Chewy (CHWY) shares edged 1.2% lower to $22.99 in premarket trading Wednesday, even after the online pet retailer reported 7.3% sales growth and a 90-basis-point improvement in adjusted EBITDA margin. The muted reaction, based on a delayed quote at 8:33 a.m. Eastern versus Tuesday's close of $23.27, suggests investors are looking beyond the headline numbers to a more complex cash story involving acquisitions, capital spending, and share buybacks.
The second-quarter results underscore the durability of Chewy's recurring-revenue model. Autoship, the company's scheduled-order program, now accounts for 84.6% of total sales, up from 83.0% a year earlier. Active customers grew 3.8% to 21.705 million, while net sales per active customer rose 1.9% to $602. These metrics, combined with a 9.3% increase in Autoship sales to $2.817 billion, paint a picture of a business with strong customer stickiness and predictable demand.
However, the reported growth was aided by two acquisitions: equine retailer SmartPak and veterinary platform Modern Animal. Excluding these contributions, organic sales growth was 5.7%, a 1.6-percentage-point gap that highlights the role of M&A in the top-line expansion. While the acquisitions diversify Chewy's offerings, they also add complexity and risk.
Margin expansion was real, with adjusted EBITDA rising 23.7% to $226.7 million, pushing the margin to 6.8% from 5.9% a year ago. Gross margin held steady at 30.4%, indicating that the improvement came from operating leverage rather than pricing power. GAAP net income jumped 29.8% to $80.5 million, and diluted EPS rose to $0.20 from $0.14. However, adjusted net income grew only 5.5% to $148.8 million, and adjusted EPS rose 9.1% to $0.36, reflecting the impact of share-based compensation and acquisition costs.
One notable concern is that share-based compensation exceeded GAAP net income, a recurring economic cost that can dilute shareholders unless offset by buybacks. Chewy did repurchase $400 million in stock during the first half, helping reduce the diluted share count by 4.3%, which boosted per-share metrics.
Free cash flow, a key metric for investors, declined 15.5% quarter-over-quarter to $89.5 million, despite a modest 2.6% increase in operating cash flow. Capital expenditures surged 71% to $47.9 million, driven by investments in fulfillment capacity, pharmacy facilities, veterinary clinics, and technology. These investments support Chewy's healthcare expansion but make the business more capital-intensive than a traditional online retailer.
The balance sheet reflects the cost of this expansion. Chewy spent $552.8 million net on SmartPak and Modern Animal, and ended the quarter with $611 million in cash, down from $860.1 million at the start of the year. Long-term debt now stands at $588.7 million, a new addition to the balance sheet, with a weighted-average interest rate of 5.41%. The goodwill from these acquisitions—$221.6 million for Modern Animal and $73.1 million for SmartPak—represents a significant intangible asset that depends on successful integration and synergies.
Investors are left to weigh the potential benefits of Chewy's healthcare strategy against the increased financial leverage and spending. The company has raised its full-year revenue and profitability outlook, but specific numbers were not disclosed in the earnings release, leaving analysts to seek clarity in management's commentary.
Looking ahead, the key metrics to watch are Autoship's growth and share, organic customer additions, Modern Animal's clinic economics, and free cash flow after higher capex and interest expenses. The recurring-revenue engine is strengthening, but Wednesday's tepid stock reaction suggests the market wants evidence that these new investments will convert durability into cash.
