenues are highly predictable and allow operational planning to reduce cost and grow margin in a way that gives Chewy unique structural competitive advantages. We ended Q3 with 21.2 million active customers, up nearly 5% year over year and delivered improvements across every part of the active customer funnel. Marketing efficiency continues to strengthen as we deploy spend with greater precision, attracting high quality customers, driving stronger conversion and improving LTV to CAC ratios. Enhanced mobile app functionality is lifting direct traffic with app customers and app orders up approximately 15% year over year. These improvements supported marketing leverage in the quarter while enabling year over year growth in both new customers and reactivations alongside lower churn. Net sales per active customer reached $595, up nearly 5% year over year. Now let’s review profitability and free cash flow, after which I will comment on some of our ongoing initiatives. Gross margin expanded roughly 50 basis points year over year to 29.8% driven by sponsored ads growth, a strong auto ship baseline and favorable category mix. We believe that these gains will structurally enhance our margins going forward. Adjusted EBITDA reached $181 million, up 30% year over year. Adjusted EBITDA margin reached 5.8% representing 100 basis points of year over year expansion and flow through of about 18% margin. Gains reflect strong gross margin execution, disciplined SGA management and continued efficiency in advertising and marketing. And finally, we generated approximately $176 million of free cash flow in the quarter, up nearly $70 million sequentially. Our profitability and cash generation enabled us to repurchase $55 million of shares while self funding strategic investments that position Chewy for durable long term value creation. Now I would like to provide an update on some of Chewy’s ongoing initiatives starting with Chewy’s health offerings. Chewy Vet Care or CVC continues to exceed expectations, driving strong utilization, supporting ecosystem engagement and strengthening customer loyalty through recurring high margin services. Each clinic acts as both an acquisition channel and a retention driver, supporting deeper autoship and health program participation. We have opened two additional CVC practices since our last earnings call, including our first one in Phoenix, bringing our total to 14 locations across five states. Two more clinics are opening soon, keeping us on track with our previously stated plan to open eight to 10 locations this fiscal year. Staying on the topic of Chewy’s health offerings, on October 30th we announced the acquisition of Smart Equine, a leading equine health brand with strong loyalty and repeat purchase behavior. The transaction is expected to be accretive to adjusted EBITDA margins upon closing. Smart Equine enhances Chewy’s premium health and nutraceutical assortment and strengthens our position in high value wellness categories. By layering its premium assortment over Chewy’s network and scale, we see significant opportunity to enhance our health and wellness mix and expand both net sales within this category as well as margins. Our paid membership program Chewy continues to outperform our expectations, driving higher order frequency, broader category engagement, higher mobile app adoption and stronger auto ship participation. After launching at an introductory price of $49 per year with a 30 day free trial, we raised the annual fee to $79 at the end of October. Early data shows continued growth and strong conversion from free to paid memberships. Paid Chewy members are already delivering gross margins in line with the overall enterprise and with higher pricing in place, we remain confident in the program’s growth and margin potential. I would now like to turn the call over to Will for a detailed recap of our results and guidance after which I will make some final closing remarks about 2026 and Chewy’s future will.
Will Billings (Chief Accounting Officer and Interim Principal Financial Officer)
Thank you Sumit Third quarter net sales grew 8.3% year over year to 3.12 billion above the high end of our Q3 guidance range. Gross margin expanded approximately 50 basis points to 29.8%. Q3 SGA excluding share based compensation and related taxes was 588.6 million or 18.9% of net sales and includes approximately 2.7 million of one time transaction costs primarily related to the pending Smart Equine acquisition. Excluding SBC and these one time costs, we delivered SGA leverage of 20 basis points year over year. Consistent with our expectations. We returned to SGA leverage as our newest automated facility in Houston scaled and as we cycled past certain transitory costs related to the Dallas FC and inventory pull forward. Advertising and marketing expense was 197.9 million are 6.3% of net sales reflecting about 40 basis points of year over year leverage. As Sumit noted, this leverage is driven by higher productivity of spend, not reduced investment. We are attracting high quality customers and are quickly converting them into auto, ship, Chewy plus and health programs which deepens loyalty and increases lifetime value. These efficiencies reflect more discipline, allocation of marketing dollars and stronger flywheel effects that we expect to build as we scale. Q3 adjusted net income was 1:35.7 million up 59.6% year over year and adjusted diluted earnings per share of $0.32 landed near the high end of our prior guidance range. Third quarter adjusted EBITDA was 180.9 million representing a 5.8% adjusted EBITDA margin up 100 basis points year over year and adjusted EBITDA flow through of 17.9%. Free cash flow for the quarter was 175.8 million driven by 207.9 million of cash from operating activities and 32.1 million of cash capital expenditures. For full year 2025, we continue to expect to convert approximately 80% of adjusted EBITDA to free cash flow. In addition, based on year to date performance, we now expect 2025 capital expenditures to come in around 1.3% of net sales below the low end of our prior target range of 1.5 to 2% of net sales. During the quarter, we repurchased approximately 1.5 million shares for $55 million. We ended Q3 with 304.9 million of remaining authorization under our existing repurchase program. We closed the quarter with approximately 675 million in cash and cash equivalents, remained debt free and had total liquidity of approximately 1.5 billion. Turning to guidance, recall that in Q2 we raised our full year net sales guidance by 175 million at the midpoint, reflecting our bullishness to outperform a market which is expected to grow low single digits in FY2025. Today we are narrowing our full year 2025 net sales outlook to between 12.58 and 12.6 billion, or approximately 8% year over year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. With even greater confidence in our ability to deliver incremental margins. We are also narrowing our full year 2025 adjusted EBITDA margin outlook to 5.6 to 5.7%, or approximately 90 basis points of adjusted EBITDA margin expansion at the midpoint year over year. Consistent with our comments last quarter, we expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin. We expect fourth quarter 2025 net sales of between 3.24 and 3.26 billion or approximately 7 to 8% year over year growth when adjusted to exclude the impact of the 14th week in Q4 of fiscal year 2024. Our fourth quarter guidance takes into account the strong year over year comps of approximately 7% net sales growth in the fourth quarter last year. We also expect Q4 adjusted diluted earnings per share in the range of 24 to $0.27, which includes an estimated $10 million of closing costs related to the pending acquisition of Smart Equine. And finally, given our performance in the first three quarters of the year, we now expect advertising and marketing expense to come in at approximately 6.5 to 6.6% of net sales for the full year. For the full year 2025, we are also expecting share based compensation expense including related taxes of approximately 315 million and weighted average diluted shares outstanding of approximately 430 million. We now expect 2025 net interest income of approximately 15 to 20 million. And lastly, we expect our effective tax rate to be between 16 to 18% for 2025. I would now like to turn the call back to Sumit for some closing remarks.
Sumit Singh (CEO)
Thanks Will. Before we take your questions I would like to make a few important remarks. First on Chewy’s margin expansion and its path, cadence and durability as we head into 2026, Chewy has an unmatched position in a uniquely attractive industry. In Chewy.com, we have the leading sales engine in our industry evidenced by the 84% of our sales on Autoship layered on top of a built out world class fulfillment network. The best in class consumer satisfaction that results from this combination leads customers to trust us with ever increasing levels of business. As you can see from the growth of our pharmacy business and our multi year steadily rising nest pack Q3 shows the result. We delivered both revenue growth and margin expansion even as we made high return targeted investments in the business. Gross margins continue to expand on a structural basis supported by sponsored ads, category mix and a growing health ecosystem. SGNA leverage is returning as automated facilities scale and as we cycle through transitory costs and marketing is becoming more efficient as we increase direct share of traffic and grow our business inside the mobile app. And to be clear, we grew at approximately twice the market rate, taking share again without pricing below inflation or sacrificing margin. In 2026 we intend to press these competitive advantages and continue our pursuit of scalable self funding initiatives that simultaneously enhance profitability. While we will always prioritize disciplined customer centric growth, our unique flywheel like operating model gives us high confidence in our ability to deliver consistent, durable EBITDA expansion over the next several years. Our long term framework is unchanged and the underlying engines that drive margin expansion are strengthening. We remain firmly on track towards the long term margin profile of 10% adjusted EBITDA that we outlined at ...
