Hello, everyone. Thank you for joining us, and welcome to the Chewy Fourth Quarter 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Natalie Nowak, Head of Investor Relations. Natalie, please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh; and CFO, Chris Deppe. Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our SEC filings including the section titled Risk Factors in our Form 10-K filed earlier today for a discussion of these risks. Reported results should not be considered an indication of future performance. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be available on our Investor Relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thank you, Natalie, and good morning, everyone. I'm thrilled to be joined today by our newly appointed CFO, Chris Deppe. Chris has been with Chewy since 2022 and brings valuable continuity and deep institutional knowledge, enabling a particularly seamless transition. He has a strong understanding of our business and the opportunities ahead for Chewy. I look forward to having many of you engage with Chris as he steps into his new role as CFO. I want to start by thanking our Chewy team members for executing a strong finish to the year. Once again, we delivered strong net sales growth, significant margin expansion and record free cash flow in 2025. As we enter 2026, we are focused on repeating this formula for success, disciplined execution, profitable growth, continued margin expansion and strong free cash flow generation, all in support of sustained long-term shareholder value. Instead of taking the traditional approach of diving straight into our results, I'd like to share my perspective on what we are seeing in the pet industry and Chewy's place in it in 2026 and beyond. So let's begin. Pet is a uniquely attractive industry, fueled by increasing pet humanization, premium product adoption and expanding lifetime value per household. Spending in this category is driven by an emotional attachment and recurring nondiscretionary needs which translates into resilient demand across economic cycles. We expect 2026 pet industry dynamics to largely mirror 2025, steady and resilient to macro trends, but without cyclical acceleration. Pet household formation appears stable with no evidence of deterioration. However, we are not underwriting a meaningful rebound in that variable. Current estimates suggest low single-digit industry growth with dog at the lower end of that range and cat at the higher end. Further, we expect industry growth to be predominantly volume driven, with little…

Thank you, Sumit, and thank you all for joining us today. Having been part of Chewy's journey for nearly 4 years, I'm excited to step into the CFO role and continue building on the strong foundation our team has established. I look forward to engaging with many of you in the quarters ahead. Let's start with a review of our financial results. As we get into the details, a reminder, fiscal year 2024 included a 53rd week and comparisons for Q4 and full year 2025 are discussed on a comparable 52-week basis where applicable. Fourth quarter net sales reached over $3.26 billion bringing our total fiscal year 2025 net sales to over $12.6 billion, delivering year-over-year net sales growth of 8.1% in Q4 and 8.3% for the full year 2025, reflecting strong execution, continued share gains in a stable category environment and consistent performance across both customer growth and spend per customer. We continue to grow active customers ending the year with 21.3 million, increasing by approximately 4% year-over-year and net additions up by more than 810,000 year-over-year in fiscal 2025. We once again saw year-over-year improvement across all elements of the active customer equation. We also continue to grow with a high-quality revenue base. Autoship customer sales reached over $2.7 billion in Q4 and $10.5 billion for the year, representing 84% of total net sales in Q4 and 83.3% for the full year 2025. Growth in Autoship customer sales outpaced overall top line growth, increasing by nearly 13% in the fourth quarter and 14% for the full year 2025 on a comparable basis, reinforcing the strength of our recurring revenue model. NSPAC reached $591 in Q4 2025, increasing by approximately 4% year-over-year on a comparable basis. Moving to profitability. We reported fourth quarter gross margin of 29.4% and full…

[Operator Instructions] Your first question comes from the line of Mark Mahaney with Evercore ISI.

Two questions, please. One on this A&M leverage going forward. Just talk about where you think that can go. The biggest drivers of that going forward? Is your such a heavily subscription Autoship type model, you think that you're showing leverage, you should be able to continue to show leverage, I would imagine, for the next couple of years, any thoughts on when we could break below 6%? And then, Sumit, could you talk a little bit about the Chewy Made strategy a little bit more, the impetus behind that? And what do you think the financial so what of that will be? Do you think that -- is that more of a kind of a -- with lower -- you mentioned some lower price points. Is that kind of more of a TAM expander? Or is it something that could just expand NSPAC per customer?

I'll take them one by one. So on the first one, yes, we expect to show A&M leverage going forward. I will refrain from commenting as to what the extent will be on an annual basis. I'll take you back to our long-range plan that we communicated or the targets that we communicated at December 2023. If you recall from that point, we're essentially running ahead of our profit targets at this point. So we've got roughly 350 basis points to go to hit the 10%, and then we start the journey of moving beyond the 10% EBITDA. If you look at the remaining left to go, we believe roughly half or a little bit less than half will come from gross margin and the rest will come from SG&A and marketing. And so we believe at our levels, spending somewhere in the 6%, 6.5% is reasonable in the near term. And then as our brand continues to build even further with the CVCs that we're putting in ground or the upper funnel connections that we're making that is giving us really good leverage, plus the way that the app, the mobile app strategy is essentially progressing. We do believe we're shifting the mix from third-party mixes to direct mixes quite effectively and that strategy should essentially continue to fuel the leverage that we're talking about. Now the second question, Chewy Made strategy. So if you -- again, I'll take you back to the high-level view of the forest first. So we believe private brands should be mid-teens level -- low to mid-teens level penetration of net sales for Chewy. At that scale, we expect private brands to be roughly 500 basis points higher gross margin than the base business. And so this essentially is a step in that direction…

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe building on Mark's question and, Sumit, some of your earlier comments on the call on AI. Can you identify some of the key areas in the cost structure of the business where you believe the application of AI can earn outsized returns in terms of efficiency gains? And then the second part of the question would be philosophically, how do you think about letting some of those efficiency gains continue to drop to the bottom line and accelerate your pathway to a higher margin framework or the philosophical balance would be reinvesting some of those back into the business to [ incent ] growth and producing a more sort of linear or managed margin progression for the business?

Eric, there's a lot in that second question. Let's start from the first one, which is a really good one. So as mentioned in the prepared remarks, we're applying AI across a number of areas in the business, right? And so I'll stay away from the future applications that we're developing that will increase search relevance and discoverability. So we'll talk about that as 2026 moves forward. What we are already deploying in the business is applications and agents that we are starting to use across customer service, across fulfillment, across pharmacy, marketing operations and general marketing areas for campaign optimization, creative optimization, so forth and so on. So if you start from customer care, I'll stay away from specific road maps and specific projects for sake of kind of competitive outlays. But you should think about these applications that allows us to essentially reduce handle times, improve on the ability for us to self-serve customers that then drives reduced contact rates, which then directly leads to lowering of costs. So an example would be earlier, roughly 8 weeks ago, we've essentially launched refunds and returns in a self-service manner and the engagement and the success rate that we are viewing in that particular launch is quite impressive. And so that becomes very encouraging for us. We also recognize that there is a cohort of customers out there that will continue to grow that are much more propense towards self-service and digitize use of platforms in the way that they demand service from platforms. And so we will extend ourselves in the use cases that we go offer to them. Internally, we're developing applications for agents that allows them to extract information and deliver coherent consistent level of service with a reduced amount of effort but also then improves the…

Your next question comes from the line of Doug Anmuth with JPMorgan.

One for Sumit and one for Chris. Sumit, you talked about Agentic as incremental demand and distribution channel. I just want to get your latest views here and how you'll implement Agentic on your own platform for customers. And I think you're more insulated just given the 84% of the revenue coming from Autoship customers. And then, Chris, can you just talk about fuel costs, some of the impact that you may be seeing in real time and how we should think about that in context of the '26 outlook?

So I agree with your thoughts. If you're selling a commodity, I think the disintermediation issue is likely one that needs paying attention. But from that point of view, we believe Chewy is quite well insulated, given our value proposition is not primarily search aggregation and because our customer relationship is not primarily built around onetime discovery. So we have continued to view ourselves and are more and more seen as a trusted recurring service-rich pet care platform. So in categories like food, pharmacy, broader health care, the customer is often not asking where to buy, they're asking for a seamless dependable experience that consistently meets their needs and that essentially plays to our strengths. So now in terms of how we think about Agentic developments, we essentially believe that these developments may over time, perhaps shape the interface of where the consumer is interacting, but it doesn't necessarily change who wins the order. And that's where our focus is, right, in making sure that Chewy remains the most trusted and convenient platform behind that transaction, whether it's through an owned experience or through future integrations, right, that we are also pursuing amongst others, and we are leading with many of these partners out there, right, that make our assortment, service and capabilities easy to access. So in that way, we see it as an opportunity. So broadly, we think the right strategy is to be present wherever pet parents choose to engage, including emerging Agentic Commerce interfaces because those platforms in our opinion can expand discovery and put Chewy in front of a much larger pool of high-intent users. And so for us, success is not just showing up. It's to make sure that behind the transaction, our assortment, service, health care capabilities and recurring relationships are durably integrated.…

And Doug, on fuel. In the near term, we're relatively well insulated. Given the scale of our Autoship business and the strength of our relationships with key partners, and so our guidance for both Q1 and the full year stands and is what we expect.

Your next question comes from the line of David Bellinger with Mizuho.

Congrats to Chris on the new seat. On the guidance, looking at revenue growth on an organic basis, it's implied about 8% growth at the midpoint and very consistent with 2025. You've got revenue guidance for Q1 a bit lighter than the full year. The organic range may be a full percentage point lower. Can you give us some additional detail on why revenue growth should pick up through the balance of the year? Is there anything unique that's hitting Q1 or something else planned throughout the year that gives you added conviction in this reacceleration?

David, I appreciate that. In Q1, we're not seeing material change in our underlying demand trends. When we look across the business, across customer engagement, retention, overall spend behavior, the trends we see remain stable and consistent with what we've seen over the past several quarters. From a quarterly perspective, Q1 is simply the lowest point to the growth profile for the year. And we move through the year, we do expect growth to build supported by continued share gains and consistent execution across the business. We have a high level of confidence there because it's really all driven by the core components of our model, which are stable and consistent, right? We're seeing strong customer adds, steady customer adds, strong retention, customers continue to engage more deeply. And third, we continue to take share in the category, which is growing at a low single-digit rate. So when you put all those together, the stable customer growth, the consistent spend expansion and our ongoing share gains, you get a model that builds in a predictable way. And so we're not relying here on any one driver for the Q2 to Q3 growth. It's really broad-based execution across the business and so that's what gives us the confidence in that ramp and delivering on our full year outlook.

Got it. And then just one follow-up on the EBITDA margin guidance, about 100 basis points of expansion. Can you help us understand the lapping of any onetime like or non-repeatable items that hit the P&L in 2025? You had the Chewy+ investments in the back half, also the Get Real launch, some front-loaded SG&A costs ahead of the tariffs. So how much of a benefit on EBITDA or EBITDA margin is assumed in 2026 as you lap these? And are there any other offsets we should consider any flexibility around further reinvestment in the business?

Yes. If you remember correctly, David, we talked about particularly in the back half of the year last year, it was a low single-digit million investment number. And so they're not material onetime impacts that we're lapping there that drive that 100 basis points. That 100 basis points really is driven by leverage in the model and improvements in the business. And so that's kind of where I would guide you there.

David, just to elaborate on that, if you recall the number, we've given a guidance of somewhere around $18 million to $20 million as what we had expected to spend. And on the Q3 call, we said we're on track to spending roughly half of that. So that was about $10 million or so. And ultimately, as Chris said, we spent kind of mid -- low to mid-single digits in revenue because we were keeping some to see if we want to invest in pricing as Q4 played through. So that -- we gave that we were keeping some to see if we wanted to accelerate the fresh demand if the demand didn't come in as per our expectations. And then the third one was we were sort of navigating Chewy+. But we were pleased with the level of efficiency that we saw there. So it's low to mid-single-digit millions. And then on the SG&A, the [ Dallas ] and the inventory impact was also $2 million to $4 million. So that's how you should size it.

Your next question comes from the line of Steve Forbes with Guggenheim.

Sumit, given the growth in net adds the last couple of years and I think your initial comments in the prepared remarks about expanding lifetime value, I was wondering if you can maybe revisit and update us on spending trends by cohort, maybe some of those newer customer cohorts? And then what type of growth are you still seeing within your most mature cohorts as we think about building conviction around NSPAC?

So both good questions. So overall, our newer cohorts, '24 and '25 are stronger than '22 and '23 cohorts. They are much more in line with our legacy cohorts. There was this kind of 3-year period where we were sort of staring at the pandemic cohorts sideways to go, really trying to interpret the quality of customers there. But we're cleanly past that. The quality of cohorts that we've been picking up is really good. Repeatable purchase rate remains high. The order rate remains high and NSPAC trending trends to the higher end of the $150 to $200 that we expect customers to spend in the first year. Now in terms of the oldest cohorts, it's less older cohorts, oldest cohorts. I think we're seeing this across a bunch of cohorts that are interfacing with our value-added services. So whether it's cohorts that are native to the app, cohorts that are native to health, particularly cohorts that are native to CVC, these cohorts are the fastest compounders of NSPAC in the company. That remains true for the fresh platform also when we get customers settled into our Get Real fresh platform, we see NSPAC compounding immediately. And so our goal is to essentially push customers more and more into these closed-loop ecosystems and accelerate their NSPAC, which we are seeing us do quite successfully. So the larger the number of customers we push into this, the faster NSPAC compounds. The oldest cohorts have continued to progress well and sound, but I felt I would give you a bit of a broader context as to why we should be excited about the durability of this in the future.

That's helpful. And then maybe just a quick follow-up regarding Chewy+ penetration. I think you commented on low single-digit penetration by year-end 2025. Any sort of initial thoughts on what the guidance implies or the expectation around penetration to end 2026, again, once to build conviction.

Yes, yes. So we like Chewy+. We are, I would say, still in a test-and-learn phase. We did achieve the low single-digit penetration that we talked about. Specifically Chewy+ exited at about 4% penetration for 2025. And the reason we're not giving you guidances for Chewy+ is because we want to retain the flexibility to ebb and flow the program to land the incrementality and the spend in the right order, right? So we like what we are seeing so far. It is compounding NSPAC in the order that we want to. The incrementality ranges that we're observing, we'd like them to be tighter, right? So we're seeing incrementality ranges in a really healthy range, but we would like to see kind of the variability around those incrementality tighten even more around the mean. And then three, there are a few metrics or KPIs that we need a little more time to accrue before we come share that with you. So one is the retentive nature of Chewy+ cohorts, right? Because Chewy+ cohorts have been developing over the last year or so, [ here in ] the quarter, each sample size is not yet wide enough or large enough for us to be able to study retentive capability independent. So what I want to be able to come say is that, hey, if we get 10% of Chewy customers into Chewy+, it should have a wide impact on our retention, which should then directly impact our NSPAC. And so that particular equation, the inputs and outputs is what we want to study a bit longer. Number two, we're also studying the impact of Chewy+ in terms of the efficiency it drives both in terms of promotion, promotional intensity as well as in terms of marketing spend or retargeting spend. And so there's enough out there for us to continue to learn. And then finally, the program value prop continues to evolve. I mean remember, today, the program has primarily product merchandise tied into it, right? And so we're sort of ebbing and flowing back and forth to go great. Like how are customers perceiving that value? Are we giving too much value? Are we extracting how much value, et cetera, et cetera. So it is natural for us particularly given how impactful this program can be to be optimistic yet prudent in our approach in the way that we progress. So we'll continue to be transparent. At the same time, we'll stay away from providing immediate targets right away.

Your next question comes from the line of Shweta Khajuria with Wolfe Research.

This is Andrew on for Shweta. I want to be click on that customer adds. So look...

Can you speak up a bit? We're having a hard time hearing you.

So I want to double-click on net customer adds. It looks like they came in above expectations in Q4. Basically, to what extent is this being driven by a broader refresh in the pet adoption cycle versus maybe your own efficiency in performance marketing? And then as we look into 2026 guidance and really the cadence, does that sort of embed a slight improvement in household formation over time? Or is it just largely based on getting wallet share through your key initiatives?

So just interpreting your question, I think you had two parts there. It's a little bit hard to hear you, so I'm going to rephrase it back to you. So I think you're asking if there is any pet household formation improvement built into our forecast. The answer is no. We said in our prepared remarks today, we're interpreting the industry as quite stable, and we're not underwriting a rebound or an acceleration in pet household formation metrics. I think that was one part of the answer. And then the second question you asked was around customer adds came in above expectations in Q4. That was primarily seasonality and primarily the go-to-market that we deploy. It was well within our forecast. So Chris, anything else to comment there?

No, I think that's right. If we missed some of the questions, you were just a bit hard to hear. Happy to follow up in the callbacks and double click.

Your next question is from Anna Andreeva with Piper Sandler.

First, to Sumit on Equine and congrats on closing the acquisition. And recognizing it's still pretty early, but how are you thinking about the growth there for this year? And are you seeing more of an incremental consumer to Chewy? And how is that behavior on the Chewy platform? And then secondly, on gross margin to Chris, can you talk a little more about the puts and takes? Should we think sponsored ads still the biggest driver for the year followed by the mix shift? And should we think gross margin expansion more levered in the first half? 1Q, I believe, will be lapping, I think, 60 basis points of one-timers from last year.

Anna, I will start with your first question, which was pertaining to the SmartEquine category, I believe, or the SmartEquine acquisition. So overall, this acquisition as we've sized it to about $80 million of top line in our forecast this year. And we like the business. It is a high-quality business of pet health nutraceuticals that essentially the category gross margins are really high. We expect to run this in the plus 35% gross margin ranges in the near future. But in 2026, what we're focused on is essentially stabilizing the business. So -- and so we don't expect a material contribution from this particular line into the P&L. In fact, we're going to ensure that we take the time to get the business to a high-quality -- I'll say this, we like the high-quality nature of the business in the category, but the business that we've picked up requires a little bit of fixing. And so 2026 is that year. We don't expect it to take any investments from us, right? But we don't expect it to be materially contributive to the P&L. So our guidance that we provided fully incorporates our excitement and the work that it will take to get this business to its future aspiration. Where do we see it in the future? We feel or we believe that we can add -- grow this to become a few hundred million dollar category at 35% to 45% gross margin. And so we're quite excited in the way that this plays in the larger health and supplement space, very much synchronous with our overall health strategy. We like the quality of the customers that are engaging with it. We really like the team that essentially has come over with it. They're passionate people, and they're happy at Chewy.

On margin expansion, we remain bullish. As we noted in the call, our long-term margin framework is unchanged. And in 2026, we're going to further expand profitability with the rate of expansion higher than 2025. We also shared we do expect the composition of EBITDA margin to shift with a larger share from operating leverage. The gross margin will continue to expand year-over-year albeit at a more moderate pace than in 2025. We will continue to see improvement from premium mix and sponsored ads. We do expect sponsored ads impact to taper a bit in 2026. But SG&A leverage further strengthens to deliver the total 100 basis points of your expansion at the midpoint of our adjusted EBITDA guidance.

And on sponsored ads, Anna, the rate of growth of sponsored ads will continue at a really healthy pace. So this is less to do with growth moderation. It is to do with the natural phenomenon that we've been talking about which is as more shifts or mixes into offsite advertisement, right, we would expect a different margin mix to essentially flow through. And so you'll see -- so that is baked into our 2026 guidance.

We have time for one more question, and this question will be coming from the line of Michael McGovern with Bank of America.

Could you just characterize kind of the industry growth backdrop in the low single-digit range relative to where you would kind of expect it on a normalized basis? And if you saw the industry backdrop improve, do you expect that your share gains would also improve and accelerate a bit?

The second part of the question is very easy. The answer is yes. We are not baking in any benefit that we get from the industry. So we're baking in a stable environment, not an accelerating environment. When the industry -- we've continued to say when the industry normalizes, we expect to also improve every metric that we are currently talking about, top line profitability and free cash flow. On the first one, industry growth backdrop in the low single-digit range versus what is normalized. We would like to see that household formation return to the 1% to 2% level. We would like to see pricing return to roughly 1.5% to 2% normalized in an industry, and we'd like to see overall growth rates get into the mid-single-digit growth rates that essentially are in the forecast for long-term growth of the pet category. That's what we consider normalized.

And can you also just double-click on your health category expectations for 2026. I think in the past, you've talked about your health category is kind of accretive to both growth and margins and close to about 30% of revenue. How is that tracking into 2026?

We continue to be bullish about our place in health, Mike. And the question is sort of really broad, so trying to sort of interpret what might be helpful. But we remain highly bullish. We run at this point a really high-quality ecosystem of products, consumer services as well as B2B services. That has now been complemented with an expanding and high-quality clinic footprint that essentially is providing us layered ecosystem benefits, both to chewy.com and is the highest compounder of NSPAC. So broadly speaking, for health, it is a high-growth, high-margin category, and we expect it to continue to contribute to Chewy for long periods of time to come.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.