Chewy raises annual sales outlook as margins improve, but growth slows

Chewy raised its full-year sales forecast and narrowed its adjusted profitability outlook upward on September 9 after reporting fiscal second-quarter revenue of $3.33 billion. Customer growth and stronger margins supported the increase, although sales growth slowed and free cash flow fell as capital spending rose.

Revenue increased 7.3% in the 13 weeks ended August 2, while adjusted EBITDA rose 23.7% to $226.7 million. Chief Executive Sumit Singh said sales reached the high end of guidance and the 6.8% adjusted EBITDA margin exceeded management’s expectations. Net income increased 29.8% to $80.5 million.

The results show Chewy earning more from a growing sales base, with qualifications: acquisitions contributed to revenue growth, a legal settlement supported reported profit, and fewer diluted shares helped per-share earnings. The accompanying investor presentation supplies numeric annual and third-quarter forecasts that put management’s outlook increase in context.

Annual sales midpoint rises $40 million

Chewy now expects fiscal 2026 net sales of $13.46 billion to $13.57 billion, compared with $13.40 billion to $13.55 billion in its June presentation. That raises the midpoint by $40 million, calculated from the two ranges, and narrows the forecast band from $150 million to $110 million.

The annual adjusted EBITDA margin target is now 6.7% to 6.8%, compared with 6.6% to 6.8% previously. The change lifts the floor by 0.1 percentage point while retaining the ceiling. Expected annual sales growth is 6.8% to 7.7%, or 5.5% to 6.3% excluding acquisitions.

For the third quarter, Chewy forecasts sales of $3.323 billion to $3.358 billion, representing 6.6% to 7.7% growth, or 5.3% to 6.2% excluding acquisitions. Its adjusted EBITDA margin target is 6.6% to 6.7%, below the second quarter’s 6.8%. The sales range brackets the latest quarter’s revenue, implying broadly steady sequential sales.

June’s second-quarter targets were $3.30 billion to $3.33 billion in sales and approximately $0.36 in adjusted diluted earnings per share. Actual adjusted diluted EPS matched that target. Chewy does not provide a GAAP net-income outlook, citing uncertainty in other income and taxes.

Customer spending grows as Autoship expansion moderates

Sales growth excluding SmartPak and Modern Animal contributions was 5.7%, compared with the reported 7.3%. The distinction matters when assessing demand across a changing business: the headline growth rate includes revenue contributed by those businesses.

Reported sales growth slowed from 7.7% in the first quarter. Autoship customer sales rose faster than total revenue, increasing 9.3% to $2.817 billion and reaching 84.6% of sales, up from 83.0% a year earlier. But that growth also moderated from 10.5% in the first quarter.

Autoship customer sales measure purchases by customers who had an order shipped through the subscription program during the preceding 364 days. The percentage describes sales associated with that customer group; it does not establish that every dollar came from an automatically scheduled order.

Active customers increased 3.8% to 21.705 million, with 208,000 net additions from the preceding quarter. The total includes approximately 43,000 SmartPak customers and excludes additions related to Modern Animal. Chewy defines an active customer as someone with at least one fulfilled product or service order during the preceding 364 days, so the measure extends beyond shoppers purchasing in the quarter itself.

Net sales per active customer rose 1.9% to $602. This divides sales over the preceding four fiscal quarters by the ending active-customer count. It provides a longer view of spending rather than a quarterly basket-size measure.

Expense discipline supports profit despite flat gross margin

Gross margin held at 30.4%, while gross profit increased to $1.011 billion from $942.2 million. Operating expenses grew more slowly than sales: selling, general and administrative expenses reached $704.4 million from $671.9 million, and advertising and marketing rose to $214.8 million from $200.6 million.

Total operating expenses increased approximately 5.4%, calculated from $919.2 million against $872.5 million. That helped operating income rise to $92 million from $69.7 million despite the unchanged gross margin.

Adjusted EBITDA, adjusted earnings and free cash flow are non-GAAP measures. Chewy’s adjustments remove specified expenses and gains from reported earnings; free cash flow subtracts capital expenditures from operating cash flow. These measures help explain operating trends, but exclusions such as recurring share-based compensation remain economically relevant.

The earnings reconciliation adds back $85.9 million of share-based compensation and related taxes and $6.4 million of transaction costs, while subtracting $24 million of net legal settlement proceeds. Adjusted net income consequently rose 5.5% to $148.8 million, considerably less than the 29.8% increase in GAAP profit. Transaction costs have been excluded from adjusted net income prospectively since the first quarter of 2026, creating a difference in treatment from the prior-year comparison.

Diluted EPS increased to $0.20 from $0.14, while adjusted diluted EPS rose to $0.36 from $0.33. Both benefited from a lower weighted-average diluted share count: 410.1 million versus 428.4 million, a calculated decline of approximately 4.3%. Basic weighted-average shares fell, and the incremental dilution from share-based awards also declined. The denominator change therefore should not be attributed entirely to repurchases.

Higher investment absorbs cash generation

Quarterly operating cash flow increased 2.6% to $137.4 million, but capital expenditures rose to $47.9 million from $28 million. The additional $19.9 million of spending exceeded the $3.5 million improvement in operating cash flow, explaining the $16.4 million decline in free cash flow to $89.5 million.

The first-half comparison was stronger. Across 26 weeks, sales rose 7.5% to $6.687 billion and adjusted EBITDA increased 27.6% to $479.8 million, with a 7.2% margin. Operating cash flow reached $245.9 million; after $85.6 million of capital expenditures, free cash flow was $160.3 million, up 3.7%.

Other capital uses were substantial. Chewy paid $552.8 million for business acquisitions, net of acquired cash, and spent $400 million on share repurchases during the first half. The presentation identifies $200 million of executed repurchases in the second quarter. Acquisition payments and repurchases are separate from the capital expenditures deducted in free cash flow.

Cash and equivalents fell to $611 million from $860.1 million at fiscal year-end. Marketable securities added $1.2 million at August 2. Chewy also recorded $811.7 million in debt proceeds and $220 million in principal repayments during the half; its balance sheet showed $588.7 million of long-term debt, net, plus a $3 million current portion, compared with none at year-end.

The next results will test whether customer spending and acquisition-excluded growth support the higher annual sales target while margins remain within management’s forecast. Cash conversion deserves equal attention: stronger earnings accompanied heavier investment and capital returns, making operating cash flow and spending central to assessing the financial benefit of that growth.