Chewy's shares extended their post-earnings decline on Thursday, as investors weighed a dip in quarterly free cash flow against the company's broader growth initiatives. The stock, which closed Wednesday down 14.1% at $20.75, slipped another 2.7% in premarket trading to around $20.19. The market's focus is on the company's cash generation, which fell in the second quarter even as revenue and profit grew.
Strong Quarter, but Cash Flow Disappoints
Chewy reported second-quarter sales of $3.33 billion, up 7.3% year over year, according to its September 9 earnings release. Net income surged 29.8% to $80.5 million, while adjusted EBITDA rose 23.7% to $226.7 million, pushing the adjusted margin up 90 basis points to 6.8%. The company also saw active customers grow 3.8% to 21.7 million, and net sales per active customer increased 1.9% to $602. Autoship sales, which represent recurring orders, climbed 9.3% to $2.82 billion, now accounting for 84.6% of total sales, up from 83% a year earlier.
Despite these positive metrics, the stock reaction was negative, suggesting investors had already priced in the strong results or are skeptical of the company's ability to convert earnings into cash. The key issue: quarterly free cash flow fell 15.5% to $89.5 million from $105.9 million in the same period last year. Operating cash flow actually edged up to $137.4 million, but capital expenditures jumped to $47.9 million from $28 million, reflecting increased investment in fulfillment, pharmacy, veterinary clinics, and technology.
Six-Month Picture Shows Improvement
However, the six-month figures present a more favorable view. First-half operating cash flow advanced 11.6% to $245.9 million. After capital spending of $85.6 million, free cash flow was $160.3 million, compared to $154.6 million a year earlier. This suggests that the quarterly decline may be due to timing of investments and working capital changes rather than a structural deterioration.
Chewy has also become more aggressive in capital allocation. During the first half, the company spent $552.8 million on acquisitions and $400 million on share repurchases. It also recorded $811.7 million in debt proceeds and ended the quarter with $611 million in cash, down from $860.1 million at the start of the fiscal year. Long-term debt stood at $588.7 million.
Buybacks and Debt: A Double-Edged Sword
The share repurchase program has reduced the share count to approximately 401.5 million Class A and Class B shares as of August 2, down from about 415.1 million at the beginning of the year. At Thursday's indicated premarket price, this implies an equity value of roughly $8.1 billion. While buybacks can boost per-share earnings, they do not address the underlying cash flow concerns. Notably, first-half repurchases were two and a half times first-half free cash flow, meaning the company is using debt and cash reserves to fund buybacks, which may not be sustainable in the long term.
What Would Justify the Selloff?
The bullish case for Chewy hinges on three factors: continued Autoship growth exceeding total sales, the 6.8% adjusted EBITDA margin translating into stronger operating cash flow, and its veterinary and health acquisitions adding recurring revenue without requiring persistently higher capital investment. If customer growth continues, the current valuation may be defensible.
On the other hand, the bearish case argues that margin improvements may not be repeatable, and that clinics, technology, and fulfillment expansion will continue to consume cash. Investors should monitor third-quarter working capital, capital expenditures, net debt, and the gap between adjusted EBITDA and free cash flow. The company's latest SEC filing confirms the results and its NYSE:CHWY listing, but the next cash flow statement—not another adjusted earnings beat—will determine whether the post-earnings drop was justified.
