Chewy stock is surging to new heights today. What’s driving CHWY stock higher?
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Operator
Hello everyone. Thank you for joining us and welcome to the Chuwy fourth quarter 2025 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. I will now hand the call over to Natalie Nowak, Head of Investor Relations. Natalie, please go ahead.
Natalie Nowak (Head of Investor Relations)
Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2025. Joining me today are Chewy’s CEO Sumit Singh and CFO Chris Depe. 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 [email protected] 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 Form 10K filed earlier today 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 (Chief Executive Officer)
Thank you Natalie and good morning everyone. I am thrilled to be joined today by our newly appointed CFO Chris Chris Depe. Chris has been with Chewy since 2022 and brings valuable continuity and deep institutional knowledge enabling a particularly seamless transition. He has a strong understanding of our business and the opportunities ahead for Chewy. I look forward to having many of you engage with Chris as he steps into his new role as cfo. I want to start by thanking our Chewy team members for executing a strong finish to the year. Once again, we delivered strong net sales growth, significant margin expansion and record free cash flow in 2025. As we enter 2026, we are focused on repeating this formula for success disciplined execution, profitable growth, continued margin expansion and strong free cash flow generation all in support of sustained long term shareholder value. Instead of taking the traditional approach of diving straight into our results, I’d like to share my perspective on what we are seeing in the pet industry and Chewy’s place in it in 2026 and beyond. So let’s begin. Pet is a uniquely attractive industry fueled by increasing pet humanization, premium product adoption and expanding lifetime value per household. Spending in this category is driven by an emotional attachment and recurring non discretionary needs which translates into resilient demand across economic cycles. We expect 2026 pet industry dynamics to largely mirror 2025, steady and resilient to macro trends, but without cyclical acceleration, pet household formation appears stable with no evidence of deterioration. However, we are not underwriting a meaningful rebound in that variable. Current estimates suggest low single digit industry growth with DOG at the lower end of that range and CAT at the higher end. Further, we expect industry growth to be predominantly volume driven with little or no contribution from pricing. Importantly, we expect the secular shift towards e commerce penetration to continue and as consumers increasingly prioritize convenience, transparency and auto replenishment, structural advantages that persist across economic environments and benefit scaled digital platforms like Chui. Against this backdrop we once again expect to deliver share gaining growth. We believe that Chewy is unique with a differentiated flywheel like operating model powered by a leading sales engine with over 80% of net sales on autoship, supported by a world class fulfillment network delivering best in class consumer satisfaction. The algorithm supporting our underlying growth remains balanced and durable driven both by active customer growth and nest back expansion. We reached an inflection point in NET adds in 2024 and and built on that progress throughout 2025 adding approximately 150,000 to 250,000 net adds per quarter. In the current environment we believe we can continue to deliver quarterly sequential net adds within that range. At the same time we see a long Runway to grow NESPAC through premium and health mix shift, private brands expansion and and deeper engagement. Now shifting to margins on margin expansion including its trajectory and durability, we remain equally bullish. As I noted during our last earnings call, our long term margin framework is unchanged and the underlying drivers of margin expansion are strengthening. In 2026, we expect to further expand profitability with the rate of expansion expected to build relative to 2025. SGA leverage will further strengthen as we move through the year, supported by the continued ramp of our next generation Houston Fulfillment center and efficiencies from the use of AI that help structurally lower our cost to serve. I will talk about these shortly. And finally, we believe Chewy remains well positioned to compound growth, expand share and drive sustained margin and free cash flow expansion in 2026 and beyond, independent of a macro reacceleration. Said simply as we look to 2026, our model does not depend on a minimum net sales growth threshold to expand profitability. Now an update on some of our strategic priorities and then Chris will take you through our financial results and 2026 guidance. Starting with Chewy Vetcare, we opened 10 new practices in 2025 reaching the high end of our target range, bringing our CVC footprint to 18 locations across five states. Performance continues to exceed expectations supported by strong utilization and consistently high customer and veterinarian satisfaction scores. CVC is also driving compelling ecosystem wide value, serving as both a customer acquisition engine and an engagement flywheel that deepens relationships with high value health customers. And the results are compelling. CVC is the fastest Nest PAC compounder in the business. We believe veterinary care is a powerful growth vector and a key pillar of value creation for Chewy. We are confident in the path ahead as we continue to execute and scale this platform. Turning to AI for those of you familiar with Chewy, it will come as no surprise that our ability to adopt technology and and drive rapid innovation is a core strength. We operate on a modern, nimble and scalable tech stack supported by a world class team of designers, product managers, marketers and technologists who excel at building applications that enhance the customer experience while lowering costs. The arrival of AI only amplifies this advantage, enabling us to innovate faster, operate more efficiently and unlock entirely new capabilities. And that is exactly what we focused on. Over the past several quarters we have focused on building the foundation required to deploy AI at scale across Chewy. Today, with our unified enterprise data platform and central AI tooling in place, we are embedding AI across key layers of the business, specifically the purchase experience, our service and operations layer, and our supply chain and fulfillment network. Let me elaborate. Within the purchase experience, we are progressing quickly to apply AI across our platforms to improve search, relevance, product discoverability and personalization. Externally we are closely following the emergence of agentic commerce models and view it as a future incremental demand and distribution channel for Chewy Pet remains a deeply emotional category where trust, relationships and empathy matter and these are enduring strengths of the Chewy brand. Combined with our leadership in price selection and recurring convenience, both purchase and delivery, we believe our competitive position remains strong across the broader organization. We are already deploying AI to drive greater structural efficiency. Functions such as customer service, fulfillment, pharmacy and marketing operations are leveraging internally developed AI tools to streamline workflows and and improve productivity. As we move through 2026, these efforts will translate into measurable financial impact. Based on our current roadmap, we expect AI driven efficiencies to contribute a low tens of millions of dollars benefit in 2026 with a meaningful step up in 2027 where we see a path to approximately 50 million or more in annualized savings as these capabilities scale. Moving on from AI, let me briefly talk about Chewy Private brands. After the launch of our fresh brand get real in Q2 last year, we are entering an exciting new chapter for Chewy Private brands with the launch of Chewy Made. Chewy Made is our unified owned brand platform designed to deliver trusted, high quality products while driving durable, profitable growth for Chewy. Starting in April and throughout 2026, we will expand our presence across both dog and cat consumables. This includes a balanced offering of dog food positioned at more accessible price points to broaden our reach into everyday nutrition, a broader assortment in everyday and gourmet cat nutrition, as well as entry into high demand formats where we currently have low penetration. In addition to the expanded assortment, we are consolidating some existing brands under this platform, creating a more cohesive and streamlined experience for customers. We look forward to keeping you updated on the progress of Chewy Made. In closing, we continue to execute from a position of strength. We are delivering share gains, expanding margins through structural efficiencies and generating growing free cash flow. Looking ahead to 2026, we are well positioned to further build on this momentum and drive sustained earnings growth. With that, I will turn it over to Chris.
Chris Deppe (Chief Financial Officer)
Thank you Sumit and thank you all for joining us today. Having been part of Chewy’s journey for nearly four years, I’m excited to step into the CFO role and continue building on the strong foundation our team has established. I look forward to engaging with many of you in the quarters ahead. Let’s start with a review of our financial results as we get into the details. A reminder fiscal year 2024 included a 53rd week and comparisons for Q4 and full year 2025 are discussed on a comparable 52 week basis where applicable. Fourth quarter net sales reached over $3.26 billion, bringing our total fiscal year 2025 net sales to over $12.6 billion delivering year over year net sales growth of 8.1% in Q4 and 8.3% for the full year 2025, reflecting strong execution, continued share gains in a stable category environment and consistent performance across both customer growth and spend per customer. We continue to grow active customers ending the year with 21.3 million increasing by approximately 4% year over year and net additions up by more than 810,000 year over year in fiscal 2025, we once again saw year over year improvement across all elements of the active customer equation. We also continue to grow with a high quality revenue base. Autoship customer Sales reached over $2.7 billion in Q4 and $10.5 billion for the year, representing 84% of total net sales in Q4 and 83.3% for the full year 2025. Growth in autoship customer sales outpaced overall top line growth, increasing by nearly 13% in the fourth quarter and 14% for the full year 2025 on a comparable basis. Reinforcing the strength of our recurring revenue model. Nest PAC reached $591 in Q4 2025 increasing by approximately 4% year over year on a comparable basis. Moving to profitability, we reported fourth quarter gross margin of 29.4% and full year 2025 gross margin of 29.8% representing approximately 90 basis points of year on year margin expansion in Q4 and 60 basis points of expansion for the full year. Strong gross margin performance was driven by sponsored ads growth premium mix into high margin categories including health and wellness verticals and a rational promotional environment shifting to operating expenses. Please note that my discussion of SG and A excludes share based compensation expense and related taxes. Fourth quarter SG&A fourth quarter with $607 million or 18.6% of net sales and full year 2025 came in at $2.4 billion or 18.8% of net sales. Q4 and 2025 SG&A include approximately $10 million of one time transaction costs primarily related to the Smart equine acquisition excluding SPC. In these one time costs we delivered SGA leverage of approximately 20 basis points in Q4 and full year. SG and A as a percentage of net sales came in flat year over year. Fourth quarter advertising and marketing expense was $233 million, bringing full year 2025 A&M expense to $825 million, or 6.5% of 2025 net sales reflecting approximately 30 basis points of leverage year over year. Fourth quarter adjusted net income was $115 million and full year 2025 came in at $541 million, which translated into $0.27 adjusted earnings per share in Q4 and $1.27 in full year 2025. Fourth quarter adjusted EBITDA came in at $162 million, representing a 5.0% adjusted EBITDA margin up 120 basis points year over year and adjusted EBITDA flow through of approximately 19%. Full year 2025 adjusted EBITDA came in at $719 million or 5.7% adjusted EBITDA margin growing approximately 26% year over ...
