Chewy (CHWY)

E-commerce pet food and supplies retailer Chewy (NYSE:CHWY) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 8.3% year on year to $3.12 billion. Its non-GAAP profit of $0.35 per share was 3.2% above analysts’ consensus estimates.

Company Overview

Founded by Ryan Cohen, who later became known for his involvement in GameStop, Chewy (NYSE:CHWY) is an online retailer specializing in pet food, supplies, and healthcare services.

Consumers ever rising demand for convenience, selection, and speed are secular engines underpinning ecommerce adoption. For years prior to Covid, ecommerce penetration as a percentage of overall retail would grow 1-2% annually, but in 2020 adoption accelerated by 5%, reaching 25%, as increased emphasis on convenience drove consumers to structurally buy more online. The surge in buying caused many online retailers to rapidly grow their logistics infrastructures, preparing them for further growth in the years ahead as consumer shopping habits continue to shift online.

Chewy competes with Amazon (NASDAQ:AMZN), Petco (NASDAQ:WOOF), BARK (NYSE:BARK), PetMed Express (NASDAQ:PETS), Walmart (NYSE:WMT), and Costco (NYSE:COST).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Chewy grew its sales at a mediocre 9.3% compounded annual growth rate. This was below our standard for the consumer internet sector and is a poor baseline for our analysis.

This quarter, Chewy reported year-on-year revenue growth of 8.3%, and its $3.12 billion of revenue exceeded Wall Street’s estimates by 1.1%.

Looking ahead, sell-side analysts expect revenue to grow 4.7% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

For online retail (separate from online marketplaces) businesses like Chewy, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.

Chewy’s unit economics are far below other consumer internet companies because it must carry inventories as an online retailer. This means it has relatively higher capital intensity than a pure software business like Meta or Airbnb and signals it operates in a competitive market. As you can see below, it averaged a 29% gross margin over the last two years. Said differently, Chewy had to pay a chunky $71.03 to its service providers for every $100 in revenue.

In Q1, Chewy produced a 29.6% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.

Chewy has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer internet business, producing an average EBITDA margin of 4.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Chewy’s EBITDA margin rose by 4.3 percentage points over the last few years, as its sales growth gave it operating leverage.

In Q1, Chewy generated an EBITDA margin profit margin of 6.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Chewy’s full-year EPS flipped from negative to positive over the last three years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Chewy reported EPS at $0.35, up from $0.31 in the same quarter last year. This print beat analysts’ estimates by 3.2%. Over the next 12 months, Wall Street expects Chewy’s full-year EPS of $1.07 to grow 22.8%.

Although EBITDA is undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Chewy has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.1%, subpar for a consumer internet business.

Taking a step back, an encouraging sign is that Chewy’s margin expanded by 4.2 percentage points over the last few years. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Chewy’s free cash flow clocked in at $48.7 million in Q1, equivalent to a 1.6% margin. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Chewy is a profitable, well-capitalized company with $616.4 million of cash and $500.2 million of debt on its balance sheet. This $116.2 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see Chewy narrowly top analysts’ revenue and EBITDA expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. Overall, this print had some key positives, but given the valuation going into the quarter, investors were likely hoping for more. Shares traded down 5.4% to $43.30 immediately following the results.

Updated: June 19, 2025 at 10:17 PM EDT

Are you wondering whether to buy Chewy or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Chewy’s business quality ultimately falls short of our standards. First off, its revenue growth was mediocre over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its EPS growth over the last three years has been fantastic, the downside is its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses. On top of that, its low free cash flow margins give it little breathing room.

Chewy’s EV/EBITDA ratio based on the next 12 months is 23.6x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $44.99 on the company (compared to the current share price of $41.35).