Chewy, Inc. ($CHWY)

All right. We are going to get started. I'm Doug Anmuth, JPMorgan Internet analyst. We're pleased to have with us Chewy's CEO, Sumit Singh. Chewy is the largest pure-play online pet retailer in the U.S. The company has more than 21 million active customers. We estimate Chewy will generate about $13.7 billion in net sales this year, including around 85% of which come from Autoship customers. Chewy is guiding to 6.7% EBITDA margins at the midpoint this year, and we project about $750 million in free cash flow. Sumit became Chewy's CEO in March of 2018 after previously serving as Chief Operating Officer, and he previously held senior management positions at both Amazon and Dell. So welcome, Sumit.

Thank you. Good morning.

All right. So kicking off, maybe you can just help us understand kind of the overall state of online pet spending. Third-party data estimates that more than 40% of pet food and treat spend in the U.S. occurs online. What drives this next leg of digital penetration gains? And do you need secular pet household formation to reaccelerate?

So there's a lot there in that question. Let's unpack it. So overall, we interpret the pet industry to be now $160 billion in TAM, of which roughly $15 billion is non-health care services. So these would be grooming, boarding, lodging, et cetera. So if you take that out, what is digitally propensed at this particular point is roughly $150 billion of TAM. We interpret that TAM broken into 3 pillars. So I took the $15 billion out of the $150 billion, roughly $90 billion approaching $100 billion is food and supplies and about $50 billion plus is health care. And so food and supplies has been digitizing for a long time. So over the last 6 years or so, food and supplies e-commerce penetration has gone from mid-teens to, as Doug mentioned, sort of mid-30s to high 30 levels. And then health care is what I would consider 5, 7, 8 years behind where food and supplies is. And so we are right now entering the mid-teens level of penetration for health overall. When you look at Chewy's composition in the way that we drive growth underneath of it, for every dollar that moves online, we pick up $0.40 to $0.45 in the food and supplies vertical, and we're picking up $0.70 of every dollar that is moving online in the health vertical. So underneath of it, our drivers are secular trends of e-com, in our opinion, will continue. They have continued for a number of years. The pandemic brought in what you would consider the high tide and then sort of the tide reverted back to normalize back in retail. But the secular wind, the currents that have been blowing towards online will continue to do so. In fact, over the next several years, we believe the category should cross 45%, 50% of online penetration and health will continue to get more and more digitized and Chewy is building over the last 6 years, we focused on building a very large platform that is integrated through one-party data and is now continuing to pull in a lot of commerce from chewy.com into our physical presences with the clinic. I'm sure we'll talk about that a little bit. Yes, I'm sure there's a question there I did not answer, so happy to go at it again. But overall, we're bullish about the category and the secular trends that fuel e-commerce.

Okay. Great. You've talked about the company delivering low single-digit active customer growth in fiscal '26 with kind of broadly consistent cadence through the year and the revenue growth will accelerate for a few quarters. What is driving Chewy's implied share gains? And how do you think about kind of interplay across gross adds, reactivations and churn?

Okay. So I gave you some data points on the dollar that we are picking up relative to every dollar that is moving online. When you look at share positions, we are -- on an aggregate basis, we are roughly 8% to 10% of the share of the larger TAM of $160 billion. When you consider e-commerce, we are likely 40%, 42% of the share of the market at this particular point. And underneath of it, our trends are fueled by a very strong Autoship business on the retail side and primarily on the health side. So between food and medication, over 85% of our sales or nearly 85% of our sales are driven by this quasi-subscription program, Autoship, which has continued to grow from low 50s 7, 8 years ago to now having crossed the 80% mark. So very durable, predictable, repeatable revenue. On top of that, now I also want to remind you that Autoship customers are not dormant customers. So it's not set it and forget it. They very actively engage through attach. And so the base load of Autoship provides a healthy tailwind. But on top of that, Autoship customers also attach to a very healthy degree and a high degree. The second part of our share gain is fueled by health. Clearly, I mentioned we're picking up $0.70 for every dollar. We run the largest pet pharmacy in the country. And so from a business point of view, you've got to look at us as 2 strong pillars, one fueled by Autoship and the other one as a secular trend where we are outpacing the market growth per se. If you look at industry growth, we estimate industry to grow roughly at low single digits percentage point this year, roughly about 3% or so, plus/minus 1%, give or take. The -- our algorithm for growth is driven by a combination of new customer growth, so customer file increase and share of wallet increase. Share of wallet increase, the way you have to look at it is the following. So if you divide $160 billion TAM by roughly 90 million U.S. pet owning households, you get to about $1,800 share of wallet per household. That's how you think about the entitlement. We are at $600 share of wallet per household. So we're about 1/3 of our way there. And we are the largest aggregator of share of wallet as publicly available data would suggest. Why? Again, back to a program like Autoship, back to the attach rates that we drive, back to the health premiumized mix that we've been shifting the business into, all of these provide very healthy NSPAC accretion. And in terms of file increases, we've guided to grow customer file to the tune of low single digit. And so our revenue composition is a combination of both active file increase and NSPAC increase. On active file, Doug, we are continuing to see gross adds increase, and we continue to see our churn improve on a quarter-by-quarter basis, given, again, the fact that we have highly propensed repeatable, sticky categories that are less propensed to immediate macro volatility per se. We're not immune from it, but we clearly are resilient to the point where we have confidence in our share gain story.

Okay. Let's hit that last point just in terms of the macro environment. Historically, Chewy has been -- in the category has been more durable, just given significant majority of net sales coming from nondiscretionary type spend. What are you seeing in terms of impact on consumer spending or sentiment due to higher gas prices?

So I agree pet is resilient and continues to be resilient. Pets don't eat more in Q4. They don't eat less in Q1, and that provides the category a stable categorization, if you would. Underneath of that, our business, as I will keep iterating, is fueled by a very large subscription service and a very large health vertical. The emotive nature of the category alongside these durable levers that we bring to market puts us in a category which is relatively much more inert to some of these macro headwinds. For example, when the tariff wars were going on, we shared a data point to the market saying 85% of our sales comes from food and meds and only 15% comes from discretionary. And that was helpful at that point because as consumers shifted out of discretionary, Chewy was relatively well insulated. So this year is not much dissimilar to some of those trends. Over the last -- so while pet remains resilient, it is not immune to the macro changes that we are seeing. In the last couple of months, we are continuing to see and interpret the consumer as being more stretched than we were when we entered the year. There's no shortage of data points that supports that. Leaders here are actively talking about that. And we are very closely watching these trends for what they mean towards the end of the year. So only time will tell. What I want to impress upon is that even if we are -- we enter a period of relatively softer macro in the future, our ability to draw and continue to gain share against an industry that we believe is growing low single digits remains intact. More so, I would say that our ability to underwrite the profit algorithm, which we have continued to build resiliency into over the last few years. So on a structurally foundational basis, we are not concerned about the macro volatility in a way that we will deliver or underwrite earnings. Specific to fuel prices, we're underwriting low single-digit millions of impact to fuel in our Q1 quarter. And we have not yet forecasted it for the rest of the year. So if we were to underwrite a similar amount of impact for the rest of the year, we have the ability to absorb it, again, without coming off of our earnings algorithm.

Got it. Okay. All right. That's helpful. Maybe let's just go back for a minute to NSPAC, which is essentially spend per active customer. Inflation and pricing tailwinds kind of subsiding somewhat. I guess when you think about cohort maturation, cross-selling new verticals, MAP, which is obviously the way the industry is primarily priced, what kind of drives the sustained pricing power and NSPAC growth going forward?

Okay. So the best way to understand NSPAC is if you trace it all the way back to 2019 when we came to market, I believe NSPAC at that time was roughly $350 to $380. NSPAC is sitting at $600. And the industry has gone through unprecedented amounts of inflation through the pandemic. So if you break down the growth of NSPAC, less than 20% of this growth came from inflation. The rest of it is structural share of wallet growth. So let me take that off the table, first of all. So our NSPAC growth comes in the following manner. We have a very repeatable, predictable way in which customer cohorts spend their money. You can -- we've shared this disclosure twice, once in 2019, once in December 2023. Our customers spend $150 first year or up to $150, $250 year 2 and $300. By year 5, they're spending $500, $600. Our cohorts that are 9-, 10-year olds are spending $1,000 plus. Very predictable build of NSPAC fueled by our ability to drive very strong customer relationship, our ability to put customers on Autoship. What an Autoship order does is that it takes the thinking out of the next order out of the picture. So it builds a repeatable layer cake in a way that revenue compounds for these cohorts that we essentially mature or graduate through the year. So a bunch of our NSPAC comes as part of our maturity curves as these cohorts are developing. Then in 2018, we introduced the health business. What -- and health is broad at this point. So I'll say we introduced pharmacy particularly. What a pharmacy vertical does to a customer is every time we expose an existing Chewy customer to a pharmacy vertical, share of wallet increases by $300 to $500. The marginal cost of acquisition is nearly zero because this is an existing Chewy customer. So today, roughly 25%, a little bit below of our customers, so existing 21 million customers, about 25% or so are subscribed to pharmacy, which tells you -- and you can see the weighted impact contribution then in terms of -- if you back out in terms of mathematics as to how much a category like this can contribute to the NSPAC weight, which also tells you there's a lot of headroom for us to grow into as we continue to mature businesses like pharmacy, veterinarian diet, health and wellness supplements. To give you a data point, from 2019 until 2024, Chewy grew $9 billion in incremental revenue. We've given you a data point that at least $3 billion of that $9 billion has come from Chewy Health. Margins in pharmacy are 1,500 basis points higher gross margin than the base business. So these are structural moats. These are structural differentiators. Underneath of that, I would say we've completely rebuilt our supply chain, Doug from the first time that we met you in 2018, '19 up until now. And that then durably protects our margin from fluctuations that happen in the market or to the transportation industry or to any other last mile network that is built out there. So overall, I would say we feel pretty good about our ability to compound NSPAC. I have not yet talked about CVC, Chewy Vet Care, which is the fastest compounder of NSPAC. I'm sure Doug will get there, so we'll address it at that point.

Okay. Yes, we'll get to CVC in one moment. We get the question a lot just about promotions in the space and MAP. So maybe you can just talk a little bit more about how kind of the other primary players in the space are abiding by MAP and how you think about promotional environment in general?

Sure. So to understand, first, to get to promotions, you have to understand how pricing works in the pet category. So let me just sort of break that in a very simple concept called MAP, minimum advertised price. For those who may not be familiar with MAP, it is a price point, a floor set by the suppliers on which you can price their particular product. Retailers and e-tailers can price at or above MAP up until the MSRP, but not below it. If you price below it, it comes immediately with financial and supply chain in-stock type penalties, which are quite severe. And so there is a high degree of discipline that is maintained in the pet industry at MAP pricing levels. Now I said you can choose to price above MAP. So the lowest price point that a consumer can pick up a product is at MAP, and we price at MAP. If you compare Chewy prices, and this has been done and proven time and time again from studies. In fact, I wrote about this and Agentic a few weeks ago. It's on my LinkedIn, pick up the article. It's an insight as to why we're protected from disintermediation and what is our position on pricing. I'll pick up a point from there. We run pricing neck to neck with Amazon. When we compare our pricing to Petcos and the PetSmarts and Targets or the food, drug and masses of the world, we are price advantaged between 3% to 16%. So first of all, you have to understand the fact that we don't need to promote or discount because we are already price advantaged. Further, when you subscribe to Autoship, you get an incremental 5% discount on top of the base price, which is not funded by us. It is funded by suppliers because Autoship builds loyalty and repeat purchase rate. And Chewy does it the best in the industry. So for us to consider promotion, right, we are -- that is not a lever that we generally believe we need to essentially take to market. Amazon ran their Pet Day the last 5 days. We didn't match. We didn't feel need to match. We saw no loss of demand. We're past that. This was in 2018, '19, when we just come to public when we're $2 billion, $3 billion, okay, like we used to watch. We're still in the rearview mirror, we have the ability, by the way, don't be confused. We have technology that monitors industry-level pricing at 15-minute increments, and we have the ability to adjust industry level -- to react to industry-level pricing should we choose to. So we have the ability. We choose when to do so and when not to do so. And for the most part, industry has remained pretty rational on promotionality, and we don't really expect this as a lever to pull on a credible basis moving forward.

Okay. Great. Let's shift gears. I want to talk about Vet Care, and then we'll get to Agentic after that as well. But you mentioned -- so you published an extensive investor presentation on Chewy Vet Care. You've been acquisitive with Modern Animal. What are the key initiatives just in terms of vet experience, vet retention and customer acquisition as you build out this offering?

So it's funny. So we didn't really know what to expect when we started launching Chewy Vet Care in April of 2024. We built 6 clinics in '24. They have now hit a 2-year mark. We built 8 in '25 -- we built 8 in '24 and 10 in '25. So we exited '25 at 18 clinics. In each of these clinics that we dropped into the marketplace, we saw a very similar theme. We saw 40% of customers that were walking into the clinics were net new to Chewy. We saw our forecast for marketing that we had put behind the clinics come in much lower spend than expected. So the Chewy brand name carried a lot of weight and awareness and drove organic traffic that built quickly clinic utilization to the levels that we were -- exceeded clinic level to our expectations. In terms of existing customer interaction, half of the customers that are walking into CVCs are then within a very short period of time, attaching themselves to other categories at chewy.com, pharmacy, supplements, food in that order. And then in terms of retention, we track a metric called forward booking deployment rate -- forward booking rate. So this would be an Autoship type of metric for services, if you would. So if 100 customers walked in, how many walked out with a prebooked appointment for their next lot. That metric is running 2.5x what we believe industry forward booking rate to be. Our vet retention, so there's been a narrative in the industry around supply shortages for vet and the long amount of time it's taking companies to recruit vets. That is true. For Chewy, however, we are the employer of choice. Our vet recruiting time is 4 months or less against an industry that has taken an average of 12 months to recruit vets. Our vet retention at the 2-year data point that we have is running high 80s to low 90% levels. Our vet NPS, our customer NPS has continued to run at 4.8 stars or higher. These are not internal data points. These are published Google Star ratings that I'm quoting to you. So the mousetrap is a better mousetrap. It's resonating with customers. It's resonating with veterinarians. And exiting 2018 -- 2025, I said we had 18. Exiting 2026, we were going to be at 30. The Modern Animal acquisition puts us at 60. These 60 clinics have an embedded revenue run rate of $300 million in them. And so we're quite excited about the experience that CVCs are delivering, the growth compounding at much higher profitability that these can -- or the impact that these will deliver from a profitability point of view.

Okay. Maybe you can talk about that a little bit because if we go back to your Investor Day a few years ago, when you talked more about the strategy, there was -- I think there was kind of some natural skepticism in the market about going into these physical spaces and what profitability would look like. But you're targeting actually about $3.5 million, as you mentioned, of steady-state revenue per clinic and then an additional, I think, $800,000 per clinic on top of that and better EBITDA margins than the industry. So I guess what drives your bullishness on running all these metrics and running these basically more profitably on a 4-wall EBITDA basis?

So just to repeat the data points or to put them on the table, we project $3.5 million per clinic. An average clinic in the United States produces between $2 million and $3 million. We also -- on top of the $3.5 million per clinic, Doug mentioned, we are essentially projecting and we're proving this out every day, $800,000 attach per clinic. So these are the attach rates that I talked about. So clearly, CVC is fueling the ecosystem, the full platform sort of view of what Chewy is and should be. Underneath of that, the inputs that are fueling that type of revenue output is the following. We have the highest DVM productivity in the market or one of the highest that we've seen, $1 million per DVM, right? Underneath of that, our pricing and location strategy is fueling the premiumization that we expect to deliver in the services industry. We're not -- these are not in low-income neighborhoods. These are in mid- to high-income neighborhoods. They are driving premium service for a price point that is very palatable to customers. And so the demand-supply ratios that we're seeing are very positive. So our utilization, we are essentially projecting breakeven at 20 months or lower at this particular point. In fact, that's the data point that we've shown for our oldest clinics that have launched in April 2024. So go pick up this presentation that we're talking about. A new customer is spending $900 in their first year, 5x the amount of share of wallet that an average chewy.com customer spends. An existing customer expands their share of wallet 20% or plus when they walk into our clinics. So the economics are powerful here. And profitability -- industry average profitability is between 18% and 20% levels. We've projected profitability at plus 22% levels. So we're highly confident of not only the revenue, but also the flow-through to the bottom line. You asked how are we doing this? So on the -- if you look at the way that we've built the clinic, we work backwards from what veterinarians spend their time on and what customers spend their time on. And we have essentially built tech and product in the way that the clinic delivers experience that takes out the non-value-added time and pushes that towards productively engaging customers, both higher appointment mixes, but also higher DVM productivity that comes as a result of it. So what do I mean by that? If you -- I'll give you an example, the way that we're embedding AI in our clinics. We have embedded AI in 3 places. When a customer walks in, our doctors don't spend any time pulling up data or understanding what the customer background and history is. The agent automatically schedules it and prints out a full triage report that gets right to the bottom line and cuts out all of the check-in time that the vet essentially used to have. Number two, when the vet is in conversation with the customer, the interaction is fully scribed. So our agent is listening to this and fully scribes it in medical terminology back into the software that then hooks into our PIMS, practice integration management software that then updates all customer records and vet records. Post the appointment, the agent essentially is writing post follow-up notes so that the veterinarian neither has to enter data or the information nor do they have to write notes. That freed up 2 hours per day per veterinarian for us. And so instead of -- so we essentially put that back into increasing the number of slots offered and so higher vet productivity plus more number of slots drives the high revenue that you're talking about. It also lowers our cost to serve. We don't carry -- we carry very minimal inventory in the clinics. So not just from a P&L income statement point of view, from a balance sheet point of view, it is much more profitable to run this clinic because we've hooked this back into a 24-hour pharmacy delivery. We now have 5 pharmacies that we service from. So we can get your prescription to you. If you have a prescription approved from us, we can get it back to you. 75% of our orders are delivered in one day, 24 hours or less. And so these are durable structural advantages. And in the world of AI, this builds into the moat, not disintermediates from it.

Okay. That's great. Very helpful. Just last one on -- just on CVC, and I want to get to Agentic. But you're talking about kind of approaching $300 million in revenue from vet clinics exiting this year. How do you bridge that gap toward $1 billion over a multiyear time frame?

Each box costs us $1.5 million to put into the ground, okay? We are building at the rate of 10 to 12. We've acquired Modern. We now have 2 competent teams who can build at the rate of 10 to 12. So suddenly, we've gone from building 10 a year to maybe 25 a year. On an average of $4 million to $5 million per clinic, we are embedding roughly $125 million per year of clinic revenue if we wanted to, if we choose to, right? I'm not discussing my LRP. I'm essentially getting you to appreciate the mental concept of how we grow from this point onwards. So we could choose to continue to grow organically at some rate between 10%, let's say, 30%, 35%, right? All of that is incorporated within the 1.5% to 2% CapEx guidance that we've provided. So we don't expect to come off of that. In addition to that, we have shared with you that with the tech that we have built and are continuing to build, with the strength in our brand name to be able to acquire and retain customers and with our strength in fulfillment, we are also thinking of how we can do this in an asset-light manner. So if Doug wants to come to market and open a clinic, well, Doug could essentially partner with Chewy, Chewy could partner with Doug. We could lend Doug our brand name, we could lend Doug our tech. We could connect Doug's clinic back into our ecosystem. So we're fueling demand. Doug is the service provider. We are fulfilling the demand. On a GMV basis, Doug earns $100, we perhaps take 15% of that. And so in this particular case, you value the business on a GMV basis, much higher profit flow-through. On the organic side, you view the business on $4 million to $5 million per clinic at 22% to 25% of EBITDA. And so the combination of that, in our opinion, right, gets us to roughly $1 billion run rate exiting 2030.

Okay. Great. Let's shift gears. I know we have about 6 minutes left. I want to talk about Agentic. You mentioned the thought piece that you wrote recently on Agentic. You said it was on LinkedIn. So that reiterates your view that Chewy will be a beneficiary of Agentic commerce. What makes you so confident that the company and the broader pet category is a beneficiary rather than disrupted in an Agentic world?

Yes. So the headline of the article, just to sort of preface it is AI will not disintermediate Chewy. It will route demand to it. So not only -- we believe not only are we not disintermediated, we are advantaged in the world of Agentic. It's a gift that we look forward to receiving as time moves on. There are a few key assertions that build into that belief. One is pet and pet is not your average category in the level of emotiveness, in the level of care. An average pet parent thinks about their pet 10 times a day. An average pet parent doesn't go to sleep thinking did my pet eat? Are they eating well? They care about longevity. 80% of the customers would put their pet in front of them when it comes to medical appointments or insurance requirements, et cetera, et cetera. Chewy then is also not your average retailer, right? 80% plus on Autoship, 21 million customers deeply loyal to us, the way that we deliver service in a highly personalized manner, so not just the purchase experience, but the post-purchase experience. The fact that we have no CRM department per se and yet the surprise and delight from the way that we run our customer care or we deliver the experience drives -- I mean, coming in here, every time that we checked into somebody or we asked Chewy, the person was like, oh, I'm a Chewy customer, I love it, right? And that you don't hear about -- it makes you feel really good about that. So first of all, like it's not like buying a transactional toothpaste where you can essentially outsource your thinking to anybody. But let's argue that the consumer ultimately wants to -- wants to get the maximum value out of their purchase. Well, that's what agents will be good at doing. So what the Agentic world, in our opinion, will do is it will shift the search interface upwards to these Agentic services. And the agents that are essentially cross comparing will route demand to the place where they will find the maximum value for that particular customer. Well, that place will be chewy. Two reasons because I just said -- I explained to you or shared my point of view on how we price. So we're advantaged on pricing, but also Autoship compounds that advantage for us because it's even cheaper. So not only will we win the first order, we will also -- in our expectation is we will win every subsequent order from that point onwards. And so -- and then third, we are not sitting idle. We are building actively interfaces into the Agentic world. So a team at Chewy is focused on leading the integration and shaping protocol or commerce protocols for pet with the Googles of the world and the OpenAIs of the world, right? So we are leading there. You can go check for yourself. And another team is essentially making sure that SEO goes to Agentic and Chewy is the one that feeds in catalog information, attribute data, content data, vet information, health information because we are one of the largest purviewers of this type of information that exists on one platform. So our view is the 300 million active users that live on Gemini on a monthly basis, when they start engaging with the platform and interact with the pet category, Chewy should be a net beneficiary of this.

Okay. Let's stick with AI. You've also cited tens of millions of dollars of AI cost benefits this year and more than $50 million annualized in '27 -- fiscal '27. Can you just help us understand where these efficiencies are being realized across your business?

Yes. So I believe we are one of the very few companies that has quantified AI savings. And we're doing so because we can see sort of where we're implementing and the impact that it will have. So the way that we've built it, first of all, is we have a completely services API-driven tech stack. It is modern in nature, on top of which we sit an enterprise data platform which we've been reformatting over the last few quarters to become self-sufficient in the native AI world that we're moving into. And now we're essentially putting applications on top of it. So as opposed to a lot of companies that will run to the market and integrate with third-party providers, we essentially have our own infrastructure stack, on top of which sits our data stack, on top of which sits a central AI tooling platform that the company has internally built, on top of which we are building applications. So it gives us full control in terms of the stack, the capability, the go-to-market ability as well as the cost benefit quantification that we bring as a result of it. We're embedding AI in 3 different pillars. So the way that I want you to think about it is 3 different pillars. The first one is Agentic experiences that are customer-facing. That's not where we are sizing the benefit. We'll come talk to you about that in the future. We're in the process of building that. The other 2 pillars where we have cited tens of million dollars of benefits in '26 and up to $50 million or greater in '27 are we're embedding AI in our service operations layers and in our fulfillment and supply chain layers. We run the third largest -- we are the third largest direct-to-consumer shipper in the country at this point. We run 18 fulfillment centers, 5 pharmacies and are a very sophisticated and large supply chain and fulfillment provider, which means we have an ability to embed AI in many of our workflows and drive productivity and OpEx leverage into our networks. That's one. Number two, we're embedding AI in pharmacies. We're embedding it in customer care. We're embedding it in marketing operations. That's what I call the service operations layer. So overall, Doug, I believe we have the visibility and the confidence to deliver what we are saying we can deliver.

All right. Excellent. We're going to leave it there. Thank you, Sumit.