Chewy - Earnings Call - Q1 2026

Executive Summary

• Chewy delivered a solid quarter: net sales of $3.12B (+8.3% YoY), adjusted EBITDA margin of 6.2% (+50 bps YoY), and adjusted diluted EPS of $0.35; GAAP diluted EPS was $0.15. Auto-ship penetration reached a record 82.2% of sales and active customers grew 3.8% to 20.8M.
• Results modestly exceeded Wall Street consensus: revenue beat by ~1.1% ($3.12B vs $3.08B*) and adjusted EPS beat by ~3.3% ($0.35 vs $0.339*). Management guided Q2 net sales to $3.06–$3.09B and maintained FY2025 net sales at $12.3–$12.45B with FY adjusted EBITDA margin 5.4%–5.7%.
• Key positives: Sponsored Ads drove gross margin expansion normalized for prior-year one-offs, Hardgoods grew 12.3% YoY on refreshed assortment, and free cash flow remained positive ($48.7M) despite seasonality.
• Watch items: GAAP gross margin down 10 bps YoY due to prior-year one-time benefits, GAAP net margin down 30 bps YoY, and CFO transition announced in May (company reaffirmed guidance).
• Stock reaction catalysts: management signaled trending toward the “upper half” of FY net sales guidance and sequential gross margin improvement expected in Q2; Chewy Plus and CVC progress are emerging levers.

Note: “Q1 2026” refers to Chewy’s fiscal Q1 2025 ended May 4, 2025.

What Went Well and What Went Wrong

What Went Well

• Record Auto-ship penetration (82.2% of net sales), with Auto-ship sales up 14.8% YoY to $2.56B; management highlighted Auto-ship as a key differentiation and loyalty driver.
• Sponsored Ads were the largest driver of normalized gross margin improvement; 1P ad platform enables video and off-site capabilities with strong partner ROI.
• Hardgoods net sales grew 12.3% YoY on refreshed assortment, faster SKU onboarding, and improved discovery; CEO cited “customers appreciate the new offerings” and >150 new brands added over two quarters.

What Went Wrong

• GAAP gross margin declined 10 bps YoY (29.6% vs 29.7%) driven by prior-year Q1 one-time benefits; normalized, gross margin expanded ~60 bps YoY per management.
• GAAP net margin declined 30 bps YoY (2.0% vs 2.3%) amid lower net interest income and higher SG&A tied to network expansion.
• Free cash flow of $48.7M decreased vs $52.6M prior year due to higher capex timing; management still expects ~80% of adjusted EBITDA to convert to FCF for FY.

Transcript

Operator (participant)

Good morning, everyone, and a warm welcome to Chewy's first quarter 2025 earnings call. My name is Emily, and I'll be coordinating your call today. After the presentation, you'll have the opportunity to ask any questions, which you can do at any time by pressing Star, followed by the number one on your telephone keypad. I will now hand over to our host, Natalie Nowak, Director of Investor Relations, to begin. Natalie, please go ahead.

Natalie Nowak (Director of Investor Relations)

Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh, and CFO, David Reeder. 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 website at investor.chewy.com. 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 10-K 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 2023.

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. With that, I'd like to turn the call over to Sumit.

Sumit Singh (CEO)

Thanks, Natalie. Good morning, everyone. The momentum at Chewy continues. Our team delivered a strong start to 2025, achieving top-line results exceeding expectations, continued growth in active customers, and solid profitability and free cash flow generation. Our Q1 results are a testament to the hard work and dedication of every Chewy team member and Chewy's ability to continue to take market share amidst a resilient pet category. Now, let's review the specifics. Q1 net sales exceeded the high end of our guidance range, increasing by over 8% to $3.12 billion. Net sales performance was underpinned by strong participation from new and existing customers across a variety of Chewy's offerings and our favorable mix of core consumables and health and wellness categories. Also notable this quarter was the 12.3% year-over-year growth we delivered within hardgoods.

Over the last several quarters, you have heard me talk about our ongoing efforts to refresh assortment and improve overall experience, and we believe that customers appreciate the new offerings available in this category. Further, our Auto-ship subscription program continues to be a pillar of strength and differentiation for Chewy, enabling high visibility and predictability in our business while also enhancing customer loyalty. First-quarter Auto-ship customer sales of $2.56 billion represented approximately 82% of Q1 net sales, reaching a record high for the company. Growth in Auto-ship customer sales once again outpaced overall top-line growth, increasing by nearly 15% in the first quarter. Moving on to the topic of active customers, the momentum we spoke about last quarter continued through Q1, and we ended the quarter with 20.8 million active customers, reflecting 3.8% year-over-year growth and an increase of approximately 240,000 customers sequentially.

Active customer growth was driven by continued strength in gross additions, along with improvement in gross churn. Moving down the P&L, gross margin came in at 29.6% for the quarter. Recall that last year we highlighted approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L. Adjusting for these one-time benefits in the comparable prior year period, we expanded gross margin by approximately 60 basis points year-over-year. Dave will provide additional color on our gross margin performance. We generated $192.7 million of adjusted EBITDA in the quarter, representing a 6.2% adjusted EBITDA margin and a year-over-year increase of approximately 50 basis points. Accounting for the previously mentioned one-time items, which positively impacted first quarter 2024, adjusted EBITDA margin increased approximately 120 basis points year-over-year.

Our adjusted EBITDA performance in Q1 reflects our strong gross margin performance, continued OPEX discipline, and the timing of certain marketing campaigns resulting in modest advertising and marketing leverage inside the quarter. Finally, we generated nearly $50 million of free cash flow and deployed $23.2 million towards share repurchases in the quarter, in line with our internal expectations. Now, I would like to provide an update on some of Chewy's strategic initiatives. Starting with Chewy VetCare, or CVC. Since our last earnings call, we have opened three additional Chewy VetCare practices, bringing our current CVC count to 11 locations across four states. The encouraging signs of success we have spoken about over the last several quarters remain strong through Q1. Our current footprint continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits as customers deepen their commitment to Chewy.

Additionally, we continue to gain valuable insight and learnings from each of our CVC locations as they ramp, allowing us to apply those learnings to our recently opened and future clinics as we drive more efficient unit economics. We remain on track to open 8-10 new clinics in fiscal year 2025, and we look forward to keeping you updated on our progress as we continue to build this business. Our Sponsored Ads business continues to perform well and grew sequentially quarter over quarter. The successful migration to our 1P platform that I spoke about last quarter has enabled us to broaden our suite of ad products and content capabilities, including the expansion of offsite ads. We are thoughtfully ramping offsite across search and social, with demand exceeding internal expectations. We continue to be excited about our Sponsored Ads business.

Elsewhere, I am excited to share that we have transitioned the Chewy Plus membership program out of beta phase, following a successful testing period. While still in its nascency, we are excited about our ability to drive even stronger loyalty as we expand access and engagement with the Chewy Plus paid membership program. Before I wrap up, I would like to briefly share my perspective on Chewy's long-term outlook. We have a strong and growing confidence in our ability to deliver on the strategic roadmap and long-term financial model that we outlined at Capital Markets Day in December 2023. That confidence is grounded in our execution to date and the meaningful progress we are making towards those goals. To illustrate, achieving the midpoint of our FY 2025 adjusted EBITDA margin guidance range would represent over 220 basis points of margin expansion, from 3.3% to approximately 5.6% in just two years.

Importantly, consistent with last year, approximately 80% of that profitability is expected to convert into free cash flow, translating to approximately $550 million, all while continuing to fund our strategic growth initiatives through the P&L. Key verticals like health, Sponsored Ads, and private brands remain early in their life cycle, and programs such as Auto-ship, our retail business, and broader competitive moats continue to scale. These developments support our path to achieving our long-term adjusted EBITDA margin target of 10%. Lastly, as you know, earlier this month, we announced that David Reeder, our CFO, will be leaving Chewy to pursue a CEO role in the semiconductor industry. David will remain in his role for the next several weeks to ensure a smooth transition. We thank him for his contributions and wish him continued success.

With strong internal talent, a differentiated strategy, and solid momentum, we remain confident in our ability to deliver a share-gaining FY 2025 and sustain long-term value for our shareholders. With that, I will turn the call over to Dave.

David Reeder (CFO)

Thank you, Sumit, and thank you all for joining us today. Our strong first-quarter results showcase the resilience of the pet industry, the durability of Chewy's business model, and continued momentum in the business. First-quarter net sales grew 8.3% year-over-year to $3.12 billion, exceeding the high end of the Q1 guidance range we provided last quarter. We saw continued momentum and active customer growth and ended Q1 with 20.8 million active customers, reflecting a year-over-year increase of approximately 3.8%. Once again, we outperformed internal expectations and delivered year-over-year improvement across all elements of the active customer equation. New customers and reactivations grew year-over-year, while gross churn improved over the same period. Auto-ship customer sales increased by 14.8% to $2.56 billion in the first quarter, with growth in auto-ship customer sales outpacing overall top-line growth by approximately 650 basis points.

Additionally, auto-ship customer sales represented 82.2% of our total net sales in Q1, a new high for the business. NESSPAC reached $583 as of Q1, representing an increase of 3.7% year-over-year. Moving to profitability, we reported first-quarter gross margin of 29.6%. As Sumit mentioned, last year in our first quarter 2024 earnings script, we identified approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L, resulting in a normalized gross margin of approximately 29% in the first quarter 2024. Adjusting for these one-time benefits in the comparable prior year period, we expanded first quarter 2025 gross margin by approximately 60 basis points year-over-year. Sponsored Ads continues to be the largest driver of gross margin improvement year-over-year, combined with strong auto-ship baseload and products mixed shift into margin-accretive categories. Shifting to operating expenses, please note that my discussion of SG&A excludes share-based compensation expense and related taxes.

In the first quarter, SG&A was $575.1 million, or 18.5% of net sales. For fiscal year 2025, we expect to deliver modest SG&A leverage driven by at-scale fixed-cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll. First-quarter advertising and marketing expense was $193.8 million, or 6.2% of net sales. Based on the timing of certain marketing campaigns, this expense category delivered modest leverage benefit in the first quarter. For the year, we continue to expect advertising and marketing expense to be largely in line with the results we've delivered in the last two years, or approximately 6.7%-6.8% of net sales in fiscal year 2023 and fiscal year 2024, respectively. This remains consistent with our previously stated long-term target range of 6%-7% of net sales. First-quarter adjusted net income was $148.9 million, representing an 8.6% increase year-over-year.

We delivered $0.35 of adjusted diluted earnings per share, the high end of our guidance range. First-quarter adjusted EBITDA came in at $192.7 million, representing a 6.2% adjusted EBITDA margin, which equated to approximately 50 basis points of year-over-year margin expansion. Excluding the 70 basis points of one-time benefit in first quarter 2024 gross margin, our adjusted EBITDA flow-through for Q1 2025 was approximately 21%. In the first quarter, we reported free cash flow of $48.7 million, which reflects $86.4 million of net cash provided by operating activities and $37.7 million of capital expenditures. For full year 2025, we expect approximately 80% of adjusted EBITDA to convert into free cash flow, and that CAPEX will be at the low end of our previously stated range of 1.5%-2% of net sales.

We continue to reinvest back into the business using our free cash flow while also returning capital to shareholders. We continue to periodically execute open market repurchases pursuant to the $500 million share repurchase authorization we announced at this time last year. In the first quarter, we repurchased approximately 665,000 shares for a total of $23.2 million under our existing program. At the end of the first quarter, we had approximately $383.5 million of remaining capacity under our existing program for future repurchases. We ended the quarter with approximately $616 million in cash and cash equivalents, and we remained debt-free with an overall liquidity position of approximately $1.4 billion. Now, I'd like to discuss our second quarter and full year 2025 outlook. We expect second quarter 2025 net sales of between $3.06 billion and $3.09 billion, or approximately 7% to 8% year-over-year growth.

We are maintaining our full year 2025 net sales outlook of between $12.3 billion and $12.45 billion, or approximately 6%-7% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. Our first quarter results and second quarter net sales guidance indicate we are trending towards the upper half of our full year net sales guidance range. Given we still have much of the year ahead of us, we are reserving the flexibility to adjust the range upward as we continue to progress throughout the year. Moving to profitability guidance, we are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4%-5.7%. The midpoint of our guidance range indicates approximately 75 basis points of year-over-year margin expansion.

Consistent with our comments last quarter and what we delivered in fiscal year 2024, we expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin. As such, and given our Q1 results, we expect to deliver sequential improvement in gross margin in the second quarter. Additionally, consistent with our comments last quarter pertaining to the 2025 quarterly progression of adjusted EBITDA margin, we expect first quarter results to represent the high point and expect modest sequential declines throughout the year due to the typical seasonality and the timing of investments. We also expect second quarter adjusted diluted earnings per share in the range of $0.30-$0.35. For the full year 2025, we also anticipate share-based compensation expense, including relating taxes, to be approximately $315 million and weighted average diluted shares outstanding of approximately 430 million.

We expect 2025 net interest income of approximately $25 million-$30 million, and we expect our effective tax rate to be in the range of 20%-22% for the year. Finally, as we discussed on our earnings call last quarter, we continue to embed in our guidance minimal expected impact from tariffs. In closing, I echo Sumit's perspective on Chewy's long-term outlook. The company has a clear differentiated strategy and a strong leadership team focused on delivering exceptional customer experiences. These strengths position Chewy well to execute its roadmap, drive strong financial performance, and continue to enhance shareholder value. Leaving Chewy is a bittersweet decision. I'm grateful for the opportunity to work alongside Sumit and the talented team here. Thank you to all the Chewy team members for all your dedication and discipline. I wish the company continued success in the years ahead.

With that, I will turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing star, followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star, followed by two, to withdraw yourself from the queue. Our first question today comes from Curtis Nagle with Bank of America. Curtis, please go ahead.

Curtis Nagle (Director)

Great. Maybe just for our first one, could we just dig into net customer adds? Exceeded the expectations pretty nicely in Q1. Is low single-digit growth still the right framework for customer count growth for the full year?

Sumit Singh (CEO)

Hey, Curt. This is Sumit. Good morning. Yeah. We were super pleased with the rate and the momentum that has continued from last quarter through Q1. Importantly, these results, as I've talked about in the previous quarter, we believe are predominantly due to the strength of execution and our own efforts. As the market continues to normalize in the background, that should only serve as tailwind. That tailwind is not incorporated in our guidance. Everything that we're delivering and what's incorporated in guidance is primarily our execution and our efforts. I think it's a pretty good baseline to take the low single-digit rate, although obviously we're starting to operate at the higher end of that. The reasons are pretty clear. We're adding more customers on the gross ad side, and we're driving retention up.

Therefore, gross churn is down, and the algorithm is essentially spitting out a nice cohort of customers, which are higher quality relative to kind of what we've seen coming out of the pandemic. We are sort of pleased with both the rate of acquisition of customers, the rate of ads, as well as the quality of ads, driven by the efforts that we've done here in the last two to three quarters.

Curtis Nagle (Director)

Got it. Understood. Maybe just a quick update in terms of how you're thinking about growth for the industry this year. I think you pointed to still expecting a normalization. In terms of growth and how to think about household formation, just an update on kind of where that sits now from last quarter would be awesome. Thanks.

Sumit Singh (CEO)

Yeah, sure. So there's a couple of different data points that we're triangulating. First of all, when you look at growth of the industry, it's primarily from an adoptions and relinquishments point of view, so net household formation has been flat. It hasn't gone backwards relative to where we were in or how we came into the year. It's trending fairly flat, which is a continued kind of encouraging sign. Number two, overall, when we look at the top-line growth of the industry, we are estimating, based on the sources that we have in front of us, roughly a 3%-4% growth of the market. Clearly, our guidance that we've provided is a share-gaining plan, growing at roughly two times the growth of the market.

From a pricing standpoint, we're not really baking in any sort of inflation throughout the year, although it may not be surprising to hear that as sort of tariffs continue to roll out, the industry might actually react by adjusting some pricing in hard goods or categories that are discretionary. If that's the case, we stand ready to respond to that. Right now, what you're seeing in our guidance is structural growth driven primarily by growth of active ads as well as share of wallet increases. Dave, do you have anything to add?

David Reeder (CFO)

Okay. Well summarized. Thank you, Curtis.

Curtis Nagle (Director)

Thanks.

Operator (participant)

Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Eric Sheridan (Managing Director)

Thanks so much for taking the question. Just want to build on some of the comments in the prepared remarks on the advertising opportunity. How are you guys thinking about the investments that need to be made, especially against the off-site advertising opportunity as we look not only across 2025, but out on a multi-year view? Maybe you can give us a little bit more characterization of how the conversations with advertisers continue to evolve both on and off-site and what that might mean for ads as a percentage of the business over the longer term and whether you have any updated views on that. Thank you.

David Reeder (CFO)

Yeah, maybe I'll start with the first part of that, Eric. Sumit, maybe you can come in later and talk a little bit about some of the conversations with our suppliers. We feel great about the progress that we've made with respect to Sponsored Ads, both in 2024 as well as entering 2025. We're particularly excited, as we've talked about previously, about the first-party platform migration that we executed at the beginning of this year. To remind you, that's our first-party software stack that really kind of completes, although we're always updating it, it kind of completes the portfolio and suite of products that we wanted to be able to offer to our suppliers. Specifically, it gives us the ability to support new content formats such as video. We're able to do more self-service.

It enables us to do both on-site, like we did primarily last year, as well as off-site, which we're increasingly doing this year given the pent-up demand there. It just really enables us to kind of more fully offer to our partners the Sponsored Ads experience that they expect. We are quite pleased with how it's performed. The momentum from fourth quarter last year and really all of 2024 has continued into 2025, and it looks like a good year for us in Sponsored Ads. Sumit, you want any comments on the.

Sumit Singh (CEO)

Yeah, Eric, I would, the framework that I would put in your mind is building on what Dave said, is we're thinking of this as a demand-side and supply-side house, obviously. Last year, we focused on on-site product ramp and opening up supply primarily in, let's say, the consumables category. This year, we're expanding the suite of products, as Dave mentioned, into social and off-site, and we're going to expand this into other categories. What you're seeing us is rapidly opening up supply. Our teams internally are very closely aligned with our partners, both activating more partners as well as more dollars from pocket to be able to apply to the supply that we're opening up on the website to drive higher utilization rates. We're super pleased with the utilization.

Between our partners and us, we're super transparent and having a really good, high-quality conversation on the ROI expected. So far, we've continued to exceed ROI expectations, therefore pretty nicely balancing the demand and supply side. On top of that, you want to put the one key platform that essentially allows us to flow through a greater portion to our bottom line and improve experience for our suppliers, including greater analytic capability that we didn't have or may not have had at the same level in the past. We're fairly pleased with the bespoke product that we're building in the early stages, but we've quickly ramped up into getting to the 1% a little bit beyond that. We are true to the 1%-3% ranges that we've provided.

The only implication you need to think about is as we move from on-site into off-site, we're still going to flow through at pretty high margins, albeit slightly lower than just the on-site product.

Eric Sheridan (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question comes from Mark Mahaney with Evercore ISI. Please go ahead, Mark.

Mark Mahaney (Senior Managing Director)

Okay. Thank you. Could you talk about the sustainability of the active customer growth by drilling down a little bit into what's enabling you to drive retention up for existing customers? And are there new sources of gross ads that you're able to tap into now that you weren't in the past? Just talk about both sides of that equation and the sustainability going forward. Thank you.

Sumit Singh (CEO)

Yeah. Mark, I'll start and Dave will add. We feel pretty good about the sustainability. We're bullish, and we feel we're in early stages of gaining momentum. Momentum, we continue to gain as you've sort of seen from the last three quarters of compiled results. Internal efforts primarily point to the work that we've done in taking a broader marketing funnel and strategy to the market. Internally, they point to a better product, whether it's the storefront or whether it's the app. Internally, the quality of customer is what kind of drives confidence in the retention and the future sort of revenue flywheel of these type of customers. Just to give you some data points, when you look at new customer NESSPAC for the Q1 2025 cohort, it is trending low single digits higher.

Right now, I'm just taking simple averages, so bear with me because the data is still early, but it's trending low single digits % higher on a year-over-year basis relative to Q1 2024 cohort. What are the inputs of that? The inputs of that are, as Dave talked about and I talked about earlier, it's the increasing mix of Auto-ship baseload. It's the mix towards repeatable categories like Consumables and Health that drive about 85% of our revenue. You would expect this then leading to improved reorder rates. You'd go over and see, did reorder rates actually improve? When you look at new customer reorder rates, new customer reorder rates also showed a steady improvement year over year, right? Relative to the cohorts of the previous 2024, reorder rates are also up by about low single-digit percentage points.

The combined tells you both sort of the gross ads tactics are working as well as our, I guess, our efforts to retain these customers are driven by more structural initiatives and actions that are more controllable rather than kind of taking advantage of any sort of industry trending that may or may not happen. That's how we're looking at the rest of the year.

Eric Sheridan (Managing Director)

Okay. Thank you, Sumit.

Operator (participant)

Thank you. Our next question comes from Nathan Feather with Morgan Stanley. Please go ahead.

Nathan Feather (Equity Research Associate)

Hey, everyone. Congrats on the really strong quarter here. I want to dig in a little bit into Chewy Plus with that program and inside of beta. Any way to kind of think about the adoption rates you've received on that tier? How should we kind of contextualize the changes in both unit economics and wallet share once people join that program? Thank you.

David Reeder (CFO)

Hey, Nathan. We had difficulty understanding your question. Would you mind perhaps repeating it for us?

Nathan Feather (Equity Research Associate)

Hey, yes. Sorry about that. I want to talk about Chewy Plus, potentially here are the adoption rates you've received on that program and any way to think about the changes in unit economics or wallet share once people onboard. Thank you.

Sumit Singh (CEO)

Yeah. Nathan, I'll start and Dave will add as he sees pertinent. Let's talk about Chewy Plus. Just to refresh our facts, we had a successful beta in 2024 from May, June of 2024 all the way through January, February of this year, right? Now we've chosen to expand the Chewy Plus, which is a paid program, to all of our customers starting sort of late February, early March. It's early stages. Also to recap, Chewy Plus offers members free shipping, 5% rewards that are aggregated into their accounts, and then limited-time exclusive offers. Members enjoy a free 30-day trial and then pay an introductory fee of $49 for the year for the membership. Now here are the results. Since expanding, Chewy Plus has continued to show strong membership growth and positive customer feedback, right? We're measuring active sessions for members that are higher.

Active sessions are higher, orders and frequency is higher, cross-category penetration is higher, which was one of the hypotheses or learning interests in the program to be able to see, hey, does it promote discoverability and does it promote attach rate? We are seeing that relative to the cross-category penetration of a non-Chewy Plus member versus a Chewy Plus member, right? These numbers are up both on a year-over-year basis as well as compared to a similar cohort of non-members. What you are essentially seeing is while Chewy Plus continues to show strong net sales growth given NESSPAC is expanding and expanding faster than a non-Chewy Plus member, costs, right, have stayed in line with expectations, and these members are now driving incremental contribution profit, right?

We're going to stay away from providing specific details today, but to give you early reads, the rate of membership sign-ups is now we've now expanded the program. You can essentially see it on the website across our shopping funnel. We're still ramping up, so it's not fully ramped yet, and you should expect us to continue to ramp up. In the background, we're going to keep it very disciplined on contribution profit and drive member growth on the front end. Dave, anything to add?

David Reeder (CFO)

Yeah. Nathan, if I could just broaden out the commentary just for a moment and talk a little bit more about not all of our loyalty programs and not just Chewy Plus. You saw Auto-ship have a tremendous quarter of 460 basis points on a year-over-year basis, continued engagement with that cohort of customers that have decided that they like the value proposition as well as the convenience of Auto-ship. When you kind of put this together in a constellation, you have got growing brand awareness for Chewy. You have got more conversion of that brand awareness to active customers. You have got that active customer growth that is more likely than not to be propensed to move into categories such as Auto-ship or Chewy Plus. You have got reduced then engagement, reduced or excuse me, increased engagement, reduced churn.

You have customers that have left realizing that they like the Chewy experience and coming back. All of this is coming together in the active customer growth that you're seeing as well as the NESSPAC that you're seeing. Quite pleased with the first quarter, quite pleased with the momentum that we're carrying into second quarter, and optimistic, albeit early optimistic for the implications for the year.

Nathan Feather (Equity Research Associate)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from Doug Anmuth with JPMorgan. Please go ahead.

Doug Anmuth (Managing Director and Internet Analyst)

Good morning. Thanks for taking the questions. I just want to follow up on the Auto-ship comments, David and Sumit. In particular, we've seen Auto-ship customer sales, I think, improve from about 66% of the total several years ago at the IPO to 82% today. Hoping you could just talk about the path new customers are taking to becoming Auto-ship customers and how that's evolved over the years. Second, can you just talk about Hardgoods a little bit, the drivers of the 12% growth that you're seeing there and some of the changes you're making in terms of assortment and experience, how that's improving? Thanks.

Sumit Singh (CEO)

Sure. Hey, Doug, I'll start and Dave will add to it. So auto ship, when you deconstruct it as a business in itself, the fundamental principles that we're applying are retention into auto ship is acquisition into auto ship followed by settlement and therefore retention into auto ship, right? And so in terms of acquisition into auto ship, the roadmap follows some concepts that you would call our brilliance in the basics of retail, which is assortment, high in stock, and essentially paired with what you would consider is Chewy's moat and differentiation, which is a super convenient and high-powered personalized digital experience that allows customers discoverability and therefore a higher rate of conversion than what you would expect or see in the rest of the industry. Broadly, that's been the template and how we've continued to grow the program.

Kudos to our partners for continuing to believe and support given how good a program this is to drive loyalty for a specific supplier brand and therefore generate lifetime value for long periods of time. Now, on the retention side, we followed a similar playbook, allowing our personalized approach and one-on-one connection with customers to be able to really get them to feel like they're getting value out of the program. We talk about loyalty, and Dave said this well. When you talk about customer loyalty, right, we think about a model that is built in concentric circles. It starts with the way that we go to market with our high-touch service. It then builds around programs like Auto-ship. It then introduces newer programs like Chewy Plus that are now complementary to Auto-ship, and we're seeing both play off of each other.

The app ecosystem essentially keeps customers more engaged and therefore highly propensed to more discoverability and growth of share of wallet. Anyway, I'll get back to the point on Auto-ship. I think over the last few years, you've seen us add assortment, improve experience, both purchase and post-purchase, and that's the path from 66 to 82. Your second question was around Hardgoods growth. This one, I would say, is A, again, brilliance in the basics and the team's resilience and the quality of execution being driven from the team. You've heard us talk about freshness and newness of assortment. You heard us talk about better lifecycle management of inventory. You heard us talk about discoverability, and then you heard us talk about a personalized approach that drives a better experience on the website. It's all a combination of that. Dave, anything to add?

David Reeder (CFO)

Yeah. I mean, while you were speaking, I was just refreshing my memory across all of the subcategories within hard goods. Doug, as I look at the data here on a year-over-year basis, I mean, almost all of the categories that I've been kind of spot-checking are up year-over-year in hard goods. I think that speaks both to all of the things that we've discussed with respect to active customer growth, continued penetration with respect to share of wallet, as well as refresh of assortment that the team has done an excellent job on getting that refreshed assortment not only into our fulfillment centers, not only with our third-party shippers as well as first-party fulfillment, but also getting those products in front of customers at the point of time in which they are willing and able to make a discretionary purchase.

All of those things came together for us in first quarter, and that momentum looks quite positive.

Sumit Singh (CEO)

Doug, to give you a few data points, I mean, we've added over 150 new brands on the portfolio over the last two quarters. We've reduced time-to-onboarding SKUs by about 40-50%. What you're essentially, if you put them together, you're saying, "Okay, you guys have more choices for customers, and your go-to-market is two times faster than where it was last year." I mean, all of this translates to time, and then you put the effort of discoverability and post-purchase experience that we deliver. It drives the flywheel a bit more efficiently, and that's what you're seeing.

Doug Anmuth (Managing Director and Internet Analyst)

Great. Thank you both.

Operator (participant)

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Rupesh Parikh (Managing Director and Senior Analyst)

Good morning, and thanks for taking my question. I guess I just want to go back to the top line. Very strong momentum, broad-based category momentum as well. From a share perspective, where do you guys believe you're gaining market share and any changes versus recent quarters?

Sumit Singh (CEO)

Oh, yes. No doubt about it. I mean, whether you come at it from the industry growth at 3%-4% and our guidance, or you come at it from if you break that down mathematically, what you would find is, so let's say, let's just do kind of real-time maths. Let's say 3% of the industry at about $140 billion. That means the industry will add roughly $4 billion this year on a year-over-year basis. If you consider a penetration of somewhere in the 30%-35% online and do the math of Chewy's revenue, what you would find is that we're picking up roughly 50 cents of every dollar that is moving online, which is higher than in the past we've talked about 40-42 cents of every dollar that's moving online.

There's clearly a share gain plan built in, and we're pleased with the way the teams are executing.

Rupesh Parikh (Managing Director and Senior Analyst)

Great. Thank you, and Dave, best of luck.

Natalie Nowak (Director of Investor Relations)

Thanks, Rupesh.

Operator (participant)

Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead, David.

David Bellinger (Director and Senior Analyst)

Hey, good morning. Thanks for the questions, and thanks to Dave as well. Two questions from us. First one, just on gross margins within the core. In understanding the 70 basis point one-time benefit you had last year, it still seems like something might be changing within the gross margin line. Could you just help us understand the moving pieces there? Excluding the Sponsored Ads and that being the largest driver of margin expansion, are you seeing something or promotions or something else within the core Chewy retail business where the gross margins are weakening in some way? The second question on the operating expense line, not much leverage despite the automation efforts. Anything that stood out in Q1 and what's leading to the stronger leverage that's planned through the rest of the year? Thank you.

David Reeder (CFO)

Thanks, David. A couple of items to note with respect to gross margin. One, internally, we were pleased with our gross margin. It came in largely as we expected. Two, on a normalized basis, it expanded more than 60 basis points year-over-year, if you recall, in our first quarter of 2024, that script which you referenced. We did identify roughly 70 basis points of one-time items that benefited us in gross margin last year. That resulted in a first quarter 2024 gross margin of 29%. So you normalize for that on a year-over-year basis of 60 basis points. Three, in this call's prepared commentary, we indicated that we expect gross margin to increase sequentially from Q1 to Q2. We also reiterated that we expect our year-over-year EBITDA increase to be majority-driven, roughly 60% by gross margin.

Kind of a lot to like about our first quarter results, the market share gaining revenue, active customer growth, normalized year-over-year gross margin expansion, record EBITDA margin, continued momentum in the second quarter, a lot to like. The puts and takes were gross margin. Obviously, gross margin on a year-over-year basis normalized, as I mentioned, single biggest contributor Sponsored Ads followed by product mix accretion followed by, of course, the normal kind of fixed cost absorption that you get in those lines. We expect that playbook to continue in a very similar vein as what we saw last year. Moving to the operating expenses, we were pretty happy with the operating expenses for Q1. Obviously, you can't get to that EBITDA margin of 6.2% without being happy with a lot of the lines in the P&L.

We expect to get a little bit more contribution from gross margin in the second quarter as well as the latter half of the year. I'm talking about on a year-over-year basis. We expect to continue to get leverage from the OpEx lines. We did have, as we called out, lower advertising and marketing expense in the first quarter. That was largely just a result of the timing of certain campaigns. You have kind of seen that number on any specific quarter kind of bounce around between that 6%-7% range. We think for the year, advertising and marketing will be very consistent with what we have posted in prior years, so roughly 6.7%-6.8% of net sales. No real surprise on that line for the year. Of course, on any specific quarter, you may see a little movement just based on timing.

David Bellinger (Director and Senior Analyst)

Great. Thank you. Very helpful.

David Reeder (CFO)

Thanks, David.

Operator (participant)

Thank you. Our next question comes from Shweta Gujaria with Wolfe Research. Please go ahead.

Shweta Khajuria (Managing Director)

Thanks a lot for taking my question. I have one on CVC. You talked about three new additions, 11 locations across four states. Could you help us think about how big of an opportunity this could be for you, especially as it relates to demand gen? How do you think about expanding, call it one to three years out? Thanks a lot.

David Reeder (CFO)

I think what you're seeing us continue to do on CVC is just take a very measured approach with respect to rolling out vet clinics. As you know, we were very happy with the performance of the clinics that we rolled out in 2024. We expect to end this year in the high teens of vet clinics, so call it roughly 10 plus minus a little bit vet clinics that we expect to roll out in 2025. The performance of the vet clinics that are maturing, we've been quite pleased with. We continue to grow their utilization and their bookings. Forward booking rates remain quite strong and continue to strengthen, actually. We've been happy with the new customers that are being introduced to Chewy, which are significantly higher than what we originally modeled. That has been a very pleasant surprise to us.

As we've mentioned on some prior calls, those new customers that are coming into the vet clinics, and that's their first experience with Chewy, about half of them are then following that visit up within 30 days and actually purchasing from chewy.com. I would say in terms of vet retention, in terms of performance of individual four-wall clinic, kind of all metrics green by and large for the vet clinics. We're quite pleased with that performance. I think you'll continue to see us take a measured approach with respect to rolling out vet clinics. In terms of the opportunity, I think the opportunity is clear. You've got roughly $20 billion-plus type of market for vet services in the U.S. This enables us to tap a portion of that market, albeit with a slow rollout as we kind of perfect our offering.

It also enables us to continue to grow our pharmacy business and get more insight into all of the pharmacy that's offered within vet clinics, not just the portion that we're currently kind of seeing through our existing business. I think from that perspective, in terms of opening up a large TAM for us on a go-forward basis, we're quite pleased. We're pleased with the results. Our customers are pleased with the services and the care that they're getting. Perhaps that's the most important thing. Sumit, do you have anything to add?

Sumit Singh (CEO)

I'd say two comments, starting with the TAM and then working backwards into how to think about CVC in addition to what Dave said. Starting with the TAM, the $20-$25 billion that Dave's talking about doesn't fully encapsulate newer tech or newer technologies like either telehealth triage or insurance or software opportunities, given how much opportunity there is to be able to bring a one-piece solution to a fragmented software space or the data space in the pet health sector. If you recall from our Capital Markets Day presentation, we laid out a pretty compelling vision of the stack that we're building and that the industry is starting to benefit from. We're super excited about that in terms of how we can contribute to expanding the TAM beyond what is currently captured.

Number two, when you think about CVC, you have to also think about CVC in similar lines as to how you think about Autoship or Chewy Plus. These are ecosystem-type concepts that allow a customer to discover Chewy in a new place and then expand their engagement with Chewy regardless of their point of entry into Chewy. These are highly defensible moats in the way that they bring customers in and keep customers in. As we compound these moats, we only had Autoship several years ago. Now we have Autoship. In the future, we're going to have CVC. In the middle, we have the app and the Chewy Plus programs. We are sort of excited about how we think about customer engagement and growth of share of wallet in addition to opportunity of acquiring new customers through these varied channels.

Shweta Khajuria (Managing Director)

Okay. Thanks, Sumit. Thanks, Dave. Dave, congrats and all the best.

David Reeder (CFO)

Thanks, Shweta.

Operator (participant)

Thank you. We have time for one final question. Our last question today comes from Stephen Zacone with Citigroup. Stephen, please go ahead.

Steven Zaccone (Director of Retail Equity Research)

Great. Good morning. Thanks very much for taking my question. I had two kind of quick ones. First one just on pricing. What have you seen from a pricing standpoint? Tariffs are probably starting to impact some of the product costs out there in the industry. Has anything changed on your view of the year? The second is, from an underlying category perspective, dogs versus cats, we've heard about more strength in the cat category this year. Has that been the case in your business as well?

David Reeder (CFO)

I'll take pricing and Sumit, maybe you want to comment on dogs and cats. Look, from a pricing perspective, like for like, we see very little inflation in the industry right now. Again, I'm talking like for like products. That stated, we continue to see humanization of pets, and that humanization is leading to premiumization in terms of customers wanting more medicine, better supplements, better food for their pets to improve their overall pet health. While we're continuing to see the trends towards premiumization, we are not seeing, kind of on a like for like product basis, much inflation right now. I'm including the hardgoods into that category. If you take the hardgoods category, even some of the ones that perhaps could be impacted by tariffs, you have to really look at how much inventory is physically in individual suppliers' locations on shore.

That inventory is still in place. I would say you have not yet seen any increase from tariffs kind of flow through the hardgoods category. Stay tuned on that front. As you know, from our perspective, the vast majority of our portfolio is consumables, 85% plus of our portfolio is consumables with domestic input source streams. We see very little impact from tariffs on Chewy in fiscal year 2025 and what we have seen we have embedded in our guidance. Sumit, any comments on dogs versus cats?

Sumit Singh (CEO)

Yes, Steve. We love them all equally. Yes, in the previous call, we've come into the year sort of seeing the proportion of cats or cats being a popular choice. The data does not refresh as often, but we've continued to see strengthening of the cat business. At the same time, the dog business as well, given that we drove 6% year-over-year growth in consumables, which accounted for roughly 50% of the growth overall for Chewy. Happy with the performance.

Steven Zaccone (Director of Retail Equity Research)

Yeah. Thanks for the detail.

Operator (participant)

Thank you. Those are all the questions we have time for today. This concludes our call. Thank you all for your participation. You may now disconnect your line.