Okay, great. Good afternoon, everyone. Thank you so much for joining us. My name is Nathan Feather. I'm Morgan Stanley's small and midcap internet analyst. I'm pleased to be joined today by Sumit Singh, CEO of Chewy. Thanks so much for having you.
Nice to be here. Thank you.
Now, before we get in, quick housekeeping item for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosure. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, let's kick it off. You know, we're now about two years since your investor day, where you outlined your strategic plans along with long-term financial targets of high single-digit revenue CAGR and 10% or higher adjusted EBITDA margins. How are you progressing towards those long-term targets you outlined?
We believe we are ahead of targets and expectations. you know, it was the first Capital Markets Day that we'd hosted. We had a lot of fun doing it. It really gave us a view into, you know, what had worked from 2018 or 2019 onwards since we'd come to the market with an IPO, and then what our focus should be over the next, you know, 3, 5, 7 years per se. You know, from all, from all sense of the word, in our opinion, we've exceeded our own internal targets and expectations. Let me break that down. from a, you know, top-line point of view, back in 2023, it was a pretty tepid year for the market and category overall.
You know, we had sort of said, "Hey, we want to get growth rate back into the high single-digit to low double-digit, or low double-digit growth rates." So we've clearly been able to do that. So the difference between the high single-digit to the low double-digit, you know, we'd also assumed that the market would normalize by this particular time, so we can get into the industry a little bit more. Barring the industry not getting back to sort of pre-COVID levels of health, you know, everything else from an execution point of view has gone really well. You know, net adds are running ahead of expectations. We've inflected coming into 2024. We expect that to be sustainable and durable.
We've, you know, clearly hit the high single digit growth rate that we were talking about as a combination of net adds growing, but also share of wallet growing. You know, we expect share of wallet also to have durability. Underneath of it, Autoship, you know, has exceeded our internal forecast, reaching over 80% of net sales. Then on Capital Markets Day, you know, we'd also said, it was sort of our announcement of getting into health clinics or CVC's Chewy Vet Care. You know, we had really not a good idea on how to forecast these. You know, we were coming to market as a new, sort of a novice team.
We knew we had the power of the homegrown tech that we were putting behind it and a really high quality experiential mindset. On the back of those, you know, we sort of launched first, in the first 12 months, you know, we had a target of 6 to 8, so we launched 8. You know, that business continues to exceed our expectations. I'm sure we'll talk about that as well, but we're super bullish about where Chewy Health can go, not just the CVC part of the business, but Chewy Health can go in general over the next 3 to 5 years. When you look at profitability, I mean, clearly the numbers speak for themselves.
We came to market at 3.3% adjusted EBITDA in 2023. We provided a guidance of expanding profitability roughly 100 basis points per year, 15% flow through or more. We've beat both those expectations. You know, 2024 was a really solid year. Many things compounding to be able to produce that type of a performance. 2025, you know, despite being characterized as an investment year, you know, we're very close to the average 100 basis points that we've talked about. In fact, averaging the two years, we're, I think, sitting somewhere in the 130, 140 basis points of expansion. We're super pleased.
Sitting here, I would say we have more confidence looking forward than we did in 2023. Our most bullish bets or our boldest bets are working, you know, even better than we had expected. That's really a great feeling, great feeling to have. All positive.
Well, a lot I wanna get into there.
Yeah. Of course.
First, you recently announced Chris Deppe as your new CFO.
Yeah.
Help us peek behind the curtain at why the company chose Chris Deppe-
Yeah
-and what he brings to the role.
Yeah. you know, I don't know if you know, but I have a supply chain and operations background, 2 degrees in industrial engineering and operations research, and then, you know, later, went to Chicago Booth and became dumber. you know, I have a deep respect for what you need to make an e-com engine. You know, we were then a DTC player in 2017, 2018 when I joined Chewy. The power of delivering empathy at scale, you know, I've often said, you know, we are delivering the convenience of e-commerce at the personalized service that you can only expect at your best local neighborhood pet store.
To deliver empathy at scale, if you look at the best e-commerce engines out there, you know, they're built on 2 pillars: strong supply chain and operations, strong product and tech. Both of them are powerhouses of ours. Chris, you know, I knew back from his Amazon days. Chris has been with us now, you know, a little less than 5 years. Really back in 2018, when I'd taken the bet of reforming the fulfillment centers to go away from 1G sites to 2G sites. We were quickly becoming 1 of the larger DTC players in the country. I'm not sure how many of you know, but we are the third-largest DTC player in the country today. We're a very sophisticated supply chain and operations team. We have 16 fulfillment centers, 5 pharmacies, multiple compounding sites.
We have a lot of infrastructure that is built underneath of it that is highly efficient and scaled, you know, for all practical purposes. To run this big a sophisticated engine, you need a big, sophisticated finance partner. Back in the day, I'd reached out, you know, we'd brought Chris over to Chewy, we were, you know, lucky that we were able to have him over at Chewy. He's seen this journey over the last few years of how we've built out a really large-scale network.
You know, alongside, you know, as Dave was exiting, you know, a few months ago, we'd sort of leaned into Chris and said, "Why don't you take over FP&A and long-range planning for us?" He's had that under his belt for now about 15 months or so. Eight months ago, when Dave left, you know, I really leaned into Chris to be able to help me run the business better. You know, at Chewy, we're we pride ourselves on being strategic, but also, you know, each level of management is, you know, has an operator-owner mindset. You know, you're gonna be able to get a lot of detail out from each of us, regardless of the level we operate on.
You know, having a strong finance partner who had continuity, could understand or does understand our strategy really well, you know, and is culturally such a strong fit, candidly, I mean, I am thrilled actually of having Chris at the company, and that's why I use the words that the board and I were thrilled when we were actually able to tap into Chris internally rather than going to seek a new leader externally. That's the background.
Great. Now, looking at the broader pet macro, can you give us your latest view on the pet industry and how you think both 2026 pet ownership growth and pricing are going to come in?
Yeah. We in Q3 prepared remarks a few months ago. You know, we said, "Hey, we interpret 2026 to be materially the same as 2025." Let me take a step back and start at the higher level. When we interpret pet in the United States, we call it a $150 billion TAM, broken into three categories: you know, food and supplies at about $90 billion, health at about $50 billion, and the remaining non-healthcare pet services. Chewy now, with us expanding ourselves into specialty and equine a couple years ago and expanding into the vet services space, we now fully address the $140 billion TAM out of the $150. We play in nearly all of the TAM.
Underneath of it, you know, the market essentially has been growing at low single-digit percentage points over the last two years. Most of the growth has come on the back of volume. Very little in the last two years has come on the back of price. Those inputs aren't necessarily expected to change as we go into 2026. We were hoping they would. Coming into 2025, out of 2024, Q4 2024, we started seeing green shoots where pet adoption was starting to outrun relinquishments. The rate of outpacing relinquishments is something that we would like to see a, you know, increase by a few factors.
Today when we compare, you know, again, one of these data points where we're integrated with about 50% of the shelters and rescue community in the United States, so we get a pretty good grounds-up, you know, data back into us. Shelters and rescues produce a majority of the pets back into the market. In a normalized environment, you want to see about 10-15 million pets, you know, pardon my choice of words, but getting sort of recycled every year. You know, pets die, pets get adopted. 10-15 million pets, and I'm talking dogs and cats only. I'm not talking specialty animals, you know, chicken and equine, which by the way runs in, you know, equine runs in millions.
In fact, I don't know if you know, but equine or, sorry, chicken is the third most popular pet in the United States. Maybe that's intuitive. It wasn't to us, but, you know, there you have it. You know, the dog and cat market household formation is running at roughly in the $2 million-$4 million aggregated positive range, which is great because in 2023 it was -$2 million. Clearly the market is inflecting, but to achieve the $10 million-$12 million, $15 million pet refresh rate that we would like to call normalized, I don't believe we get there in 2026. Pricing, we don't see material benefit in pricing in 2026. We also don't see, you know, we see a rational promotional environment in 2026. We don't see, you know, discipline coming off the rails in 2026.
Dogs are currently running slightly softer than cats. You may have heard this. You may have read about it. Suppliers who we talk to, whether it be, you know, Nestlé's or Mars' or, you know, Hill's, the Royal Canin's of the world or the, you know, Blue Buffalo's, General Mills' of the world, everybody seems to be essentially coalescing on these data points now. Underneath of it, you should expect two strong trends favoring Chewy. A, the secular tailwind towards e-commerce continues. B, we continue to differentiate ourselves, or we continue to extend ourselves outside of squarely the dog and cat segment into, you know, segments like equine, specialty animals, health, et cetera.
Underneath of it, you should expect us to continue to gain share, you know, pretty nicely, I would say, just like you saw in 2025. You should expect us to continue to capture, you know, a very healthy percentage of growth that is moving online, both in the retail segments, which are, you know, dog food, dog, cat food supplies, as well as the health segments. Overall, we're bullish about 2026.
Got it. Let's dive into the P&L here, starting at the top with customers. Seen a strong rebound in customer growth over the past 6 quarters.
Yep.
What would you consider a normalized level of net adds? What are opportunities that you're pursuing to further increase your share gain here?
Yeah. Let me tie this question to the components of the growth algorithm first, and then I will dive deeper into this question. I was talking to you about growth in 2026. We will guide when we come to market on March 25th, as in our earnings call. The composition of the growth will primarily be led by volume, less price. In terms of customer algorithm, you should expect us to continue to expand on net adds, just like we did in 2025, and expand on NSPAC. The combination of net adds and NSPAC will drive growth. You have now, coming to customers, you've seen us add in 2025, expand net adds at the rate of 150,000 to 250,000 customers per quarter.
We believe that to be durable and sustainable in a market where we expect no greater tailwind going into 2026. If you connect that with my original commentary on when the market normalizes, we expect to further increase our net add expansion. If you look at gross adds expansion pre-pandemic, at peak, we were adding 1.4 million-1.6 million customers. This is pre-pandemic, not pandemic, so I'm normalizing for the pandemic. At our peak, you should expect us to add 1.4 million-1.6 million customers, you know, which was the rate that we were adding pre-pandemic. Currently, you're right, we're adding somewhere in the 600,000-1 million range in a market that is essentially flat. I think that's pretty compelling performance.
It showcases the durability as well as the differentiation that we bring to the marketplace against any competitive forces or against any market headwind. We're super proud of that.
Okay. Got it. Well, one of the things you are doing on the customer side is new paid loyalty program, Chewy+. Seems to be driving improved NSPAC for adopted cohorts. Certainly, it's improved my NSPAC as a customer. Can you help us visualize how big Chewy+ can get as a percent of revenue, and what's the right way to pace that expansion over the next few years?
For those of you who have studied Chewy and know the management team, you will appreciate we are thoughtful and deliberate and highly disciplined about financial guardrails on one side and customer experience on the other. You know, we gated and paced sponsored ads very, very, you know, in an equitable kinda model per se. Chewy+ is our way of putting another flywheel next to Autoship on purely the product merchandise side, mostly consumables, right? You didn't really have a compelling, you know, hook for customers for supplies or for, you know, non-consumables categories or discretionary categories. Number two, the deeper a retailer penetrates into a category, the more you open yourself up to sort of cross-category compares. Number three, Chewy has so much more to offer than we did in 2018.
Instead of us trying to brand every product and go to market from a product marketing point of view, we thought, "Why don't we come up with a paid membership program and test product market fit?" You should imagine or you should envision Chewy+ in its current phasing to be part of that product market fit testing. We expect incrementality out of the program at very little capital deployed or very little margin impact for the program. That's our current sort of guardrail. This figuring out Chewy+ as to what the sweet spot really is or where it sits, I think it's gonna take us a bit. In fact, it took...
If you go back and trace the history of Amazon Prime, it took several years before Prime truly had incrementality data or was able to sort of figure out, like, okay, what actually does it do to consumers? We have some positive, very positive signs coming out of Chewy+ in its initial first 4 quarters, I would say. What are those? It's helping discover choices at Chewy faster. It is helping customers consolidate share of wallet faster. Incrementality is positive. The range of incrementality is wide, from low double-digit percentage for, you know, high-spend customers to, you know, healthy levels of double-digit expansion for low-spend customers. The sweet spot is for us to really drive incrementality for cohorts that sit between $300-$800. We continue to sort of refine our targeting abilities.
We continue to build more value prop into the program without actually having to put dollars on the table. We've gotten it to the point where it's not, you know, materially dilutive to us, and at the same time, we are seeing incrementality come through. Is it material enough to swing, you know, our growth rates, right? Beyond kind of the tailwinds that we would see from the market? Not yet. We would exit this year exactly where we've guided, you know, just at the low end of the low single-digit penetration. Going into 2026, we don't see material profit impact at all out of Chewy+.
Okay, great. One of the areas we've been really excited about is the vet clinic opportunity. Can you talk to us about your key learnings from clinics you've opened already? You know, one of the biggest pushbacks we received is that the vet business is simply too small-
Yeah
- to really value. I guess, what are the key steps you have to take to scale that business to a more material level?
We're happy we're at this point that, you know, the questions have turned from show me this works to how fast can you scale? Although we haven't truly shown you this works, we intend to. You know, we're nearing the completion of, you know, 18 months to 2 years with our original cohort of April 2024. That is our timeline for us to come and share a whole lot more with you, to give you sort of, you know, a one-time look under the hood so you can truly appreciate and get excited, as excited, perhaps even more relative to why we are so excited. Let me give you a few data points. We are viewing success on CVC across a few different dimensions.
One is the Net Promoter Score or customer sat and vet satisfaction rates. That also includes our ability to hire and retain vets. That is exceeding our expectation. We now have 18 in operation, we've run these over a period of 2 years. It's easier when a product launches, you know, perhaps you could even throw at me that you launched it in familiar markets. To have, you know, a 4.8, 4.9 consistent rating on Google reviews that cannot be influenced by us and is really public rating, NPS is running phenomenally high. We love kind of the product market fit that we're finding out there and the customer response to it. Number 2, vet satisfaction scores are high.
Our ability to retain, recruit and retain vets, continues to run at par, continues to run ahead of where, you know, we believe the industry hiring and recruiting timelines are. We're happy about that. That is definitely not a bottleneck for us. Number two, you know, we've guardrailed this on the ability to ramp clinic utilization levels and bounce against marketing spend in the market that we're entering. Both are running ahead of our expectation in the right way. For example, we are ramping these clinics faster than our internal forecast, and our marketing spend that we had originally forecasted is running lower than what we had originally forecasted.
What we're finding is that the Chewy brand overall is so strong when we go drop a box inside the market, we don't necessarily have to spend localized marketing at the levels that we thought to be able to attract demand into the marketplace. Number three, financial success. From a ramp point of view, we've benchmarked ourselves to standard clinics out there, which are, you know, $2 million-$3 million in revenue, four-wall revenue, and roughly 15%-18% EBITDA margins. Currently, we're running ahead of these plans. You know, we wanna come talk to you about that. We're super excited about how they're ramping, and, you know, the financial metrics that we're seeing. Basically across all of our metrics, the scorecard is a bright green.
The final thing I would say is customer incrementality, which was a thesis that we had, there was really no way of putting numbers behind it. There was some market research that we'd conducted. This is something you heard. Four out of 10 customers are net new to Chewy. That has maintained. In fact, that number is higher in certain markets than others. At a minimum, Four out of 10 customers are net new to Chewy. Half the customers within a very short period of time are attaching themselves to other categories on chewy.com, pharmacy, supplements, food in that order. CVC currently is the fastest net back compounder inside the company to a scale that we believe is very impressive.
To us, you know, when we come back and share with you greater details in April, that's the timeline we've set for ourselves, we want to be able to set a path for how we think about expansion on Chewy+. Let me give you the framework. We will deploy both capital and capital light models or asset light models to be able to scale, you know, a network of, you know, clinics. In the investment portfolio, you're looking at us, you know, build right now 8-10, 10-12 clinics per year. That may go up some, but not materially. We will also continue to...
We are in the market continuing to look at very specific curated, you know, culture-forward, tech-forward, you know, acquisition opportunities or integration opportunities, or strategic business opportunities, which, you know, I look forward to talking to you about in the near future. Next to it, as you know, we build our own technology. Currently, Chewy CVCs run Chewy Tech. Chewy Tech is more efficient. Why? Because an average clinic out there... Why do we believe our margins are gonna be better? This is one data point. An average clinic out there runs on eight different software integrations. We run on one, which is Chewy Stack. So for us to be able to have that efficient a tech alongside a better experience allows us to build a moat that is much more attractive than any mousetrap you've seen in the marketplace.
When we take this software stack and come to market alongside the Chewy brand name, we believe we're gonna be able to create affiliates, you know, using an asset-light model that will really help tie in the ecosystem and scale profitability at an even greater rate. You know, on different types of revenue models. Hopefully that's helpful, but we're super excited about CVC.
Very helpful, and looking forward to learning more in April. Now, on the flip side, one of the things you haven't been as vocal about is AI. Can you help us think through what are the most underappreciated opportunities for Chewy in your view and the most underappreciated challenge?
I love it. Most companies are going to get AI incorrect, or they're going to get off course, in my opinion, in the near term. The reason is that, you know, for AI to work, you really have to build AI use cases and solutions on top of strong data sets and a really fundamentally sound infrastructure. Given that we are one P, so you should know something about the Chewy Stack for those of you who are, you know, who appreciate tech literacy. We are built on a completely service-oriented architecture. You know, for a company of this scale and size, we run roughly 450 microservices that essentially are tied with a really nimble cloud engineering team, right, where we are dual-sourced in the cloud.
From a data point of view, you know, we now have our data consolidated at the enterprise level across one main platform rather than multiple platforms. Right? Very soon in the near future, we're gonna have certified data lakes and layers that are essentially going to allow us to unify data signals. If you go to chewy.com today, our experience in the app is much better than it used to be a year or two ago, right? Two years ago, I couldn't even recognize whether you are a dog customer or a cat customer. That's how basic we were. Today, not only do I ingest your pet profiles, I am able to connect your pet profile data to my order engine and put that through my discoverability and my search algorithms.
In the future, we're gonna be able to unify signals that come from other pet parents and essentially go to market with you or allow you to be able to use us as a fully full pet concierge. Let me kind of back up 'cause I'm painting you the future. Let me talk about what we're doing now so that you can sort of not just say, "Okay, we'll see when that works." AI is going to be implemented in three places at Chewy. We've already started that. Let me break that out for you. The purchase experience, which I'm sure we'll talk about, you know, all of the latest sort of news that you're hearing about disruptions and agentic commerce and all of that stuff. I'll come to that at the end.
Number two, the middle layers of the company, the service layers of the company. Whether that's workflows, inside functions, or whether that's customer care, going out and meeting customers. I will refer to this as the middle service layer. Finally, supply chain and fulfillment. Yeah. That's the way to understand an engine like Chewy. When we talk to you about the plan for 2026, you should expect us to talk to you about how we're deploying AI across our pharmacies, across our fulfillment centers, to be able to provide leverage that wasn't baked in in our original 2023 Capital Markets Day business cases. Right? We give you a target of reaching OPEX 17%-19%, right?
We have visibility with the use of AI across, you know, our middle layers and our supply chain and fulfillment to be able to exceed, right, those long-range targets that we've provided to you. We will start showing you the impact in 2026. Now, coming to the purchase side of the funnel. First of all, I will loudly reject this notion that we are exposed or are at risk of disintermediation from any agentic activity that is happening out there. In fact, quite the opposite. Not only do we feel we are really well insulated, we actually believe this is going to serve as an incremental channel to Chewy. Why are we well insulated?
Agentic commerce protocols are essentially going to integrate the most basic available signals before they turn, you know, into having recall and context of customer shopping. That's great. It doesn't disrupt empathy at scale or kindness at scale, which is sort of the main, you know, moat that we're built on. You know, Chewy getting disrupted on tenets of price or selection, I mean, those days are far behind us. That has been tested over and over again, you know, against the fact that we've been playing stalwarts like Amazon and Walmart over the last five years and have continued to, you know, gain share and differentiate ourselves. That differentiation is durable. The moat is very durable.
Underneath of it, on a pricing, purely pricing side, if this notion is, hey, there's an agent out there that'll price compare, and you essentially, you know, the user will directly buy from whichever the best place is, great, we welcome that. On a weighted price index point of view, we are still positioned 5%-7% cheaper than retail or independent channels. By the way, we have yet to lose on price on any large-scale e-com player. Pricing is just not, you know, a tool that competition will be waged on. In fact, we were one of the first players to come out into the market. You heard about, you know, retailers like Wayfair and Etsy, so forth.
We are also integrated with Google, with Google's UCP, Universal Commerce Protocol. You know, we're leading some of the use cases that they're coming out to market with. We have an agentic team internally that is essentially building AI-forward solutions with all of the AI native companies that you're hearing about. To us, you know, we will essentially find ourselves where customers are, and this will open up a net new channel. The analogy is similar to when TikTok came to market and in fact, you know, it led Facebook and YouTube to launch Reels and Shorts. Clearly, they're more valuable companies today than they were prior to that product being in the marketplace. These are incrementally new channels. They'll find new users, younger generations that will essentially, you know, perhaps shop, but we'll be right there with them.
Don't forget, there's a whole post-purchase experience that needs to be delivered. We have categories like health that are very hard to disintermediate. We will continue to be bigger in physical spaces that are very hard to disintermediate, so we're not worried about this.
Okay, great. Well, let's flip below the line.
Yeah.
You made a host of investments in 2025, both delivering solid margin expansion. As we enter 2026, you said in the last earnings call you expect the balance of investment to shift towards operating leverage. I guess given that, how should we think about margin expansion levers in 2026 versus 2025?
Just to recap 2025, we have guided, you know, to EBITDA margins of 5.6%-5.7%, 5.65 at the midpoint, that's an 85 basis point expansion. At the high end, that's a 90 basis point expansion. you know, profits will flow through at 3 times the rate of revenue, or profits will grow at 3 times the rate of revenue. As you go into 2026, you know, I will leave you with a few things. A, the rate of EBITDA margin expansion, our expectation is that it will exceed 2025. Number two, you know, profit flow-through will happen at a minimum at 18%, right?
Number three, you know, the rate of profit growth will continue to exceed revenue growth by a significant margin, right, just like 2025. The composition of profitability as we had guided or, you know, my prepared remarks in Q3, this is now coming directly to your question. We believe the composition of profitability, so in 2025, we said to you a majority of the profits will be driven by gross margin, right, followed by SG&A. In 2026, we believe the algorithm will be reversed, right? We believe we will continue to give you gross profit expansion, but the majority of the EBITDA that you will see or the expansion that you will see is due to healthy levels of SG&A expansion.
Some part of that is because we don't have, you know, Houston fulfillment center, as we've been talking about, starting from the Q2 earnings call, right? That it'll start delivering leverage in Q3 and Q4 of this year, so you should expect it to deliver more leverage next year. Keep in mind that every fulfillment center that we launched, the fully automated fulfillment center, you should expect it to give you roughly 25-30 basis points of leverage at the SG&A level. 2026, you know, we will have Houston ramp up to provide a nice bit of that leverage. I talked about some part of AI solutions that we are putting in across our customer care teams, across our fulfillment centers. You should see the effect of that starting to come through.
In 2025, we took some tactical investments, right, in the low to mid-single digit millions, right? Around buying up a few, like, inventory or some Dallas, you know, the curve that we were managing as Houston was ramping and Dallas was nailing down. Shouldn't expect a repeat of that. Broadly speaking, you know, outside of strategic deployment in continuing to build, you know, and transparently build the network of CVC, you know, we will continue to focus on running the business as efficiently as we possibly can. Overall, we're quite bullish about going into 2026.
Okay, great. Well, one last thing. Can you leave us with one or two aspects of the business you feel are most misunderstood or underappreciated by investors?
Yeah. Yeah. I think we're one of the more consistent, you know, deliverers of result, and consistent growers of top line and incremental profitability. We should expect to continue to see about 80% or more of that profit converted into free cash flow. We have no debt. It's a fairly, you know, it's a very disciplined team. I think the power of Chewy Health as a compounder of financial metrics, I think is still not well understood. I think the differentiable and durable moat that we go to market with is perhaps also not as well appreciated as it should be. We run one of the largest scale fulfillment networks, world-class fulfillment, you know, backed by 80%+ of our revenue coming through quasi-subscription type products like Autoship.
We run the number one pet pharmacy in the country in terms of scale, and we continue to diversify and strengthen our moats by penetrating deeper into categories like health. The durability and the heart that we go to market with and the lifelong relationships that we form with customers, I think, you know, I'm not sure if all of that is, is well understood. You know, 2026 gives us another chance, and we're looking forward to doing so.
Okay, great. Sumit, thank you so much for being here.
Yeah, thank you.