Chewy, Inc.

Hello, everyone. Thank you for joining us and welcome to the Chewy fourth quarter 2025 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. I will now hand the call over to Natalie Nowak, head of investor relations. Natalie, please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2025. Joining me today are CHUI's CEO, Sumit Singh, and CFO, Chris Deppe. 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.chui.com. On our call today, we will be making forward-looking statements, including statements concerning CHUI'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 Form 10-K, filed earlier today, 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 2024. 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. And with that, I'd like to turn the call over to Sumit.

Thank you, Natalie, and good morning, everyone. I am thrilled to be joined today by our newly appointed CFO, Chris Deppi. Chris has been with Chewy since 2022 and brings valuable continuity and deep institutional knowledge, enabling a particularly seamless transition. He has a strong understanding of our business and the opportunities ahead for Chewy. I look forward to having many of you engage with Chris as he steps into his new role as CFO. I want to start by thanking our Chewy team members for executing a strong finish to the year. Once again, we delivered strong net sales growth, significant margin expansion, and record free cash flow in 2025. As we enter 2026, we are focused on repeating this formula for success. Disciplined execution, profitable growth, continued margin expansion, and strong free cash flow generation, all in support of sustained long-term shareholder value. Instead of taking the traditional approach of diving straight into our results, I'd like to share my perspective on what we are seeing in the pet industry and Chewy's place in it in 2026 and beyond. So let's begin. Pet is a uniquely attractive industry fueled by increasing pet humanization, premium product adoption, and expanding lifetime value per household. Spending in this category is driven by an emotional attachment and recurring non-discretionary needs, which translates into resilient demand across economic cycles. We expect 2026 pet industry dynamics to largely mirror 2025, steady and resilient to macro trends, but without cyclical acceleration. Pet household formation appears stable, with no evidence of deterioration. However, we are not underwriting a meaningful rebound in that variable. Current estimates suggest low single-digit industry growth with dog at the lower end of that range and cat at the higher end. Further, we expect industry growth to be predominantly volume-driven with little or no contribution from pricing. Importantly, we expect the secular shift towards e-commerce penetration to continue as consumers increasingly prioritize convenience, transparency, and auto replenishment, structural advantages that persist across economic environments and benefit scaled digital platforms like Chewy. Against this backdrop, we once again expect to deliver share gaining growth. We believe that Chewy is unique with a differentiated flywheel-like operating model powered by a leading sales engine with over 80% of net sales on Autoship, supported by a world-class fulfillment network delivering best-in-class consumer satisfaction. The algorithm supporting our underlying growth remains balanced and durable, driven both by active customer growth and NESPAC expansion. We reached an inflection point in net ads in 2024 and built on that progress throughout 2025, adding approximately 150,000 to 250,000 net ads per quarter. In the current environment, we believe we can continue to deliver quarterly sequential net ads within that range. At the same time, we see a long runway to grow Nespac through premium and health mix shifts private brands expansion, and deeper engagement. Now, shifting to margins. On margin expansion, including its trajectory and durability, we remain equally bullish. As I noted during our last earnings call, our long-term margin framework is unchanged, and the underlying drivers of margin expansion are strengthening. In 2026, we expect to further expand profitability with the rate of expansion expected to build relative to 2025. SG&A leverage will further strengthen as we move through the year, supported by the continued ramp of our next generation Houston Fulfillment Center and efficiencies from the use of AI that help structurally lower our cost to serve. I will talk about these shortly. And finally, we believe CHUI remains well positioned to compound growth expand share, and drive sustained margin and free cash flow expansion in 2026 and beyond, independent of a macro reacceleration. Said simply, as we look to 2026, our model does not depend on a minimum net sales growth threshold to expand profitability. Now, an update on some of our strategic priorities, and then Chris will take you through our financial results and 2026 guidance. Starting with CHUI VetCare, we opened 10 new practices in 2025, reaching the high end of our target range, bringing our CVC footprint to 18 locations across five states. Performance continues to exceed expectations, supported by strong utilization and consistently high customer and veterinarian satisfaction scores. CVC is also driving compelling ecosystem-wide value, serving as both a customer acquisition engine and an engagement flywheel that deepens relationships with high-value health customers. And the results are compelling. CVC is the fastest Nespac compounder in the business. We believe veterinary care is a powerful growth vector and a key pillar of value creation for Chewy. We are confident in the path ahead as we continue to execute and scale this platform. Turning to AI. For those of you familiar with Chewy, it will come as no surprise that our ability to adopt technology and drive rapid innovation is a core strength. We operate on a modern, nimble, and scalable tech stack supported by a world-class team of designers, product managers, marketers, and technologists. who excel at building applications that enhance the customer experience while lowering costs. The arrival of AI only amplifies this advantage, enabling us to innovate faster, operate more efficiently, and unlock entirely new capabilities. And that is exactly what we've focused on. Over the past several quarters, we have focused on building the foundation required to deploy AI at scale across Chewy. Today, with our unified enterprise data platform and central AI tooling in place, we are embedding AI across key layers of the business, specifically the purchase experience, our service and operations layer, and our supply chain and fulfillment network. Let me elaborate. Within the purchase experience, we are progressing quickly to apply AI across our platforms to improve search relevance, product discoverability, and personalization. Externally, we are closely following the emergence of agentic commerce models and view it as a future incremental demand and distribution channel for Chewy. Pet remains a deeply emotional category where trust, relationships, and empathy matter. And these are enduring strengths of the Chewy brand. Combined with our leadership and price selection and recurring convenience, both purchase and delivery, we believe our competitive position remains strong. Across the broader organization, we are already deploying AI to drive greater structural efficiency. Functions such as customer service fulfillment, pharmacy, and marketing operations are leveraging internally developed AI tools to streamline workflows and improve productivity. As we move through 2026, these efforts will translate into measurable financial impact. Based on our current roadmap, we expect AI-driven efficiencies to contribute a low tens of millions of dollars benefit in 2026 with a meaningful step-up in 2027, where we see a path to approximately 50 million or more in annualized savings as these capabilities scale. Moving on from AI, let me briefly talk about Chewy Private Brands. After the launch of our fresh brand, Get Real, in Q2 last year, we are entering an exciting new chapter for Chewy Private Brands with the launch of Chewy Made. Chewy Made is our unified owned brand platform designed to deliver trusted, high quality products while driving durable, profitable growth for Chewy. Starting in April and throughout 2026, we will expand our presence across both dog and cat consumables. This includes a balanced offering of dog food positioned at more accessible price points to broaden our reach into everyday nutrition a broader assortment in everyday and gourmet cat nutrition, as well as entry into high demand formats where we currently have low penetration. In addition to the expanded assortment, we are consolidating some existing brands under this platform, creating a more cohesive and streamlined experience for customers. We look forward to keeping you updated on the progress of Chewy Made. In closing, we continue to execute from a position of strength. We are delivering share gains, expanding margins through structural efficiencies, and generating growing free cash flow. Looking ahead to 2026, we are well positioned to further build on this momentum and drive sustained earnings growth. With that, I will turn it over to Chris.

Thank you, Sumit, and thank you all for joining us today. Having been part of Chewy's journey for nearly four years, I'm excited to step into the CFO role and continue building on the strong foundation our team has established. I look forward to engaging with many of you in the quarters ahead. Let's start with a review of our financial results. As we get into the details, a reminder. Fiscal year 2024 included a 53rd week, and comparisons for Q4 and full year 2025 are discussed on a comparable 52-week basis where applicable. Fourth quarter net sales reached over $3.26 billion, bringing our total fiscal year 2025 net sales to over $12.6 billion, delivering year-over-year net sales growth of 8.1% in Q4 and 8.3% for the full year 2025, reflecting strong execution, continued share gains in a stable category environment, and consistent performance across both customer growth and spend per customer. We continue to grow active customers, ending the year with 21.3 million, increasing by approximately 4% year-over-year, and net additions up by more than 810,000 year-over-year in fiscal 2025. We once again saw year-over-year improvement across all elements of the active customer equation. We also continue to grow with a high quality revenue base. Autoship customer sales reached over $2.7 billion in Q4, and $10.5 billion for the year, representing 84% of total net sales in Q4 and 83.3% for the full year 2025. Growth in auto ship customer sales outpaced overall top-line growth, increasing by nearly 13% in the fourth quarter and 14% for the full year 2025 on a comparable basis, reinforcing the strength of our recurring revenue model. NESPAC reached $591 in Q4 2025, increasing by approximately 4% year-over-year on a comparable basis. Moving to profitability, we reported fourth quarter gross margin of 29.4% and full year 2025 gross margin of 29.8%, representing approximately 90 basis points of year-on-year margin expansion in Q4 and 60 basis points of expansion for the full year. Strong gross margin performance was driven by sponsored ads growth, premium mix into high margin categories including health and wellness verticals, and a rational promotional environment. Shifting to operating expenses, please note that my discussion of SG&A excludes share-based compensation expense and related taxes. Fourth quarter SG&A was $607 million, or 18.6% of net sales, and full year 2025 came in at $2.4 billion, or 18.8% of net sales. Q4 and 2025 SG&A include approximately $10 million of one-time transaction costs, primarily related to the smart equine acquisition. Excluding SBC in these one-time costs, we delivered SG&A leverage of approximately 20 basis points in Q4, and full year SG&A as a percentage of net sales came in flat year over year. Fourth quarter advertising and marketing expense was $233 million, bringing full year 2025 A&M expense to $825 million, or 6.5% of 2025 net sales, reflecting approximately 30 basis points of leverage year-over-year. Fourth quarter adjusted net income was $115 million, and full year 2025 came in at $541 million, which translated into $0.27 adjusted earnings per share in Q4 and $1.27 in full year 2025. Fourth quarter adjusted EBITDA came in at $162 million, representing a 5.0% adjusted EBITDA margin, up 120 basis points year over year, and adjusted EBITDA flow through of approximately 19%. Full year 2025 adjusted EBITDA came in at $719 million, or 5.7% adjusted EBITDA margin, growing approximately 26% year-over-year, reflecting 90 basis points of year-over-year margin expansion and flow-through of over 16%. This level of profitability expansion at our scale reflects the structural strength of our model and continued operating discipline across the business. We are consistently expanding earnings at a rate meaningfully above net sales growth, demonstrating the operating leverage embedded in the model. The results we are delivering today are a clear reflection of the underlying strength of the business and where it is going. In the fourth quarter, we reported free cash flow of $232 million, and in fiscal year 2025, we generated $562.4 million of free cash flow, both record highs for the company, highlighting the continued improvement in earnings quality and capital efficiency. The consistency, scale, and continued growth of our free cash flow underscore the quality and resilience of our model. Our four-year 2025 free cash flow reflects $691.6 million of net cash provided by operating activities and $129.2 million of capital expenditures. We ended the year with approximately $879 million in cash, cash equivalents, and marketable securities, and we remain debt-free with an overall liquidity position of approximately $1.7 billion. Over the course of the year, we repurchased and retired approximately 6.8 million shares, spending approximately $257 million on share repurchases in 2025. Overall, our capital allocation priorities are unchanged. Advance the strategic priorities of the business where returns are attractive, maintain a strong balance sheet, and return excess cash to shareholders. Share repurchases will remain a key part of our capital allocation strategy, and we expect our level of activity to increase relative to 2025, reflecting both the strength of our cash generation and our view of the current valuation. Now turning to forward-looking guidance. As we enter fiscal 2026, I want to clearly frame how we expect the year to progress, both from a full-year standpoint and in terms of quarterly cadence. In addition to our guidance ranges, I will provide perspective on pacing so that our expectations for growth and profitability are well understood and appropriately reflected in how you model the year. Our 2026 outlook is built around three consistent priorities. First, continued share gains supported by stable demand and balanced growth across active customers in NESPAC. Second, ongoing margin expansion driven by a combination of mixed improvement and increasing operating leverage, and third, improved incremental flow-through relative to 2025, reflecting strengthening cost discipline and the scaling benefits embedded in our model. Let me now walk through the specifics of our 2026 outlook. For the full year 2026, we expect net sales of between $13.6 and $13.75 billion, or approximately 8% to 9% year-over-year growth, with the recently closed Smart Equine acquisition expected to contribute approximately $80 million of net sales to the total company in 2026. Overall net sales growth will continue to be driven by a combination of active customer growth and nest pack expansion. Our forecast assumes no price inflation in 2026, and we remain confident in delivering low single-digit active customer growth with net additions broadly consistent throughout the year. As you think about the quarterly progression of net sales, Q1 is expected to represent the low point of the year from a growth perspective, largely reflecting timing and lapping dynamics. We expect net sales growth to build in Q2 and continue to strengthen through Q3. From a profitability standpoint, we expect to deliver another year of meaningful expansion in 2026. We anticipate full-year 2026 adjusted EBITDA margin in the range of $6.6 to 6.8%, or approximately 100 basis points of year-over-year expansion at the midpoint. Based on our guidance ranges, we expect to deliver adjusted EBITDA of approximately $900 to over $930 million, with growth to once again outpace net sales growth by approximately three times in 2026. Let me provide some perspective on how margins are expected to progress through the year. The composition of adjusted EBITDA margin expansion In fiscal year 2026, it is expected to shift relative to 2025. We expect a larger share of our EBITDA margin expansion to come from operating leverage, reflecting structural improvements within SG&A and modest leverage in A&M, with gross margin continuing to expand year over year, though at a more moderate pace than in 2025. Turning to gross margin, as a reminder in 2025, gross margin peaked in the second quarter due to the timing of certain initiatives in the business. In 2026, we expect quarter-over-quarter gross margin pacing to be more in line with our historical performance as observed in prior years. Turning to SG&A and advertising and marketing, we expect to deliver SG&A leverage in 2026 with SG&A as a percentage of net sales broadly consistent throughout the year. We also expect advertising and marketing expense to follow a similar sequential quarterly progression as what you observed in 2025. And finally, we anticipate a sequential moderation in Q4 margins consistent with typical seasonality and the timing of promotional activity as observed in prior years. Now, turning to the first quarter, we expect Q1 2026 net sales of between $3.33 and $3.36 billion, or approximately 7% to 8% year-over-year growth. which as previously mentioned, we expect to represent the low point of the year. Additionally, quarterly net sales contribution from Smart Equine is expected to be broadly consistent throughout the year. We also expect first quarter adjusted diluted earnings per share in the range of $0.40 to $0.45. And finally, to provide additional color on other line items for the full year 2026, we expect Share-based compensation expense, including related taxes, to be broadly flat compared to 2025. Weighted average diluted shares outstanding of approximately $425 million. We also expect 2026 net interest income of approximately $10 to $15 million, and our effective tax rate to be in the range of 20 to 22%. In closing, I'd like to thank all of our CHUI team members for their disciplined execution in 2025. As we look ahead, we remain confident in our strategy and in our ability to deliver continued share gaining growth, expanding margins, and strong cash generation. We believe the momentum in the business positions us well to deliver another successful year of profitable growth in 2026. We look forward to updating you on our progress in the quarters ahead. With that, I will turn the call over to the operator for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Mark Mahaney with Evercore ISI. Your line is open. Please go ahead.

Okay, thanks. Two questions, please. One on this A&M leverage going forwards. Just talk about where you think that can go. The biggest drivers of that going forwards is you're such a heavily subscription, you know, auto ship type model. You think that, you know, you're showing leverage. You should be able to continue to show leverage, I would imagine, for the next couple of years, anytime. Thoughts on when we could break below 6%? And then, Sumit, could you talk a little bit about the Chewy Maid strategy a little bit more, the impetus behind that, and what do you think the financial so what of that will be? Do you think that is that more of a kind of a with lower, you mentioned some lower price points. Is that kind of a more of a TAM expander, or is it something that could just expand a NESPAC per customer? Thank you very much.

Hi, Mark. Good morning. I'll take them one by one. So on the first one, yes, we expect to show A&M leverage going forward. I will refrain from commenting as to what the extent will be on an annual basis. I'll take you back to our long-range plan that we communicated or the targets that we communicated in December 2023. If you recall, you know, from that point, we're essentially running ahead of our profit targets at this point. So we've got roughly 350 basis points to go to hit the 10%, and then we start the journey of, you know, moving beyond the 10% EBITDA. If you look at the remaining left to go, we believe roughly, you know, half or a little bit less than half will come from gross margin, and the rest will come from, you know, SG&A and marketing. And so, you know, we believe at our levels, you know, spending somewhere in the 6%, 6.5% is reasonable in the near term. And then, you know, as our brand continues to build even further with, you know, the CVCs that we're putting in ground or, you know, the upper funnel connections that we're making that is giving us really good leverage, plus the way that the app, the mobile app strategy is essentially progressing. You know, we do believe we're shifting the mix from third party mixes to direct mixes quite effectively. And that strategy should essentially continue to fuel the leverage that we're talking about. Now, the second question, Chewy made strategy. So if you, again, I'll take you back to the high-level view of the forest force. So we believe private brands should be, you know, mid-teens level, low to mid-teens level penetration of net sales for Chewy. At that scale, we expect private brands to be, you know, roughly 500 basis points higher gross margin than the base business. And so this essentially is, you know, a step in that direction, because today we're sitting at, you know, I would say low to mid single digits of penetration of net sales. And especially when you look at our penetration, we are penetrated quite reasonably well on the hard good side. So on supplies, we're mid-teens to high-teens level penetration. And therefore, the opportunity, you know, staring us in the face is on the consumable side. Now, it also happens that consumables is the largest TAM of the 90 billion food and supplies TAM. Consumables is about 50 to 60 billion of that. So for us, the way that we are bringing forward assortment, it allows us to fill in, you know, gaps in assortment at the high end. So you saw that with the launch of fresh food that is a very high NASPAC compounder. We're also looking at, you know, value offerings across the surface and going, okay, where can we inject strategically you know, utilize the power of a scaled e-comm network to be able to lower our cost to serve and deliver those price points effectively without really, you know, sacrificing margins along the way. And so in that way, it becomes, you know, a margin boost for us. So for us, you know, this will ebb and flow relative to the assortment that we bring to life, but we're filling in assortment, you know, both in dog, in cat, we've been, you know, I would say anemic in the past. And so you've seen me talk about two new assortment categories in CAT this time around. We'll continue to keep you updated, but we're excited about where we go from here.

Thank you, Sumit.

Sure. Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open. Please go ahead.

Thanks so much for taking the question. Maybe building on Mark's question and some of your earlier comments on the call on AI, Can you identify some of the key areas in the cost structure of the business where you believe the application of AI can earn outsized returns in terms of efficiency gains? And then the second part of the question would be philosophically, how do you think about letting some of those efficiency gains continue to drop to the bottom line and accelerate your pathway to a higher margin framework? Or the philosophical balance would be reinvesting some of those back into the business to incent growth. and producing a more sort of linear or managed margin progression for the business. Thanks so much.

Hey, Eric. There's a lot in that second question. Let's start from the first one, which is a really good one. So as mentioned in the prepared remarks, we're applying AI across a number of areas in the business, right? And so I'll stay away from the future applications that we're developing that will increase, you know, search relevance and discoverability. So we'll talk about that as 2026 moves forward. What we are already deploying in the business is applications and agents that we are starting to use across customer service, across fulfillment, across pharmacy, marketing operations, and general marketing areas, you know, for campaign optimization, creative optimization, so forth and so on. So if you start from customer care, I'll stay away from specific roadmaps and specific projects for sake of competitive outlays. But you should think about these applications that allows us to essentially reduce handle times, improve on the ability for us to self-serve customers that then drives reduced contact rates, which then directly leads to lowering of costs. So an example would be earlier, roughly eight weeks ago, we've essentially launched refunds and returns in a self-service manner and the engagement and the success rate that we are viewing in that particular launch is quite impressive. And so that becomes very encouraging for us. We also recognize that there's a cohort of customers out there that will continue to grow that are much more propense towards self-service and digitized used of platforms in the way that they, you know, demand service from platforms. And so we will extend, you know, ourselves in the use cases that we go offer to them. Internally, you know, we're developing applications for agents that allows them to extract information and deliver coherent, consistent level of service with, you know, a reduced amount of effort, but also then improves the agent experience. So it improves our retention and quality that the agents essentially provide to customers, but it also concurrently reduces our cost structure, given that input metrics like average handle times and contact rates essentially decrease as a combination of those two, right? On the health spectrum, we're using a lot of computer vision, you know, in our FCs. We're using, you know, AI to be able to, you know, codify our, you know, the way the scripts are being read, the scripts are being processed. et cetera, et cetera. Happy to go into details, you know, when we do a one-on-one. But essentially, we're quite bullish in the way that we're going to use these applications in the near to medium term. Now, over the long term, you know, we believe we're a pretty good case for, you know, when humanoids essentially come to life, right? So today, we're not going to talk about that. But if you look at the fulfillment space in the world, 60% of your variable cost essentially is spent in picking and packing, And so if you can build relevant solutions in the future to bring to life in these fulfillment areas, you can drive dramatic productivity, you know, alongside kind of the human, without losing the human element that we're so good at delivering to the market. So that's sort of our medium, near medium and long-term thinking. Now, your second question is how do we manage this? I will take you back to our broad aspirations of how we manage growth, profitability, and free cash flow. We want to grow revenue to be between high single-digit and low double-digit percentage points. The composition of that revenue will remain with NetAds growing and Nespac growing. We want to also deliver 100 basis points of margin expansion on an average and so you can see that this print sets us up for a high quality durable performance not just in 26 but also 27 right at midpoint we're delivering 100 and we're set up to perhaps exceed that relative to how the performance comes in for the rest of the year now we also want to convert at least 80 percent of that profitability into free cash flow and so we're not just going for one or the other i think we want to deliver a trifecta of growth increased profitability that builds durably on top of previous year's performance, and then accumulating or compounding free cash flow that we can deploy to reinvest in high ROI opportunities, but also to return cash to shareholders.

Great. Thank you.

Sure. Your next question comes from the line of Doug Anmuth with J.P. Morgan. Your line is open. Please go ahead.

Thanks for taking the questions. One for Sumit and one for Chris. Sumit, you talked about agentic as incremental demand and distribution channel. I just want to get your latest views here and how you'll implement agentic on your own platform for customers. And I think you're more insulated just given the 84% of the revenue coming from auto ship customers. And then, Chris, can you just talk about fuel costs, some of the impact that you may be seeing in real time, and how we should think about that in context of the 26 outlook? Thanks.

Hey, Doug. So I agree with your thoughts. You know, if you're selling a commodity, I think the disintermediation issue is likely one that needs paying attention. But from that point of view, we believe Chewy is quite well insulated, given our value proposition is not primarily search aggregation and because our customer relationship is not primarily built around one-time discovery. So, you know, we have continued to view ourselves and are more and more seen as a trusted, recurring, service-rich pet care platform. So in categories like food, pharmacy, broader healthcare, the customer is often not asking where to buy. They're asking for a seamless, dependable experience that consistently meets their needs. And that essentially plays to our strengths. So now, you know, in terms of how we think about genetic developments, we essentially, you know, believe that these developments may over time perhaps shape the interface of where the consumer is interacting, but it doesn't necessarily change who wins the order. And that's where, you know, our focus is, right, in making sure that Shoei remains the most trusted and convenient platform behind that transaction, whether it's through an owned experience or through future integrations, right, that we are also pursuing amongst others, and we are leading with many of these partners out there, right, that make our assortment, service, and capabilities easy to access. So in that way, we see it as an opportunity. So broadly, we think the right strategy is to be present wherever pet parents choose to engage, including emerging and genetic commerce interfaces, because those platforms, in our opinion, can expand discovery and put Chewy in front of a much larger pool of high-intent users. And so for us, success is not just showing up. It's to make sure that behind the transaction, our assortment, service, healthcare capabilities, and recurring relationships are durably integrated. And we have quite high confidence in being able to do that. Now, another thing that I've heard is, you know, will that impact, you know, sponsored ads business? That's another question that I've gotten. So I'll just kind of proactively hit that. And there again, you know, I believe that Chewy's retail media proposition is differentiated because it is highly tied to an engaged pet audience, strong first party data, recurring purchase behavior and closed loop conversations. So said otherwise, our ad proposition is not just we have page views, it is that we have a very high intentful pet audience, strong first party data, recurring behavior, and the closed loop attribution that I talked about. So if you look at us, we convert a large portion of ad attributed purchases directly to ownership orders, because that's how our ad model is built. And so then we combine that with on-site and off-site formats, increasingly tied together through Chewy data. So it continues to give suppliers a very strong reason to advertise with Chewy, even if agentic interfaces grow, because we sit close to that conversion repeat behavior. So that's kind of my point of view externally. Internally, I've talked about sponsored ads and AI. I talked about creating applications that will allow consumers not only to self-serve, so post-purchase support, but also in purchase discoverability and conversion. right, with the use of AI that drives personalization driven by memory recall, injection of pet profile data, tied to order data that then delivers, right, a highly curated and personalized in-app experience to you as the customer. That's the future that we're headed into. And in our opinion, we're not that far off.

Okay. And, Doug, on fuel, in the near term, we're relatively well insulated. Given the scale of our auto chip business and the strength of our relationships with key partners, and so our guidance for both Q1 and the full year stands and is what we expect.

Thank you both.

Your next question comes from the line of David Bellinger with Mizuho. Your line is open. Please go ahead.

Hey, everyone. Good morning. Thanks for the questions and congrats to Chris on the new seat. On the guidance, looking at revenue growth on an organic basis, it's implied about 8% growth at the midpoint and very consistent with 2025. You've got revenue guidance for Q1 a bit lighter than the full year. Your organic range may be a full percentage point lower. Can you give us some additional detail on why revenue growth should pick up through the balance of the years? Is there anything unique that's hitting Q1 or something else planned throughout the year that gives you added conviction in this re-acceleration. Hey, David.

Appreciate that. You know, on Q1, we're not seeing material change in our underlying demand trends. When we look across the business, across customer engagement, retention, overall spend behavior, the trends we see remain stable and consistent with what we've seen over the past several quarters. You know, from a quarterly perspective, Q1 is simply the lowest point in the growth profile for the year. And we move through the year, we do expect growth to build, supported by continued share gains, consistent execution across the business. You know, we have a high level of confidence there because it's really all driven by the core components of our model, which are stable and consistent, right? We're seeing strong customer ads, steady customer ads, strong retention. You know, customers continue to engage more deeply. And, you know, third, we continue to take share in the category, which is growing in a low single-digit rate. So, when you put all those together, the stable customer growth, the consistent spend expansion, and our ongoing share gains, you get a model that builds in a predictable way. And so, you know, we're not relying here on any one driver for the Q2 to Q3 growth. It's really broad-based execution across the business. And so that's what gives us the confidence in that ramp and delivering on our four-year outlook.

Got it. And then just one follow-up on the EBITDA margin guidance, about 100 basis points of expansion. Can you help us understand the lapping of any one-time-like or non-repeatable items that hit the P&L in 2025? You had the Chewy Plus investments in the back half. Also the get real launch, some front-loaded SG&A costs ahead of the tariffs. So how much of a benefit on EBITDA or EBITDA margin is assumed in 2026 as you lap these? And are there any other offsets we should consider, any flexibility around further reinvestment in the business? Thank you.

Yeah. If you remember correctly, David, we talked about the black half of the year last year. It was a low single-digit million investment number, and so they're not material, one-time impacts that were lapping there that drive that 100 basis points. That 100 basis points really is driven by leveraging the model and improvements in the business, and so that's kind of where I would guide you there.

David, just to elaborate on that, if you recall the number, we've given a guidance of somewhere around $18 to $20 billion at what we had expected to spend. And on the Q3 call, we said, you know, we're on track to spending roughly half of that. So that was about, you know, $10 million or so. And ultimately, as Chris said, we spent, you know, kind of low to mid single digits in revenue because we were keeping some to see if we want to invest in pricing as Q4 played through so that, you know, We gave that. We, you know, were keeping some to see if we wanted to accelerate the fresh demand, if the demand didn't come in as per your expectations. And then the third one was we were sort of, you know, navigating Chewy Plus. But we were pleased with the level of efficiency that we saw there. So it's low to mid single-digit millions. And then on the SG&A, you know, the Dallas and the inventory impact was also, you know, $2 to $4 million. So that's how you should size it.

Appreciate it. Thank you both.

Sure.

Your next question comes from the line of Steve Forbes with Guggenheim. Your line is open. Please go ahead.

Good morning, Sumit and Chris. Sumit, given the growth in net ads the last couple of years, and I think your initial comments and the prepared remarks about expanding lifetime value, I was wondering if you could maybe revisit and update us on spending trends by cohort, maybe some of those newer customer cohorts. And then what type of growth are you still seeing within your most mature cohorts as we think about building conviction around NSBAC?

So both good questions. So overall, our newer cohorts, 24 and 25, are stronger than 22 and 23 cohorts. They are much more in line with our legacy cohorts. You know, there was this kind of three-year period where We were sort of staring at the pandemic cohorts, you know, sideways to go really try to interpret the quality of customers there. But, you know, we're cleanly past that. The quality of cohorts that we've been picking up is really good. Repeatable purchase rate remains high. Reorder rate remains high. And that's back trending, you know, trends to the higher end of the $150 to $200 that we expect customers to spend in the first year. Now, in terms of the oldest cohorts, It's less older cohorts, oldest cohorts. I think we're seeing this across, you know, a bunch of cohorts that are interfacing with our value-added services. So whether it's, you know, cohorts that are native to the app, cohorts that are native to health, particularly cohorts that are native to CBC, you know, these cohorts are the fastest compounders of NESPAC in the companies. you know, that remains true for the fresh platform also. When we get a customer settled into our get real fresh platform, we see Nest Pack compounding immediately. And so, you know, our goal is to essentially, you know, push customers more and more into these closed loop ecosystems and, you know, accelerate their Nest Pack, which we are seeing us do quite successfully. So the larger the number of customers we push into this, the faster NESPAC compounds. The oldest cohorts have continued to progress, you know, well and sound, but I felt I would give you a bit of a broader context as to why we should be excited about the durability of this in the future.

That's helpful. And then maybe just a quick follow-up regarding Chewy Plus penetration. I think you commented comment on low single-digit penetration by year-end, during year-end 2025. Any sort of initial thoughts on what the guidance implies or the expectation around penetration to end 2026? Again, one to build conviction, yeah.

Yeah, yeah. So we like Chewy Plus. We are, I would say, still in a test and learn phase. We did achieve the low single-digit penetration that we talked about. Specifically, Chewy Plus exited at about 4% penetration for 2025. And the reason we're not giving you guidances for CHUI Plus is because we want to retain the flexibility to ebb and flow the program to land the incrementality and the spend in the right order. So we like what we are seeing so far. It is compounding NESPAC in the order that we want to. The incrementality ranges that we're observing, we'd like them to be tighter. So we're seeing incrementality ranges in a really healthy uh you know uh range but we would like to see kind of the variability around those incrementality tighten even more around the mean and then three you know there are a few metrics or kpis that we need a little more time to accrue before we come share that with you so one is the retentive nature of chewy plus cohorts right because chewy plus cohorts have been developing over the last year or so year and either in the quarter You know, each sample size is not yet wide enough or large enough for us to be able to study retentive capability, you know, independently. So what I want to be able to come say is that, hey, if we get 10% of Chewy customers into Chewy Plus, it should have a Y impact on our retention, which should then directly impact our NASPAC. And so that particular equation, the inputs and outputs, is what we want to study a bit longer. Number two, we're also studying the impact of Chewy Plus in terms of the efficiency it drives, both in terms of promotion, promotional intensity, as well as in terms of marketing spend or retargeting spend. And so, you know, there's enough out there for us to continue to learn. And then finally, the program value prop continues to evolve. I mean, remember, today the program has, you know, primarily product merchandise tied into it, right? And so we're sort of ebbing and flowing back and forth to go, great, like, you know, how are customers perceiving that value? Are we giving too much value? Are we extracting how much value, et cetera, et cetera? So it is natural for us, particularly given how impactful this program can be, to be optimistic yet prudent in our approach in the way that we progress. So we'll continue to be transparent. At the same time, we'll stay away from providing immediate targets right away.

Thank you.

Your next question comes from the line of Shweta Kajuria with Wolf Research. Your line is open. Please go ahead.

Hi, this is Andrew for Shweta. Thanks for taking the question. I want to double-click on net customer ads.

Sorry, can you speak up a bit? We're having a hard time hearing you.

Yeah, yeah, sorry about that. So I want to double-click on net customer ads. Looks like they came in above expectations in Q4. Basically, to what extent is this being driven by a broader refresh in the pet adoption cycle versus maybe your own efficiency in performance marketing? And then as we look into 2026 guidance and really the cadence, does that sort of embed a slight improvement in pet household formation over time, or is it just largely based on getting wallet share through your key initiatives?

So just interpreting your question, I think you had two parts there. It's a little bit hard to hear you, so I'm going to rephrase it back to you. So I think you're asking if there is any pet household formation improvement built into our forecast. The answer is no. You know, we said in our prepared remarks today we're interpreting the industry as quite stable and we're not underwriting a rebound or an acceleration in pet household formation metric. I think that was one part of the answer. And then the second question you asked was around customer ads came in above expectations in Q4. That was primarily seasonality and primarily, you know, the good market that we deploy. It was well within our forecast. So, Chris, anything else to comment there?

No, I think that's right. We missed some of the questions. You were just a bit hard to hear. Happy to follow up and call back and double click.

Appreciate it. Thank you.

Your next question is from Anna Andreeva with Piper Sandler. Your line is open. Please go ahead.

Great. Thank you so much for taking our question and good morning. First, to Sumit on Equine and congrats on closing the acquisition and recognizing it's still pretty early, but how are you thinking about the growth there for this year? And are you seeing more of an incremental consumer to Chewy And how is that behavior on the Chewy platform? And then secondly, on gross margin to Chris, can you talk a little more about the puts and takes? Should we think sponsored ads is still the biggest driver for the year, followed by the mix shift? And should we think gross margin expansion more levered in the first half? OneQ, I believe, will be lapping, I think, 60 basis points of one-timers from last year. And thank you so much, guys.

Hi, Anna. I will start with your first question, which was pertaining to the SmartEquine category, I believe, or the SmartEquine acquisition. So overall, this acquisition, we've sized it to about $80 million of top line in our forecast this year. And we like the business. It is a high-quality business of pet health nutraceuticals that essentially, the category gross margins are really high. We expect to run this in the plus 35% gross margin ranges in the near future. But in 2026, what we're focused on is essentially stabilizing the business. And so we don't expect a material contribution from this particular line into the P&L. In fact, we're going to ensure that we take the time to get the business to a high quality I'll say this, we like the high-quality nature of the business and the category, but the business that we've picked up requires a little bit of fixing. And so, you know, 2026 is that year. We don't expect it to take any investments from us, right? But we don't expect it to be materially contributive to the P&L. So our guidance that we've provided fully incorporates our, you know, excitement and the work that it will take. uh to get this business uh you know uh to its future aspiration where do we see it in the future we feel or we believe that we can add uh you know grow this to become a few hundred million dollar category you know at you know 35 to 45 gross margins and so we're quite excited in the way that this plays in the larger health and supplement space uh very much synchronous with our overall health strategy We like the quality of the customers that are engaging with it. We really like the team, you know, that essentially has come over with it. You know, they're passionate people and they're happy at Chewy.

Yeah, on margin, you know, on margin expansion, we remain bullish. You know, as we noted in the call, Our long-term margin framework's unchanged, and in 2026, we're going to further expand profitability with the rate of expansion higher than 2025. You know, we also shared we do expect the composition of EBITDA margin to shift with a larger share from operating leverage. The gross margin will continue to expand year over year, albeit at a more moderate pace than in 2025. We will continue to see improvement from premium mix and sponsored ads. We do expect sponsored ads impact to taper a bit in 2026, but SG&A leverage further strengthens to deliver the total 100 basis points of your expansion at the midpoint of our adjusted EBIT guidance.

And on sponsored ads, Ana, the rate of growth of sponsored ads will continue at a really healthy pace. So this is less to do with growth moderation. It is to do with the natural phenomenon that we've been talking about, which is as more shifts or mixes into offsite advertisement, right, we would expect a different margin mix to essentially flow through. And so you'll see, so that is baked into our 2026 guidance.

Right. Fair enough. Thank you so much, guys. Sure.

We have time for one more question, and this question will be coming from the line of Michael McGovern. with Bank of America. Your line is open. Please go ahead.

Hey, thanks for taking my question. Could you just characterize kind of the industry growth backdrop in the low single digit range relative to where you would kind of expect it on a normalized basis? And if you saw the industry backdrop improve, do you expect that your share gains would also improve and accelerate a bit?

The second part of the question is very easy. The answer is yes. We are not baking in any benefit that we get from the industry. So we're baking in a stable environment, not an accelerating environment. When the industry, you know, we've continued to say when the industry normalizes, you know, we expect to also improve every metric that we are currently talking about, top line profitability and free cash flow. On the first one, industry growth backdrop in the low single-digit range versus what is normalized. We would like to see pet household formation return to the 1% to 2% level. We would like to see pricing return to roughly 1.5% to 2% normalized in an industry. And we'd like to see overall growth rates get into the mid-single-digit growth rates that essentially are in the forecast for long-term growth of the pet category. That's what we consider normalized.

Thanks, and can you also just double-click on your health category expectations for 2026? I think in the past you've talked about your health category as kind of accretive to both growth and margins and close to about 30% of revenue. How is that tracking into 2026? Thank you.

We continue to be bullish about our place in health, Mike, and the question is sort of really broad. trying to sort of interpret what might be helpful. But we remain highly bullish. We run, at this point, a really high-quality ecosystem of products, consumer services, as well as B2B services that has now been complemented with an expanding and high-quality clinic footprint that essentially is providing us layered ecosystem benefits, both to Chewy.com and is the highest compounder of NESPAC, So broadly speaking for health, you know, it is a high growth, high margin category, and we expect it to continue to contribute to CHUI for long periods of time to come.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.