• Pet industry normalization and improving customer metrics: For the first time since 2022, CHWY is seeing more pet adoptions than relinquishments in their shelter data, indicating industry normalization. Customer acquisition and reactivation rates exceeded internal expectations in Q1, with reactivations up mid-teens year-over-year. Management noted these are early but positive signals for pet household formation, suggesting potential for future growth.
• Expanding profit margins and strong cash generation: CHWY reached what management called "an exciting inflection point" in profitability and cash generation, leading to their first-ever $500 million share repurchase program. Gross margin reached 29.7% with sponsored ads being the largest driver of improvement, and the company is on track to reach its long-term 10% EBITDA margin target. Their ability to generate free cash flow (over 80% conversion) provides financial flexibility.
• High-growth healthcare vertical and vet care expansion: The company is seeing strong early performance from its vet care clinics with high customer NPS scores, better-than-expected appointment utilization, and strong vet staffing. This healthcare vertical is growing faster than other categories and improving overall product mix, supporting higher margins. Management plans to accelerate clinic openings to the high end of their 4-8 range for 2024.

• Despite management's optimism about "green shoots," Chewy continues to struggle with customer growth, with active customers declining and management guiding for "relatively flat" customer counts year-over-year. As CFO David Reeder stated, they expect customers to be "flat to slightly down maybe in the first half, flat to slightly up in the second half" – indicating continued challenges in customer acquisition despite improving customer reactivation.
• Chewy's growth strategy depends heavily on increasing NSPAC (Net Sales Per Active Customer) rather than expanding its customer base, which may not be sustainable long-term. Management acknowledged they're "capturing about 1/3 of the NSPAC in the market" currently, suggesting limited additional upside potential, while discretionary categories remain pressured by inflation.
• The hard goods/discretionary category remains a significant weakness, with continued year-over-year declines. While management noted they've reduced the rate of decline "to the tune of high teens to the low 30% start from where we started the year," this category continues to face substantial challenges that are limiting overall revenue growth potential.

Chewy Q1 2025 Earnings Call Q&A Summary

1. Share Repurchase
   Q: What is your approach to the new share buyback program?
   A: The Board authorized Chewy's first-ever $500 million share repurchase program. Management will be active in the market starting Q2, using both opportunistic and methodical approaches given their strong cash position of $1.1 billion and over 80% conversion of EBITDA to free cash flow.

2. Profitability Outlook
   Q: What's driving the record profitability and future expectations?
   A: Q1 adjusted EBITDA margin reached 5.7%, with management raising full-year guidance to 4.1-4.3%. This reflects 20%+ flow-through at midpoint, driven by sponsored ads growth, product mix improvement toward healthcare, and operational leverage from scaled infrastructure.

3. Customer Dynamics
   Q: When will customer counts turn positive?
   A: Management expects customer counts to remain flat to slightly down in 1H 2024 with improvement in 2H. Q1 showed encouraging signs with net new customers and reactivations (up mid-teens year-over-year) exceeding internal expectations for the first time since 2022.

4. Veterinary Expansion
   Q: What's driving optimism about vet care clinics?
   A: Chewy has opened 4 clinics with plans to reach up to 8 this year. Early results show strong vet staffing, high NPS scores, and better-than-expected new customer acquisition. Management expects to measure success through customer satisfaction, vet recruitment/retention, and operational execution.

5. Chewy Plus Program
   Q: How will Chewy Plus rollout and interact with Autoship?
   A: The recently launched paid membership beta offers shipping benefits, cash rewards, and exclusive perks. Management views Chewy Plus as complementary to Autoship, with each program potentially driving adoption of the other to increase repeat purchase rates, NSPAC, and engagement.

6. Revenue Outlook
   Q: What's your view on top-line guidance and industry trends?
   A: Q1 revenue grew 3.1% to $2.88 billion. Management maintained full-year guidance of $11.6-11.8 billion (4-6% growth). They're seeing early green shoots in pet household formation, with shelter data showing more adoptions than relinquishments for the first time since 2022.

7. Sponsored Ads
   Q: How is the sponsored ads business performing?
   A: Sponsored ads were the largest contributor to gross margin improvement. The program continues ramping well with new products like branded search ads. Management expects to exit the year at the low end of their 1-3% of net sales target range.

8. Hard Goods Category
   Q: Are you seeing any green shoots in hard goods?
   A: Management has observed improved search volume and consumer intent for hard goods, likely tied to adoption trends. They've significantly slowed the category's decline from low 30% to high teens and are focused on improving assortment and maximizing demand conversion while remaining economically sensible.

9. Marketing Strategy
   Q: What are your marketing priorities given current customer dynamics?
   A: Chewy is using a full-funnel marketing approach with separate teams focusing on acquisition and retention/reactivation. They've increased brand awareness among Gen Z and millennial segments and improved targeting capabilities through their rebuilt content platform. Marketing spend will be at the higher end of their 6-7% range.

10. Customer Cohorts
    Q: How are existing cohorts trending relative to historic levels?
    A: Recent cohorts from late 2022 show low single-digit percentage point improvements in retention compared to pandemic cohorts. New customers are signing up for Autoship at some of the highest rates in company history. Customers continue to trend toward health-related and premium categories.