Dive Brief:
- Focused on expanding loyalty services and its sponsored ad business, Chewy’s first quarter net sales increased 8.3% year over year to $3.1 billion, according to a company press release Wednesday.
- However, the pet company’s net income for the quarter decreased 6.7% to $62.4 million. Chewy’s gross margin declined 10 basis points to 29.6% and its total operating expenses increased about 7.3% to $846.9 million.
- Chewy reaffirmed full fiscal year 2025 guidance and expects second quarter net sales to be in a range of $3.06 billion to $3.09 billion, per a company presentation.
Dive Insight:
While many retail companies grapple with challenging macro headwinds, Chewy leadership sounded upbeat regarding the company’s overall start to the new fiscal year.
“Fiscal year 2025 is off to a strong start as the momentum at Chewy continues,” Sumit Singh, chief executive officer of Chewy, said in a statement. “We delivered topline growth exceeding the high-end of our net sales guidance range, year-over-year growth in active customers, and compelling profitability and free cash flow generation. These results are a testament to the resiliency of the pet category and underscore the strength of Chewy’s value proposition and our ability to continue to gain market share.”
On a call with analysts Wednesday, Singh noted that the company has now transitioned its Chewy+ paid membership offering out of its beta phase. The $49-per-year membership provides free shipping and other perks.
Chewy also opened three new Chewy Vet Care practices since the last earnings call in March, for a total of 11 locations, per Singh. The company is on track to open a total of eight to 10 new clinics in fiscal year 2025.
While several performance metrics in the quarter were positive, analysts noted the gross margin hit was notable.
“Gross margin growth deceleration was a focus on the fourth quarter and is so again here, with flat year-over-year progression,” William Blair analysts said in a note shared with Retail Dive. “We think the bigger point here is that tangible margin drivers remain, namely sponsored ad growth followed by continued mix shift and fixed cost leverage. To be sure, the Street may have to get used to a slower pace of growth than early 2024, following on the heels of the initial introduction of sponsored ads.”
On the upside, the pet retailer’s net sales per active customer increased year over year from $562 to $583, while its autoship customer sales jumped from $2,233 to $2,563, representing 82.2% of net sales in Q1.
Additionally, active customer count reached nearly 20.8 million, marking a 3.8% increase from the previous year. The active customer count exceeded expectations of 20.7 million, according to a note from UBS analysts.
“Overall, [Chewy’s] 1Q marked another quarter of an acceleration in its sales momentum,” UBS analysts said. “But, the result was not without some questions as its profitability was not as robust as anticipated.”