Chewy (CHWY) 2026 財年第二季財報電話會議：銷售額成長 7.3%，財測指引收窄

重點總覽

• Chewy 2026 財年第 2 季淨銷售額年增 7.3% 至 33.3 億美元，落在公司指引的高標區間。若扣除 SmartPack 與 Modern Animal，有機淨銷售額則成長 5.7%。
• 調整後 EBITDA 達到 2.27 億美元，利潤率為 6.8%，優於公司指引的 6.3% 至 6.4%。管理層表示，超預期的表現基本上全部來自時間差異與一次性收益。
• 活躍客戶數成長 3.8% 至 2,170 萬戶。Autoship 銷售額成長 9.3% 至 28 億美元，占總淨銷售額的 84.6%。
• Chewy 將 2026 財年有機銷售額成長指引收窄至 5.5%–6.3%，並調升調整後 EBITDA 利潤率指引的低標，將區間調整為 6.7%–6.8%。
• 管理層未假設 2026 財年剩餘時間消費者需求會出現顯著復甦。相反地，其前景展望取決於市占率提升、客戶成長、Autoship 參與度、健康服務及營運效率的推動。
• Chewy 預計 AI 相關舉措將在 2026 財年帶來數千萬美元低段的成本節省，並在 2027 財年達到年化約 5,000 萬美元的規模。

核心財務數據

Chewy 本季以 2 億美元買回 990 萬股股票。在計入員工股權發行後，加權平均稀釋後流通股數比上一季減少 2%。

業務與營運表現

儘管寵物市場面臨壓力，Chewy 仍持續擴大市占率。管理層表示，公司的表現大約比整體產業類別優異兩到三倍。

消耗品以中個位數的速率成長，而整體市場則大致持平。核心主糧與藥品支出保持相對穩定，但由於消費者減少非必要支出，零食與配糧面臨較大壓力。在商品組合與零售營銷改進的支撐下，硬用品實現了 15% 左右的成長。

Chewy Health 仍是主要的成長引擎。Chewy Vet Care 的診所業務營收錄得三位數成長，而 Modern Animal 的表現則超出管理層最初的預期。寵物健康與特用產品也實現了強勁的有機成長。

鮮食與冷凍產品實現了三位數的銷量成長。公司的藥局與特殊寵物業務連續第 7 個季度錄得中雙位數的年增成長。

贊助廣告透過更高的曝光量與整體穩定的定價，持續對毛利率提供支撐。管理層還提到，向高毛利的健康類別轉移帶來了有利的結構變化。

Chewy 正將 AI 導入客服、藥局與獸醫護理等領域。其面向客戶的 AI 助手正透過自助服務處理約 30% 的對話，涵蓋訂單追蹤、退貨、Autoship 與帳戶管理等常見需求。目前公司有超過 50% 的貨量是透過自動化設施處理。

管理層財務指引

管理層收窄了有機成長區間，主因是營運趨勢趨於穩定，且先前指引中設定的更嚴峻下行情境出現的可能性降低。SmartPack 和 Modern Animal 的貢獻也高於先前預期。

銷售展望的中位數假設消費者環境不會出現實質改善。高標則需要更好的市場環境、更強的公司執行力或兩者兼備，而低標則假設環境再度惡化。

就 2026 財年而言，Chewy 還預計加權平均稀釋後股份數約為 4.1 億股、淨利息費用為 1,000 萬至 1,500 萬美元、資本支出占淨銷售額的 1.5%–2%，以及有效稅率為 24%–26%。

風險與關注焦點

• 消費者壓力繼續影響非必要購買與高端化趨勢，特別是在零食、配糧及部分硬用品方面。
• 管理層預計價格調漲對營收的貢獻有限，且未假設 2026 財年剩餘時間內整體寵物市場會出現復甦。
• 第 2 季超預期的表現中，約有 1,000 萬美元來自時間性效益（包括關稅退款與回扣），另有超過 500 萬美元來自一次性項目。這些收益並不代表基礎的利潤率常態走勢。
• 預計第 3 季毛利率將比上一季下滑，不過管理層預估第 3 季與第 4 季皆能實現溫和的年增擴張。
• 預計燃油成本將在今年剩餘時間內造成數百萬美元中段的逆風。
• 預計 Modern Animal 仍將對調整後 EBITDA 利潤率造成輕微拖累。
• AI 帶來的成本節省可能會用於抵消薪資通膨與其他成本壓力，或重新投資於成長，而非全數反映在最終淨利上。

法說會分析師問答亮點

管理層表示，消耗品內部的壓力主要集中在零食與配糧等較具選擇性的產品上。客戶仍將核心主糧、藥品與健康導向的營養補充品放在首位。

Modern Animal 在被收購時約有 10 萬名客戶，Chewy 先前估算其中 40%–50% 可能是其生態系統的新客戶。這些潛在的新增客戶目前未包含在公司的預測中。管理層預期轉化為 Autoship 的情況良好，但表示第 3 季的首要任務仍是業務整合。

Chewy 計劃推出重新設計的 Chewy Plus 計畫，提供更廣泛的健康權益，旨在提高跨類別的互動與參與度。公司還預計下半年的廣告與行銷活動會增加，且偏重於第 3 季。

管理層對 AI 驅動的生產力提升表達了高度信心，但警告投資人不要機械地將預期的成本節省直接加到 2026 財年的利潤率軌跡中。Chewy 繼續以長期調整後 EBITDA 利潤率高於 10% 為目標，並以自動化、AI 和降低變動成本作為核心驅動力。

法說會逐字稿全文

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完整財報電話會議逐字稿

管理層陳述

Operator

Hello, everyone. Thank you for joining us, and welcome to the Chewy Second Quarter earnings call. [Operator Instructions]

I will now hand the conference over to Lee Horowitz, Head of Investor Relations and Strategic Finance. Lee, please go ahead.

Lee Horowitz

Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2026. 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, the presentation summarizing our results is also available on our website at investor.cree.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 most recent Form 10-K for a discussion of these risks. Reported results should not be considered an indication of future performance. 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. During this call, we will discuss certain non-GAAP financial measures. Reconciliation 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 for fiscal year 2025. And finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will be available on our Investor Relations website shortly.

And with that, I'd like to turn the call over to Sumit.

Sumit Singh

Thank you, Lee, and good morning, everyone. Chewy delivered strong results in the second quarter, continuing to gain share and expand profitability. Our performance underscores the strength of our business model and disciplined execution. Our recurring revenue base supports durable sales, while our expanding ecosystem and the growing contribution from Chewy Health drives structural wallet share gains. Together, these advantages position us to outperform in the current environment. Our earnings algorithm also provides the capacity to continue investing for long-term growth.

During the second quarter, while we did not see a meaningful recovery in the more pressured consumer backdrop for the pet market, importantly, however, we did not see further deterioration. The environment has broadly stabilized to the trends we observed exiting the first quarter. And against this backdrop, Chewy continues to outperform the broader pet category by roughly 2 to 3x and we continue to generate compelling growth across both scaled areas of our business and newer strategic growth platforms.

Chewy Vet Care continues to scale in line with the economic framework we outlined at our recent investor event with our total clinic portfolio, again delivering triple-digit revenue growth in the second quarter. Meanwhile, our fresh and frozen portfolio is meaningfully outpacing the broader category, delivering triple-digit unit growth. And our in Pharma and Exotic business delivered its seventh consecutive quarter of mid-double-digit year-over-year sales growth.

Taken together, this momentum demonstrates the breadth of growth opportunities across the CE ecosystem and our ability to capitalize on them without relying solely on a recovery in the broader pet market. We delivered Q2 total Enterprise net sales at the high end of our guidance range of $3.33 billion, representing 7.3% year-over-year growth. Excluding the impact of SmartPack and modern animal, Q2 organic net sales increased 5.7% year-over-year, driven by active customer growth, NSPAC expansion and ongoing market share gains.

We ended the quarter with 21.7 million active customers, up 3.8% year-over-year, while net sales per active customer increased to $602. Autoship customer sales once again outpaced overall company growth, increasing 9.3% and representing 84.6% of total net sales in the quarter, further reinforcing the predictability, durability and recurring nature of our revenue base.

Importantly, our customer funnel remains healthy. We continue to add customers, improve retention, reactivate lapsed customers and deepen engagement across the Chewy ecosystem. These dynamics support our ability to continue gaining share within the pet industry.

Now turning to profitability. Q2 adjusted EBITDA margin reached 6.8%. While the upside relative to our expectation was largely driven by timing and discrete benefits, the underlying business continued to deliver substantial year-over-year margin expansion. Our sponsored ads portfolio continues to scale through robust impressions growth, while generally stable pricing despite rapidly expanding supply reflects a healthy underlying auction ecosystem.

Our retail product mix continues to shift towards high-margin categories, such as health and we continue to lower our variable cost to serve through automation, scale, operating discipline and increasingly AI-enabled productivity. Importantly, our strengthening earnings profile also gives us the flexibility to reinvest in the business. Where we see opportunities with compelling returns, we will continue to deploy capital behind initiatives that can accelerate growth while maintaining the operating discipline that has driven our margin expansion up until this point.

Turning to Chewy Health. We remain highly encouraged by the progress across our health ecosystem. Chewy Vet care continues to demonstrate strong customer satisfaction, attractive veterinarian productivity and retention, compelling 4-wall economics and importantly, the ability to drive incremental engagement across the broader ecosystem. We are also making strong progress integrating modern animal, which performed ahead of our expectations in the quarter. These early results reinforce our conviction in the strategic combination of modern animal and Chewy Vet Care.

Together, the 2 businesses provide greater scale, complementary capabilities, attractive unit economics and differentiated telehealth offerings. Collectively, these trends create a powerful foundation from which to expand our veterinary platform, improve access to care and connect more customers with the broader Chewy Health ecosystem, providing meaningful runway for future growth.

Furthermore, while 2026 is intended to be a foundational year for SmartPack as we strengthen the businesses core operating drivers and position it for durable growth, our early progress has been encouraging. SmartPack performed ahead of our expectations, reinforcing our conviction in the opportunity ahead. The early performance of both businesses reinforces our confidence in our ability to use Chewy scale and capabilities to improve acquired assets and generate compelling returns as we expand the power of the Chewy platform.

Now turning to Ai. Our AI strategy continues to progress from capability development towards scaled deployment and measurable financial impact. In Q2, we made strong progress deploying AI across 3 areas, improving the customer experience, increasing team member productivity and structurally lowering our cost to serve.

On the customer side, we recently launched Kai our AI-powered assistant to a select group of customers in the mobile app. Early results are encouraging with approximately 30% of chats resolved through self-service across common needs such as orders, returns, auto ship and account management. To keep true to our Chewy spirit, customers who prefer or require human support are seamlessly connected to a care team member within seconds. At the same time, we are deploying AI-enabled tools across customer care, pharmacy and Chewy Vet Care to reduce manual work and improve productivity.

In Customer care, we launched agent-facing AI capabilities, which are helping transform customer signals into intelligent insights, reducing burden on agents and increasing team member productivity. In Pharmacy, AI is helping automate data extraction and validation while improving review consistency. In Vet Care, at select Chewy Vet Care locations, we launched our AI-powered capability called Cali, which is supporting appointment confirmations, scheduling and routine follow-ups while reflecting Chewy's brand voice and customers first tone.

These initiatives are beginning to translate into tangible financial benefits. We continue to expect AI-related initiatives to generate low tens of millions of dollars of cost savings in fiscal 2026 and scaling to approximately $50 million on an annualized basis in fiscal 2027. Importantly, we view these benefits as another durable lever within our earnings model. As these capabilities scale, they should help us improve productivity, lower our variable cost to serve and create additional flexibility to reinvest behind attractive growth opportunities.

Before I turn the call over to Chris, let me briefly address our outlook. Three months ago, we reset our expectations to reflect a more cautious consumer environment. Since then, the trends underlying that outlook have broadly stabilized. We are not assuming a meaningful consumer recovery for the balance of this fiscal year. Instead, our confidence remains grounded in what we can control: gaining share, growing and retaining customers, scaling health and driving structural efficiencies across the business.

At the same time, Modern animal and SmartPack are collectively contributing above the levels contemplated within our prior outlook, and our profitability performance continues to demonstrate the structural improvements underlying our earnings algorithm. Chewy remains well positioned to gain share profitability, grow earnings and free cash flow and build the capabilities that will drive long-term shareholder value.

With that, I will turn it over to Chris.

Chris Deppe

Thank you, Sumit, and thank you all for joining us today. Q2 performance demonstrates the strength and consistency of Chewy's execution across the business, with total enterprise net sales at the high end of our guidance range and adjusted EBITDA margin exceeding our expectations. Let me start with our financial and customer performance. Second quarter net sales reached $3.33 billion, representing 7.3% year-over-year growth. Excluding SmartPack and Modern Animal, organic net sales increased 5.7% year-over-year, consistent with the midpoint of our prior expectations. Both acquired businesses performed ahead of the assumptions embedded in the prior outlook, which I will address in more detail when I discuss our updated guidance.

Organic growth in the quarter was supported by continued active customer growth, higher NSPAC and ongoing market share gains. We ended the quarter with 21.7 million active customers, representing 3.8% year-over-year growth and 208,000 sequential net additions. This included 43,000 unique customers who have transacted with SmartPack since the acquisition and are now reflected in our active customer count.

Autoship customer sales reached $2.8 billion, increasing 9.3% year-over-year and representing 84.6% of total net sales. Autoship continues to grow faster than the overall business reinforcing the durability, predictability and recurring nature of Chewy's revenue base. NSPAC reached $602. On a reported basis, NSPAC increased 1.9% year-over-year, and on a normalized basis, accounting for the extra week in the prior year comparable period, NSPAC increased 3.8%. NSPAC growth continues to benefit from customer cohort maturation, increasing engagement across health and pharmacy and broader cross-category adoption.

These drivers were partially offset by continued pressure on discretionary attachment and premiumization. Pressure on premiumization and discretionary spending materialized broadly in line with our expectations during the quarter. affecting both the consumables and hard goods categories. As we discussed last quarter, purchasing behavior within consumables is influenced by both premiumization and discretionary attachment. In the second quarter, treat sales slowed more sharply than growth in core food, reflecting moderation in discretionary purchases and the broader macroeconomic pressures we have been describing.

Importantly, Chewy continues to gain meaningful share across categories. Industry data suggests that the broader consumables market is broadly flat year-over-year, making Chewy's mid-single-digit growth, a healthy level of outperformance. Similarly, our mid-teens hard goods growth substantially outpaced the broader market, reflecting the benefits of the assortment and merchandising improvements we have made over the past year despite continued pressure on discretionary spending. .

Finally, Pet Health and Specialty Products delivered strong organic growth, underscoring the momentum across our expanding suite of health-related offerings for pet parents.

Turning to profitability. Adjusted EBITDA reached $227 million in the quarter, representing a 6.8% adjusted EBITDA margin above our guidance of 6.3% to 6.4%. Second quarter gross margin was 30.4%, flat year-over-year and up 30 basis points sequentially. As a reminder, the year-over-year comparison was against certain nonrecurring MAP-related pricing and other benefits realized in the second quarter of fiscal 2025.

Gross margin exceeded expectations, supported by continued growth in sponsored ads and disciplined promotional activity. However, approximately $10 million of the upside reflected timing-related benefits, primarily tariff refunds that were received earlier than anticipated as well as certain rebate benefits that shifted in the second half into the second quarter. The quarter also included more than $5 million of discrete benefits related to gift card breakage, inventory adjustments and certain vendor-funded merchandising activity. While these items benefited second quarter results, they are not indicative of our underlying margin run rate.

Taken together, these timing-related and discrete items accounted for essentially all of the adjusted EBITDA outperformance relative to expectations. Even excluding these benefits, adjusted EBITDA margin expansion remained very healthy and gross margin expanded year-over-year after normalizing for nonrecurring items in both periods. As these timing benefits normalize, we expect gross margin to decline modestly on a sequential basis in Q3. We broadly consistent with the seasonality we experienced last year.

As a reminder, we continue to expect fuel to represent a mid-single-digit million dollar headwind through the balance of the year. Even with these factors and normal second half seasonality, we continue to expect full year gross margin expansion, although at a more moderate pace than we delivered in fiscal 2025. Please note that my discussion of SG&A excludes share-based compensation expense and related taxes as well as transaction and integration-related costs.

Second quarter non-GAAP SG&A was $612 million or 18.4% of net sales compared with 19.1% in the prior year period. We delivered 70 basis points of year-over-year SG&A leverage reflecting improved fulfillment center utilization, lower variable cost to serve, disciplined headcount management and continued productivity gains across the organization. Lower variable cost to serve remains the largest contributor to SG&A leverage. As our automated facilities continue to scale and utilization improves, we are leveraging the fixed cost infrastructure embedded within the network while also reducing variable costs through automation, process improvements and AI-enabled tools. We continue to expect SG&A leverage in the second half to remain broadly consistent with what we delivered during the first half.

Advertising and marketing expense was $215 million or 6.5% of net sales, essentially flat year-over-year as a percentage of sales. We continue to allocate spend towards channels and customer cohorts where we see attractive acquisition economics and long-term value, supporting healthy active customer growth while maintaining disciplined returns. Looking ahead, we expect to increase advertising and marketing activity in the second half relative to Q2, with spending more heavily weighted towards Q3 than Q4. This cadence reflects attractive opportunities we are seeing to invest and brand awareness ahead of the holiday season, which we expect to support customer engagement during peak and beyond.

Q2 adjusted net income was $149 million, translating into adjusted diluted earnings per share of $0.36. As discussed, the majority of the upside relative to our guidance reflected timing and other nonrecurring gross margin benefits. At the same time, the underlying margin performance continued to benefit from the structural SG&A leverage and operating efficiencies I described earlier. Modern animal was included in these results and as expected, represented a modest drag to adjusted EBITDA margin in the quarter.

Let me close the discussion of second quarter results with cash flow and capital allocation. Free cash flow for the quarter was $90 million compared with $106 million in the prior year period. This reflected $137 million of net cash provided by operating activities and $48 million of capital expenditures. Note that while free cash flow was down year-over-year, this was entirely timing related, and we continue to expect full year free cash flow through of roughly 80%. We ended the quarter with $612 million of cash, cash equivalents and marketable securities and over $1 billion of total available liquidity.

During the quarter, we completed the acquisition of Modern Animal for $400 million, raised $600 million through our inaugural term loan issuance and deployed $200 million towards share repurchases. We repurchased 9.9 million shares during the quarter. After accounting for shares issued in the Chewy employee equity programs, these repurchases resulted in a 2% sequential reduction in weighted average diluted shares outstanding this quarter. Chewy's capital allocation framework remains unchanged. We will continue to invest behind strategic priorities where we see attractive returns, maintain a conservative and flexible balance sheet and return excess capital to shareholders. Within that framework, we continue to believe that Chewy's shares are undervalued at current levels. Repurchases, therefore, remain an attractive use of capital, and we expect to remain opportunistic in our activity.

Based on our performance through the first half and the increased visibility we now have, let me move to the outlook for the balance of the year. As I discussed, while we continue to see modest pressure on discretionary attachment and premiumization, in line with what we discussed last quarter, importantly, trends have not deteriorated further relative to the assumptions embedded in our prior outlook. This increased visibility into the operating environment, combined with the consistency of Chewy's market share gains, gives us confidence to narrow the full year organic net sales growth range.

In our view, the downside scenario underpinning the prior low end of guidance, which assumed a more meaningful weakening of the end market has become less likely. Additionally, SmartPack and Modern Animal are performing ahead of initial expectations as we progress with the integration, leading us to raise our forecast for their contributions. For fiscal year 2026, we now expect total net sales of $13.46 billion to $13.57 billion, representing a year-over-year growth of 6.8% to 7.7% including organic net sales growth of 5.5% to 6.3%. The performance of our core business in the quarter supports our continued expectation to deliver near the midpoint of the updated sales guidance.

Importantly, the midpoint does not assume any meaningful improvement in the consumer environment, but consistency at the levels we have seen for the last several months. Consistent with the prior outlook, the high end of the range contemplates either an improvement in the market backdrop, stronger execution against our plan or a combination of both. Conversely, the low end assumes some renewed deterioration in the operating environment, although less pronounced in the downsize scenario embedded in the prior guidance.

Now turning to profitability guidance. As mentioned previously, while we delivered strong underlying performance in the second quarter, essentially all of the upside relative to expectations reflect the timing related and discrete items. That said, reflecting the strength of our underlying performance year-to-date, including the continued scaling of AI initiatives, we are raising the low end of full year fiscal 2026 adjusted EBITDA margin guidance by 10 basis points and narrowing the range to 6.7% to 6.8% from 6.6% to 6.8%. This outlook reflects our continued confidence in the underlying earnings profile of the business and our ability to deliver substantial year-over-year margin expansion.

At the midpoint, this implies over 100 basis points of year-over-year adjusted EBITDA margin expansion and $912 million of adjusted EBITDA for fiscal 2026. Consistent with our comments last quarter, this guidance includes a modest margin rate drag for Modern Animal. For the third quarter of fiscal 2026, we expect net sales of $3.323 billion to $3.358 billion, representing reported year-over-year growth of 6.6% to 7.7% and organic net sales growth of 5.3% to 6.2%. This outlook reflects the same operating assumptions embedded in the full year guidance I just described.

For the third quarter, we expect adjusted EBITDA margin of 6.6% to 6.7%, representing roughly 85 basis points of year-over-year expansion at the midpoint. We also expect adjusted diluted earnings per share of around $0.39. Finally, for the full year, we now expect share-based compensation expense, including related taxes, to remain broadly flat to last year, weighted average diluted shares outstanding of approximately 410 million shares, net interest expense of $10 million to $15 million; capital expenditures of 1.5% to 2% of net sales and an effective tax rate of 24% to 26%.

In closing, Chewy's Q2 results reinforce our confidence in the underlying health and earnings power of the business. We continue to gain share, grow our recurring customer base and expand profitability through structural improvements across the organization. Our updated outlook reflects increased visibility into the balance of the year and continued confidence in our ability to deliver profitable growth.

With that, I will turn the call back over to Sumit for closing remarks.

Sumit Singh

Thank you, Chris. To close, the key takeaway from the quarter is that Chewy continues to grow customers, gain share and expand earnings even in a pet market that remains under pressure. We are growing both sides of the customer equation, the number of customers we serve and the amount that they spend with Chewy, while Autoship continues to reinforce the recurring and durable nature of our revenue base. At the same time, our earnings profile continues to strengthen. We are driving greater efficiency across the business, scaling higher-margin growth areas such as health and sponsored ads and beginning to realize tangible productivity benefits from AI and automation. .

We are particularly encouraged by the progress across Chewy Health, including the early performance of Modern Animal and the continued scaling of Chewy Vet Care. As these businesses grow, we believe they can deepen customer engagement expand wallet share and become an increasingly meaningful contributor to Chewy's long-term growth and earnings power. Importantly, our outlook does not depend on a meaningful recovery in the broader pet category. We remain focused on the things we can control, serving customers exceptionally well. gaining share, scaling our strategic growth platforms and continuing to improve the efficiency of the business.

Taken together, we believe these capabilities position Chewy to compound earnings and free cash flow over time while continuing to invest behind attractive growth opportunities and create durable long-term shareholder value. Thank you to every Chewy team member for their continued dedication and to our customers for their trust.

Operator, we are now ready to take your questions.

Operator

[Operator Instructions] Your first question comes from the line of Steven Forbes with Guggenheim.

分析師問答

Steven Forbes

Sumit, you mentioned the sort of the moderation in treat sales during the quarter, I guess, at a more accelerated pace than consumables. Is there a way to frame up for the group here on sort of what percentage of consumables is treats or what you would consider to be more discretionary, and then any particular pockets within treats that are more notable in terms of what you're seeing from a consumer behavioral standpoint?

Sumit Singh

Thanks, Steve. I'll stay away from precisely defining the penetration of trades within the business, but candidly, what you're hearing is essentially discretionary doesn't just mean supplies. And I think that's the matter point. that currently consumers are continuing to spend pretty -- at a pretty normal level on their core food, meds and the engagement through Autoship remains very strong and healthy with Chewy.

And from a discretionary part of consumables, it's the treats and the toppers. If you look at an average consumer, an average consumer with experiment with over 10 types of treates across a variety of treat categories might be soft, might be hard, might be choose, might be jerky, dental, premium, rehydrated, raw, freeze-dried and these all come at different price points and different consumption patterns relative to the households that we serve.

Some go on Autoship, some don't go on Autoship, some go on Autoship and come off. So there is a dynamic behavior that customers follow as it comes to what we consider the discretionary part of consumables, which is if you're allocating a budget from a household perspective, you prioritize core food, you prioritize meds, you prioritize categories like supplements, which are health and wellness oriented and then everything else falls a little bit more towards the discretionary side. right?

And so within that, what I would also then categorize perhaps to answer the next type of question is like we interpret the relative growth rates as consumers prioritizing discretionary hard goods over essential consumables, right? And so the 2 businesses are being influenced by different underlying factors. Consumables remains our largest and most mature category and Autoship fuels it with large penetration towards dog and a very healthy penetration towards cat.

Hard goods is a bit of a different story, and that's more of the work that we've done to bring to the category and drive the category towards double-digit growth over the last couple of years that we've been candid in talking about, right? So the growth primarily reflects improved execution and outsized share capture given that we've materially expanded the breadth and relevance of our assortment that has improved our ability to serve customer needs and capture demand in that category.

So there's a lot going on under the categories here, but I think the main takeaway is there are certain types of these merged classes that are a bit more -- consumers are viewing them as a bit more discretionary and for everything that is based in core business plus the newer parts of the businesses that might be fresh food, that might be, which is actually a growing TAM might be our health-related categories or in the large and strong equine business that we're building, very healthy growth rates there.

Steven Forbes

Helpful. And then just a quick follow-up. I don't know if it's possible for you to frame up how you expect the Modern Animal acquisition to impact net adds during the 3Q, given the SmartPack impact during the second quarter, and then any early comments on how the conversion of those customers to the Chewy Autoship platform is trending? I don't know whether in absolute or just relative to expectations?

Sumit Singh

Yes, both good questions. So we haven't yet sized the -- so we've sized the impact to net adds. I think we gave you a preview when we bought the asset, and we said they have roughly 100,000 customers, and we expect roughly 40% of that or in the 40% to 50% range to be net new to Chewy. We're continuing the integration. So once we are ready to sort of disclose that, we will build that in presently, when we are giving you forecasting, it is not including the Modern Animal net adds. So you should view our guidance as organic growth in the business. And when we do disclose it, we will come back and share the specifics just like we did with SmartPack this time.

In terms of conversion of customers to Autoship, we expect that to be super healthy. We're in the process of integration. The acquisition closed a couple of months ago. So our focus in the back half of the year, particularly Q3 is on integration. Trends are the initial inputs that we had forecasted are performing better than our initial forecast, which is why the commentary on the strengthening part of the business that you heard on the call, but we expect Autoship platform trending to be high. There is no reason to believe that this would not translate much like a Chewy customer or normal Chewy base does.

Operator

Your next question comes from the line of Nathan Feather with Morgan Stanley.

Nathaniel Feather

Given some of the pressure you've seen in organic growth from the weaker macro, I guess, how are you thinking about balancing margin expansion with potentially the ability to lean in a little bit more to reaccelerate growth. And you noted in the script that you have flexibility to reinvest in the business. Can you touch on the key areas you believe you can lean deeper in here.

Sumit Singh

Yes. I think it's a prudent question at this time. I'll keep my remarks -- I'll elaborate on this. And so just expect me to share my thinking a bit out loud. So I think you should think about it 2 ways. One, the question is sort of like, hey, how much would you consider investing to accelerate revenue growth? And then the second part is, I guess, what levers do we have available to accelerate sales growth, right? And so investment is not always a part of our consideration and planning at Chewy when we are planning for sales growth. We believe we have credible levers in front of us where we can self-fund/drive growth at very healthy ROIs.

So those -- if I take you down the list on the top of my mind, a, we remain enthusiastic about Chewy Plus and we expect to introduce a refreshed program design very shortly into the market. You heard me talk about aligning and arriving at a strong product market fit. And we believe that the redesigned offering will strengthen consumer value proposition and deliver that compelling product market fit that I've been talking about for the last one quarter or so.

Number two, we continue to identify attractive opportunities to deploy marketing dollars and bring more customers into the Chewy funnel, right? And so when you look at our performance in Q2, right, primarily a few weeks of effort where we pushed a deliberate investment decision rather than accept a deterioration in marketing efficiency. So for Q2, we leaned in a bit and we did not tolerate any deterioration in marketing efficiency and our targeting conversion CRM and app capabilities are the areas that we essentially lean then on and that continued to improve -- they continue to improve, those capabilities and they're supported more efficient acquisition of high-quality customers for us in Q2, which we expect to repeat going into Q3.

You also heard on the earnings call that we said we expect to lean in a bit and invest in brand building that we believe is a prudent investment in front of the holidays, but it also sets up importantly, 2027 in a very strong way. This is a playbook that we're borrowing from the end of 2024 in the way that we entered 2025 and we're taking some learnings from that playbook and deploying it in the back half of 2026.

And then lastly, I would say, we're also moving with urgency to bring some unique products and experiences designed to deepen engagement, increase attachment across additional categories and compound NSPAC to market in the back half of this year. right? So you should expect us to have some incremental conversations with you about some net new launches as we play through Q3, right?

So that's how you should think about the levers that we have and the mind share on where we're putting that mind share to drive accelerated growth. In terms of investment levels, we've not yet determined the appropriate levels of reinvestment for 2027 as that work remains part of our '27 planning process, right? And you can expect that any decision will be grounded in attractive long-term returns and calibrated against our broader earnings and margin objectives, right?

But I will leave you with this thought. Look at fiscal '25 and '26 out -- '25 results and '26 outlook. Incremental margins reflect several moving pieces, right? They have structured -- we have structural margin drivers that we've articulated for some time, and we continue to deliver across those as expected. We have the costs associated with bringing new fulfillment capacity online, balanced with ongoing efficiencies across the organization, including our contribution from AI initiatives.

So we've got a really healthy playbook that we can deploy against while keeping highly disciplined and trying to self-fund a bunch of our investments leaving ourselves the room and the capability to drive accelerated growth without taking away from the algorithm that we've shared with you.

Nathaniel Feather

Great. That was really helpful. Just 1 small follow-up there. On the Chewy Plus redesign, I guess, how take through what the learnings have been from that program to date and where you feel you can drive some income improvements to increase adoption?

Sumit Singh

Yes. So we really like the program so far. It's helped us drive -- it helped us learn the boundaries of sales, customer penetration and profitability guardrails, which were important to learn. At one level beneath that, it's helped us understand specific cohort interaction, cohort behavior, maturity curves of cohorts given that we played the program through for roughly 5 quarters now. And that's, in our opinion, a good amount of learning. And what we found was, through the voice of the customer, the customers have loved the same sort of Chewy forward customer-centric principles that we've leaned in with trying to maximize the value that they extract from the platform, the convenience that they have, the loyalty features that we bring forward.

At the same time, we heard that while customers really appreciate the components that we've brought forward, they would appreciate it even more if we connected the broad offerings that make Chewy the ecosystem of choice to bring those offerings to them, right? And so I'm hinting towards the program design evolving to include a multitude of health benefits that then drive the customer to interact across a variety of our businesses in new and existing and therefore, deepen their engagement.

So if I were to design a marketing tagline and I'm not a marketing copywriter, I'd say, meet the new Chewy Plus, cheaper, better, more care integrated, right? And that's a terrible copy, but that's why I'm not a marketing copy writer. But you should expect us to listen to customers and go out and really position the program to gain scale and drive the attachment and the incrementality in sales stronger than what we are seeing today. So we're excited without really disturbing the margin kind of contribution profile of that particular program. So that's how we're thinking about it. More to come in Q3.

Operator

Your next question comes from the line of Dylan Carden with William Blair.

Dylan Carden

Appreciate it. Curious if you can help us understand sort of the pet industry stabilization commentary as it relates to pricing units at household formation. And particularly sort of how you're envisioning pricing to trend in your guide into the back half?

Sumit Singh

Sure. I can take the first part. Chris will take the second part. There's a lot here in what's going on within the pet industry. I would say broadly when we entered Q1, we started noticing some signs. You'd heard me comment at some of the conferences around hey, the industry, we're not essentially baking in a rebound coming into '26, but we were expecting that rebound in '25. The stability that we were expecting coming into Q1 started deteriorating a bit in the April -- late March, April time frame, which is what you heard us comment on our Q1 earnings call, and we reset our guidance at that particular point, right?

So we said, hey, we're not essentially baking in a rebound of sales growth at this particular point. We don't expect pricing inputs to materially change. What that means is we don't expect pricing to be a benefit -- net benefit in '26, but we also don't expect the promotionality environment to be irrational, which is, by the way, what we are continuing to see for the most part. There are sort of peaks and valleys in some promo -- in some months, but for the most part, the environment is relatively stable.

And then underneath of that, we'd said to you that, hey, dog seems to be worsening, cat seems to be strengthening. So for the most part, those inputs that I talked about have continued as we've played through Q2. Importantly, however, the inputs of traffic, right, have stable/strengthened towards Chewy and online continues to pull share from the overall industry. And so the secular tailwind plus the value prop that we're bringing to the table allows us to continue to aggregate share, albeit in the slightly more pressured consumer industry, right, in the consumer pet -- consumables pet world.

So that's kind of how we're projecting. So you heard in our comments, stable. We're not baking in a rebound. We believe we have the ability to continue to drive and outperform the market in the back half, and then you just heard me take you through a series of levers and a broad thinking on the fact that we are not sitting idle as we move into 2026, regardless of what the macro does. Chris?

Chris Deppe

Yes. Just to reiterate the thing about how we set guidance. We updated our outlook, and it does not assume any recovery as Sumit noted, or any improvement in consumer behavior the trends we've seen have been broadly consistent with what we saw exiting Q1, and we view that moving forward. Within that backdrop, our outlook reflects continued execution against the drivers that we can control, which is active customer growth, retention and reactivation, Autoship engagement, cross-category adoption, health care growth, market share gains. And so we expect to grow meaningfully ahead of the category without needing that external recovery.

We do believe we have a greater visibility into the range of outcomes. The stability and trends allowed us to remove the more severe downside scenario that we contemplated last quarter, allowing us to narrow that organic growth range. For us, the high end would require either some better market backdrop, stronger execution against our initiatives or some combination of those 2 and the low end reflects a bit more pressure consumer than we're seeing today, but not as bad as what we expected in the prior original outlook that we gave you last quarter.

From a pricing standpoint, just to reiterate what Sumit said, we are operating in a very low price environment, and we're not seeing any benefit there, which we have factored into our guidance. As Sumit noted, we're not seeing deflation in the category, just not meaningful pricing contribution to sales growth.

Dylan Carden

Excellent. And as a follow-up, Sumit, you've been very helpful in kind of thinking to the agent side of all of this. Any update on sort of AI chat product discovery and now that you've got perhaps half a year in from when this really kind of started taking off, how your platform is integrated with that? Is it headwind as the business become more reliant on Autoship. Anything kind of update there would be helpful.

Sumit Singh

It's -- we think of it as a net hit, and Dylan, as -- and I've continued to maintain that point of view, including writing about it pretty publicly a few months ago. On agentic surfaces, we continue to lead with product innovation. We're following those metrics closely, and we're pleased with Chewy's position in terms of search aggregation and search demand traffic driving towards Chewy. Secondly, on our surfaces and evolving consumer behavior in terms of product discovery, it's one of the unique products that I mentioned on my remarks a bit earlier when responding to Nathan in terms of the unique products that we're bringing to life that is very much on the back of our minds to offer customers a net new way of interacting with Chewy and deepening their engagement. So I won't give the details over here. But broadly speaking, we will continue to innovate behind this new technology and utilize it to improve experience and drive deeper customer engagement while making sure that as the aggregation shifts upwards to agentic surfaces, Chewy is positioned to lead and capture an outsized portion of that demand.

Operator

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

Douglas Anmuth

Sumit, I just wanted to go back to some of your margin and cost-related comments. I guess, first, just what kind of confidence do you have just around the AI-driven efficiencies that you talked about, the low tens of millions, I think, in fiscal '26 then with $50 million plus in '27. And then perhaps more importantly, even how do you think about the headroom in lowering cost to serve going forward just on a multiyear basis?

Sumit Singh

Yes. So high confidence. Let's start with answers first. High confidence in our AI-driven efficiency, both the framework as well as the results that we are seeing flow through into the P&L. We expect -- and we're just getting started. The update that I provided this morning on our customer-facing AI assistant named CAI. We are still less than 10% or 15% of our traffic is exposed to that. And it's been in the market less than a month. but we accelerated that deployment from Q3 to Q2. When we lowered the sales guidance -- as you recall, we had to have enough confidence in our own ability to essentially absorb all of that profit impact and overdrive to profitability in the back half and some part of that is us pulling in the initiatives that were slated to launch in the back half especially those where we had high confidence.

And so this is one of them where we're seeing a very high customer take rate. And now it's about scaling our capability to open up the coverage radius to both customers as well as use cases. Other examples that I provided to you around building customer-facing -- internal team member facing agents, whether that's deployed in the pharmacy fulfillment space, which is allowing us to lower our cost to serve in pharmacy, which is durable. And so we don't expect these to essentially -- these are structurally lowering the fulfillment costs that it takes us to essentially pick, pack and ship and order to you. And so that's very durable.

Same thing in customer service. Our agents interact with a multitude of softwares and spend time in looking for answers and building that coherence, particularly for agents that are net new in a way that we help them ramp up and therefore not suffer the productivity dilution. The internal tools that we're launching are rapidly allowing us to essentially level those net new agents and their performance much closer to our experienced agents and therefore embed that productivity and lower the cost to serve structurally.

So hopefully, that kind of gives you a sense for why we don't just believe that these are in experiment mode. We believe these can be embedded. And as the scale, right, it sort of compounds the earnings that you've heard us say, to the -- or educate you on the range of $50 million.

Now I do want to clarify one thing, right? As investors look to '27, it would not be appropriate to mechanically layer the growing contribution on AI or from AI on top of our fiscal '26 margin trajectory, right? We view AI as an increasingly important component of our broader productivity agenda. and it gives us greater confidence in our ability to deliver against those financial objectives. However, these efficiencies will also help offset the normal cost pressures, right? So whether that's wage inflation or other trends in the industry, so they will help us offset the normal cost pressures, and we may reinvest some of these funds to drive attractive growth opportunities.

So net-net, we view AI as a powerful enabler of continued margin progression not as a stand-alone pool of savings that will flow directly into the bottom line. So I think both sides of the equation just have to be sort of appropriately understood. In terms of headroom that we see in lowering cost to serve, I can provide a quick point, Chris is nodding at me, he's going to take this one.

Chris Deppe

Yes, absolutely. Doug, we feel strongly about our multiyear outlook and road map to lower verbal cost to serve Sumit talked about some of the AI initiatives. We also have continued automation. We're north of 50% of our volume flowing through automated states, and we'll continue to grow that over time. And so we have a robust road map there to continue to lower our variable cost to serve and deliver SG&A leverage in the P&L.

Sumit Singh

Then our confidence in hitting the long-term margin path of 10% plus EBITDA that we've mentioned is stronger at this point and continues to strengthen with every quarter and year. And how I would wrap that up.

Operator

Your next question comes from the line of Steven Zaccone with Citi.

Steven Zaccone

I wanted to ask about some of the gross margin puts and takes in the second half of the year. Chris, I'd love you to dig into that a little bit more. You talked about gross margin being down year-over-year in the third quarter, if you just elaborate on that a little bit. And maybe to zoom out, sponsored as has been a gross margin tailwind for quite some time. Help us understand the contribution this year from an accretion perspective and can that continue to be accretive as we look into next year? .

Chris Deppe

Yes. Thanks, Steve. So just one clarifying point here. In the script, we talked about Q3 being down sequentially from Q2. It will not be down year-over-year. So the quarterly margin progression in the second half of the year will look more like 2025 or Q3 will step down from Q2 but it will leverage year-on-year, both Q3 and Q4, we expect to modestly leverage year-on-year. And so sponsored ads will be a tailwind, has been a tailwind for some time since we launched the program in fiscal 2023.

We continue to deliver gross margin tailwinds from sponsored ads, both on-site ads and off-site ads are growing this year. And gross margin also continues to benefit structurally from mix, premiumization as we move forward and grow our Chewy Health ecosystem. And so sponsored-ads will continue to grow. And I think you can continue to expect that next year as well.

Sumit Singh

The gross margin story hasn't changed, Steve. At the beginning of the year, we said it's going to be a driver -- 2 main things are going to be drivers of gross margin. This year, it's going to be our continued mix premiumization. It's going to be continued tailwind from sponsored ads, albeit at a lower level than what you saw in 2025. And so essentially, we said margins are expected to expand, albeit at a lower rate relative to '25. The only thing that has changed since -- well, things keep changing up monthly, but the broad trending that has changed is when we came into the year, we didn't really understand how much tariff -- no, sorry, no tariff, how much fuel impact should we bake in relative to the war in the Middle East. And so we started with sort of low, low single-digit impact that we obviously have updated to mid-single-digit impact that we talked about in Q1. And so we're absorbing that incremental headwind while continuing to deliver expanded gross margins as we move through the year. So overall, quite satisfied with the story.

Steven Zaccone

Okay. Understood. My follow-up is -- to follow up on some of the questions around the industry. So when you think about what's missing for the industry to see higher growth, how do you break it down, whether it's macro or whether it's just the softness in sort of the dog category that continues to be a bit of a challenge?

Sumit Singh

Well, so the softness in dog category, the trending around net dog adoptions is tied closely to some of the macro factors as we talk about. So these 2 things are correlated/casual in nature. Dog formation is closely linked to household formation, less linked to kind of a renter's market per se. So when you look at the density of dog, right, you need a bit of an underlying stable economy, driving household penetration to drive dog penetration. That's one of the reasons for the rise of cat is because on a real estate basis, cats are much more friendly and economical from that standpoint; and b, we're seeing a lot more cat innovation happen now than we've seen over the last decade or so.

Number 2 is pricing. Now recall -- helpful to recall that we've gone through double-digit inflation for a few years compounded as we've come out of the pandemic years. Now it's been stable for the last several quarters. But there have been other factors that have been pressured the consumers' mindset, albeit fuel, gas, grocery, et cetera. And so to us, all of this goes into what we believe is a headwind towards cost of ownership, right, which is why retailers and e-tailers that are trusted in delivering value, passing on that value, passing on convenience and helping consumers deal with this kind of life -- on a life cycle basis are the ones that will durably continue to compound their advantage, which is why we view this as a short-term or transitory headwind, and our focus is to continue to build Chewy and strengthen our proposition and compound advantages to rapidly accelerate as we come out of this short-term blip. Overall, we don't expect the resilience in the category or the relative immunity in the category to decline over the long term.

Operator

And the next question will be the last question for this call. It is coming from the line of Benjamin Black with Deutsche Bank.

Benjamin Black

Maybe a follow-up on AI. Sumit, can you dig in a little bit more on the early takeaways from CAI, and how do you think the customer impact and the customer experience will evolve over the next 12 to 18 months?

Sumit Singh

Yes. So obviously, when we took a customer-facing project that -- a product that essentially offers a parallel capability that we've been known to deliver through our exceptional human service agents. You can expect that the bar that this product has to meet is exceptionally high. And so that's the first design principle that from a service bar standpoint in terms of being crew to brand and tone, it has to be spot on. And so in terms of success parameters and dimensions, that is built into it. In terms of customer impact and experience, how it will evolve.

So I talked about expanding coverage use cases, right? So today, CAI is -- if you're in the beta, you're welcome to try this. If not, you will be pulled into beta because we're expanding the program quite rapidly. It is addressing what we believe are the top contact drivers, right? Where is my stuff, where is my order, shipment status, I need help with Autoship management, those type of customer inquiries. We've also embedded automated returns and refunds, which is powered by our deep study and knowledge of machine learning in the background into CAI. And so these are multiple agents that sit under an orchestrator that essentially allow us to direct customer traffic to bring back the appropriate response and self-help.

It is particularly suited to consumers that are propensed towards self-help. These are younger cohorts that continue to become a large portion of our consumer base right? The Gen Zs and the alphas are less inclined to pick up the phone and call an agent. And so experiences like these not only keep the convenience right on top of mind, it meets them where they want to be met.

And then imagine in the future, we could essentially -- because we're building this in a multi-agent orchestration framework, you could essentially keep building agent capabilities and layering in to build more holistic solutions that then combine product recommendations and deepen customer engagement from a service interaction point of view, right? And we spent several quarters building the infrastructure and focusing on our data being right. So now we can essentially build these type of solutions on top. We believe we have a durable competitive advantage here because companies will take years to get to this point or they'll essentially have to go out and integrate through third-party providers where all of our solution is first-party built.

So we're quite excited about the journey of this. We can't wait for inference cost to continue to come down because, candidly, we -- I believe we can scale faster than right now how some of the cost is actually scaling. Overall, we're quite excited about this type of stuff.

CALI, same thing. These are outbound appointments, scheduling type of use cases that we're trying out with Cali, which is a voice agent. So we have both capabilities at this point. Cai is a chat-based capability and Cali's a voice-based capability. We're trying out with multiple different types of use cases.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.