Key Takeaways:
Chewy Inc. raised its fiscal 2026 revenue and profitability outlook after second-quarter net sales reached the high end of guidance, betting that share gains and subscription retention can carry earnings even though the pet market shows no sign of recovering.
"While we did not see a meaningful recovery in the more pressured consumer backdrop for the pet market, importantly, we did not see further deterioration," Chief Executive Officer Sumit Singh said on the Sept. 9 call. "Our outlook does not depend on a meaningful recovery in the broader pet category."
The Dania Beach, Florida-based online pet retailer now expects fiscal 2026 net sales of $13.46 billion to $13.57 billion, up from a prior range of $13.4 billion to $13.55 billion, implying growth of 6.8% to 7.7%. Organic net sales growth was narrowed to 5.5% to 6.3%. Adjusted EBITDA margin guidance was tightened to 6.7% to 6.8% from 6.6% to 6.8%, lifting the low end by 10 basis points and implying $912 million of adjusted EBITDA at the midpoint, more than 100 basis points of year-over-year expansion.
Revenue rose 7.3% from $3.10 billion a year earlier, with organic growth of 5.7% excluding the SmartPak and Modern Animal acquisitions. Active customers increased 3.8% to 21.7 million, including 43,000 from SmartPak, while net sales per active customer reached $602, up 1.9% reported and 3.8% normalized for the prior year's extra week. Autoship customer sales climbed 9.3% to $2.8 billion, or 84.6% of total net sales.
Gross margin held at 30.4%, flat year over year and up 30 basis points sequentially, as cost of goods sold rose 7.3% to $2.319 billion. Chief Financial Officer Christopher Deppe said roughly $10 million of the EBITDA upside came from tariff refunds received earlier than planned and rebates shifted into the quarter, with more than $5 million more from gift card breakage, inventory adjustments and vendor-funded merchandising. "These items are not indicative of our underlying margin run rate," he said.
Chewy said it outperformed the broader pet category by two to three times, with industry data showing the consumables market roughly flat year over year against Chewy's mid-single-digit growth. Hardgoods revenue rose in the mid-teens on assortment and merchandising changes. Treats and toppers, which Singh described as the discretionary slice of consumables, slowed more sharply than core food and medications.
Chewy launched its AI customer assistant, Kai, to a limited group of mobile app users, and about 30% of chats are now resolved through self-service for order status, returns, Autoship and account management. The company pulled the deployment forward from the third quarter into the second. A voice agent, Callie, handles appointment confirmations and follow-ups at select Chewy Vet Care clinics.
Management expects AI initiatives to deliver low tens of millions of dollars in cost savings in fiscal 2026, scaling to about $50 million annualized in fiscal 2027. Singh cautioned against treating that figure as a direct addition to earnings. "It would not be appropriate to mechanically layer AI savings on top of our fiscal 26 margin trajectory," he said, noting the efficiencies will offset wage inflation and may fund growth spending.
Chewy Health remained the fastest-growing piece. The Chewy Vet Care clinic portfolio posted triple-digit revenue growth, the $400 million Modern Animal acquisition closed during the quarter and performed ahead of expectations, and SmartPak delivered its seventh consecutive quarter of mid-double-digit sales growth. Both acquisitions are a modest drag on adjusted EBITDA margin while integration continues.
Free cash flow fell to $90 million from $106 million a year earlier on timing, against $137 million of operating cash flow and $48 million of capital expenditure. Chewy ended the quarter with $612 million in cash and marketable securities and more than $1 billion of total liquidity, after issuing $600 million in term loans and repurchasing $200 million of stock, or 9.9 million shares.
For the third quarter, Chewy guided to net sales of $3.323 billion to $3.358 billion, reported growth of 6.6% to 7.7%, adjusted EBITDA margin of 6.6% to 6.7% and adjusted diluted EPS of about $0.39. Deppe said gross margin will decline sequentially from the second quarter but still leverage year over year, with fuel costs a mid-single-digit million-dollar headwind through the balance of the fiscal year.
Shares closed down 7.7% at $20.75, leaving the stock about 35% lower year to date, as investors focused on the flat gross margin and a profitability forecast that narrowed rather than climbed. The guidance midpoint assumes no improvement in consumer behavior, and the high end requires either a better market backdrop or stronger execution. The next test comes with the third-quarter report, where Modern Animal customer additions are still excluded from guidance.
