Chewy revenue misses expectations despite raised guidance

Chewy shares declined 11% following the release of its second-quarter financial results, despite the company beating revenue estimates and raising its full-year guidance. The online pet-supplies retailer reported total revenue of $3.33 billion, a 7.3% increase year-over-year, which slightly exceeded the consensus estimate of $3.32 billion. However, excluding the acquisitions of SmartPak and Modern Animal, organic revenue growth slowed to 5.7%. Adjusted earnings per share rose to $0.36 from $0.33 in the prior year period, matching analyst expectations, while gross margin remained stable at 30.4%.

The negative market reaction was driven primarily by management comments on the earnings call indicating persistent weakness in consumer discretionary spending. Chewy noted continued pressure on discretionary attachment and premiumization, suggesting that customers are prioritizing essential pet food over add-ons and higher-priced products. Although the company raised its full-year revenue guidance to between $13.46 billion and $13.57 billion, representing 6.8% to 7.7% growth, this update was attributed largely to the contribution of recent acquisitions rather than core business expansion. Adjusted EBITDA margin guidance was also nudged upward to 6.7% to 6.8%.

Organic growth remains constrained by strategy

Chewy’s business model relies heavily on recurring revenue, with autoship orders accounting for 84.6% of total sales in the quarter. While this high subscription rate aligns with the company’s strategic goals for customer retention, it limits the upside potential from one-off purchases that typically drive incremental growth. The pet industry has experienced a slowdown since the post-pandemic surge in adoptions normalized, resulting in a mature market environment. Chewy is no longer growing at the rapid pace that justified its previous high-growth valuation, and its performance now resembles that of a slower-growing consumer staples company.

Valuation reflects shifting market expectations

The stock is currently down 50% from its 52-week high, reflecting a correction in investor expectations. Based on consensus adjusted earnings per share of $1.52 for the year, Chewy trades at a forward P/E multiple of 13. However, this figure benefits from adjustments such as share-based compensation, which is projected to reach $300 million this year. On a GAAP basis, consensus earnings per share stand at $0.79, resulting in a more standard P/E ratio of 25. According to GN markets/earnings (en-US), the current valuation offers a discount, but the lack of faster organic growth limits the investment case. The company’s diversification efforts through acquisitions are sensible, but they do not fully offset the softness in core consumer demand.