Chewy

Chewy's second-quarter results featured a 7.3% net sales increase, with autoship as a share of sales rising to 84.6% (from 83%). Gross margin held at 30.4%, while operating margin rose 60 basis points to 2.8% supported by sponsored ads, disciplined promotional activity, and tariff refunds.

Why it matters: Despite a tough macro backdrop, Chewy continues to grow both its customer base (up 3.8%) and average spending per customer (1.9%). We see these increases as evidence of Chewy's brand affinity and ability to deepen wallet share even as consumers become more value-seeking. Hardgoods and health and specialty products each posted growth at midteens rates. We view this healthcare expansion, alongside assortment improvements, as broadening Chewy's addressable market, and we forecast average sales growth of 6.5% annually over the next decade.

The bottom line: We expect to hold our $32 per share fair value estimate for narrow-moat Chewy. Shares fell about 9% on the print to an over 30% discount on our valuation. We believe the market is overly pessimistic regarding Chewy's ability to grow average spending per customer profitably. We posit the market underestimates the sales mix growth of high-margin pet health product and services sales, which we forecast to rise to over one-quarter of sales by decade's end from roughly 16% in 2025, offsetting a decline in hardgoods as a share of sales to 8.3% (from 11.4%). This mix shift toward higher-margin categories underpins our forecast for operating margins to average about 6% annually over the next decade (up from 2% in 2025), versus the market implying roughly 5% annually over the same period.

Coming up: Chewy highlighted a continued rollout of its artificial intelligence-enabled customer service agents, expected to drive $50 million in savings by 2027. Given that customer service is central to its brand equity, we believe this automation must preserve service quality to preserve traffic and brand perception.

We are maintaining our fair value estimate for narrow-moat Chewy at $32 per share, reflecting steady second-quarter top-line execution and resilient customer demand despite a challenging macro backdrop for the pet industry. Chewy's second-quarter net sales rose 7.3%, supported by a 3.8% expansion in active customers, a 1.9% increase in net sales per active customer, and autoship sales climbing to 84.6% of the mix (up from 83%). We continue to forecast consolidated revenue to compound at a 6.5% CAGR over our explicit forecast horizon, underpinned by annual active customer growth of 3.1% alongside net sales per active customer compounding at 3.3%. A core driver of our valuation remains the ongoing sales mix shift within Chewy’s ecosystem; we expect core consumables to decline to 60% of revenue (from 69.7% in 2025), while higher-margin pet health and specialty products—which both expanded at midteens rates in the quarter—grow roughly 1.1% annually to comprise over a quarter of total sales by the end of the decade. While switching costs are essentially non-existent in pure-play e-commerce retail, centralizing a pet’s veterinary records, active prescriptions, and customized diet regimens establishes deeper customer engagement, which we believe will allow Chewy to defend customer retention over time. Furthermore, because veterinary care and pharmacy fulfillment command inherently higher merchandise margins than bulk pet food, integrating customers into this healthcare ecosystem enables Chewy to capture incremental wallet share at a substantially richer margin profile.

We model consolidated operating margins to scale from 2.0% to 7.8% by the end of our explicit forecast horizon. The primary catalyst for this expansion is a 350-basis-point decline in COGS as a share of revenue, driven by increasing profit contributions from Chewy Ads (estimated at 70% margins) and pet healthcare products and services (with vet clinics exceeding 20% EBITDA margins) over time. Furthermore, we expect advertising and marketing spending to drop 50 basis points as a share of sales, reflecting a strategic shift away from an inefficient growth-at-all-costs customer acquisition mandate. Selling, general, and administrative expenses are estimated to decline by 180 basis points due to fixed-cost leverage and meaningful labor and distribution efficiencies unlocked by the ongoing automation of its fulfillment centers. While we acknowledge opening brick-and-mortar veterinary clinics, expected to reach 60 locations by the end of 2026, presents an offsetting headwind to SG&A leverage, we believe the high-margin services, prescription, and specialty diet spending captured through physical sites flows directly into the gross margin line, justifying the operational offset.

Ultimately, these drivers support our forecast that Chewy will expand its share of domestic pet industry spending to nearly 10% by the end of the decade, up from 8% in 2025. By executing this transition toward a closed-loop pet healthcare ecosystem, we believe Chewy should reduce its reliance on pure-product e-commerce and unlock long-term margin durability.

We assign Chewy a narrow Morningstar Economic Moat Rating, underpinned by intangible assets tied to its trusted brand, autoship retention, proprietary data, and integrated pet healthcare ecosystem. While Chewy lacks the scale-based cost advantage of Amazon and Walmart (which dents our confidence over a 20-year horizon), we believe the firm has built a differentiated position in online pet retail that should allow it to generate excess economic returns of roughly 26% over the next decade, exceeding our 9.3% cost of capital estimate. This reflects a shift from the growth-at-all-costs mandate that prioritized massive customer acquisition and heavy infrastructure buildouts to margin expansion with a more mature cohort base, automated distribution efficiencies, and a mix-shift toward high-margin pet healthcare verticals and retail media.

Chewy’s strong brand equity is rooted in its standing as a category leader and autoship retention. The company generated $12.6 billion in fiscal 2025 net sales, second only to Amazon’s estimated $25 billion in category sales. More than 85% of sales were concentrated in nondiscretionary categories, such as food and pet health products, that require constant replenishment and, given their heavy, cumbersome nature, are uniquely suited for the convenience of doorstep delivery and auto-replenishment. Recurring autoship sales, which tend to be roughly 6% larger than traditional transactions, accounted for over 83% of sales in 2025, up from 62% in 2017, evidencing strong customer relationships. Chewy has more than tripled its active customer base to 21.3 million in 2025 from 6.8 million in 2017, while nearly doubling its net sales per active customer (NSPAC) over the same span, to $591 from $310. According to management, e-commerce penetration in pet food and supplies has risen from mid-teens levels in 2020 to the mid- to high-30% range today and should cross 45% to 50% over the next several years. We agree with this trajectory as the advantages of online procurement for core consumables make management’s target highly attainable.

While we do not view online migration as a moatworthy trait due to low barriers to entry, Chewy’s strategy is concentric and vertical into pet healthcare rather than horizontal into low-affinity categories. This prevents the value-destructive operational drift common in maturing digital platforms; every healthcare rollout, from prescription diets to business-to-business (B2B) veterinary software, acts as a complementary retention mechanism that directly feeds back into the high-velocity core retail business. By anchoring its specialized assortment, Chewy isolates its consumer base in a manner that retail giants lack the specialized focus to replicate. Consequently, we estimate that Chewy’s share of total pet industry spending expanded to 8% in 2025 from 2.5% in 2017, and we forecast this figure to approach 10% by the end of the decade.

Although mass merchants pose a threat in high-frequency consumables, Chewy is insulated by its assortment and relational commerce model (we estimate the firm grew its share of the US pet food and treats market from 4.9% in 2017 to 12.9% in 2025; we forecast this level nearing 14% by the end of the decade). Chewy stocks over 190,000 items from roughly 3,500 partner brands compared with Petco’s and PetSmart’s 12,000 in-store stock-keeping units, or SKUs, and Walmart’s mere 1,500 pet SKUs. Consumers looking for specific prescription diets or breed-specific products are unlikely to view retailers with substantially less product availability as adequate substitutes. Furthermore, many key branded pet products are governed by minimum advertised price mandates, preventing players like Amazon or Walmart from massive undercutting on premium, high-velocity brands, such as Acana and Fromm, that routinely command steep price premiums (up to twice as much per pound) and appeal to highly inelastic pet owners.

Chewy’s pet healthcare expansion is its most crucial moat-enhancing initiative. We view this as a strategic pivot to higher-margin sales via rollouts in telehealth in 2020, a business-to-business (B2B) veterinary prescription platform (PracticeHub) in 2021, and pet insurance and practice management software acquisition (PetaByte) in 2022, embedding itself into veterinary workflows in 20,000 clinics (about 50% of all US veterinary practices). PracticeHub enables clinics to fulfill digital prescriptions, set pricing, and earn revenue without incurring physical inventory overhead. Though PetaByte faces adoption headwinds among independent clinics wary of data privacy concerns, it serves as the proprietary operating system for Chewy’s own vet care locations, eliminating reliance on incumbent software providers and seamlessly integrating the physical exam room with Chewy’s digital platform.

Brick-and-mortar integration, launched in 2024, further reinforces this ecosystem as Chewy expects to operate 60 clinics by the end of fiscal 2026. Chewy’s clinics operate strictly as care centers that route product and pharmacy fulfillment back to its digital platform, acting as a customer acquisition engine. Approximately 40% of clinic visitors are net-new to Chewy, delivering a year-one NSPAC of roughly $900, well above the companywide average. Medical authority anchors retention. As veterinarians recommend medications or specialty diets through Chewy’s marketplace, customers become embedded in the ecosystem from refills and follow ups. Management noted that existing Chewy shoppers who engage with a clinic increase their share of wallet meaningfully faster than digital-only cohorts following their first visit. Altogether, we believe this will significantly deepen customer lifetime value, amplifying the cohort maturation curve beyond what management highlighted in 2022, when it suggested that customers ingrained in the Chewy ecosystem consistently spend more than $500 annually by year three, with the oldest cohorts surpassing $1,000.

Rapid scaling of Chewy Ads could outpace our estimates, providing high-margin (estimated 70% operating margins) profit accretion by leveraging first-party shopper data across 21 million active customers.

Deeper clinical integration through cloud software and physical clinics could expedite the capture of pharmacy spending, driving higher net spending per active customer ($591 in 2025).

Autoship penetration expanding beyond its current 83% of sales, driven by prescription refills and healthcare services, could provide greater sales visibility and lift fulfillment productivity.

Stagnation or declines in active customer growth could cap our forecast top-line expansion, leaving the firm reliant on increasing wallet share.

Rising logistics costs and labor inflation for heavy, bulky pet freight could outpace automation-driven efficiency gains, limiting our forecast margin expansion.

An erosion of minimum advertised price mandates could spark aggressive price cutting, allowing mass merchants with greater purchasing scale to undercut Chewy on pet food and supplies, pressuring traffic and gross margins.