Chewy shares tumble 11% despite earnings beat as free cash flow falls short

Chewy shares suffered their steepest one-day decline in more than a year on Wednesday after the online pet retailer beat Wall Street's profit expectations and raised its full-year sales forecast, only to see investors focus instead on a shortfall in cash generation and a cautious read on consumer spending. The stock fell as much as 11 percent during the session, wiping out roughly $1 billion in market value before paring some of the drop.

The reaction underscored a familiar pattern for Chewy over the past year: strong headline numbers undercut by skepticism over whether the company's margin gains and cash flow can hold up as it pours money into new ventures, including an expanding chain of veterinary clinics.

Chewy, based in Plantation, Florida, built its business selling pet food, supplies and prescription medication online. Founded in 2011 and acquired by PetSmart in 2017, it went public on the New York Stock Exchange in 2019 and has since become the dominant e-commerce player in a pet-care market that boomed during the pandemic and has cooled as households pull back on discretionary spending. Wednesday's earnings were the first full quarterly report to include a contribution from Modern Animal, a bet that the company's future growth will come as much from veterinary services as from shipping boxes of kibble.

What Chewy reported

In its second-quarter results filed with the Securities and Exchange Commission, Chewy said net sales rose 7.3 percent from a year earlier to $3.33 billion for the 13 weeks ended August 2, landing at the high end of the range the company had given investors in June. Stripping out contributions from the SmartPak equestrian brand and the recently acquired veterinary platform Modern Animal, organic growth was a more modest 5.7 percent.

Net income came to $80.5 million, or 20 cents a share on a GAAP basis, up from 15 cents a year earlier. On an adjusted basis, diluted earnings per share were 36 cents, roughly in line with the consensus estimate of about 36 cents compiled by analysts. Adjusted earnings before interest, taxes, depreciation and amortization climbed 23.7 percent to $226.7 million, and the adjusted EBITDA margin expanded 90 basis points to 6.8 percent, a level chief executive Sumit Singh described in the earnings release as exceeding the company's own expectations.

"Chewy delivered a strong second quarter, with growth of 7.3% to $3.33 billion of net sales at the high end of our guidance, and a 6.8% Adj. EBITDA margin, exceeding our expectations," Singh said in the results, which were disclosed in a Form 8-K filed with regulators on September 9.

Why the stock fell anyway

The disconnect between the earnings beat and the share slide came down to cash. Free cash flow fell 15.5 percent from a year earlier to $89.5 million, well short of the roughly $133 million analysts had penciled in, according to an analysis of the results. Capital expenditures surged 71.1 percent to $47.9 million, which the company attributed largely to integration costs tied to SmartPak and to the buildout of veterinary clinics under the Modern Animal brand.

Chief financial officer Christopher Deppe told analysts the shortfall was "entirely timing-related" and reiterated that Chewy still expects roughly 80 percent free-cash-flow conversion for the full year, according to accounts of the earnings call. Investors were not entirely convinced. Shares changed hands around $20.70 to $20.90 for much of the session, down from a prior close near $23, and are now off close to a third of their value since the start of the year.

"The market's complaint was not the quarter but the quality and visibility of future growth."

Pet-sector peers moved in sympathy. Petco shares fell roughly 6 percent to about $2.45, while shares of pet-food maker Freshpet were little changed, ticking up slightly even as the broader sector sold off.

The numbers behind the guidance raise

Despite the stock reaction, Chewy did lift its outlook. The company now expects fiscal 2026 net sales of $13.46 billion to $13.57 billion, up from a prior range of $13.40 billion to $13.55 billion, implying year-over-year growth of 6.8 percent to 7.7 percent. Management also nudged up the low end of its full-year adjusted EBITDA margin guidance by 10 basis points, while guiding third-quarter adjusted EBITDA margin to a narrower 6.6 percent to 6.7 percent — a range some analysts read as conservative given the momentum in the just-reported quarter.

Subscription-style Autoship sales, which lock in recurring revenue from repeat pet-supply orders, grew 9.3 percent to $2.82 billion and now make up 84.6 percent of total net sales. Active customers rose 3.8 percent to 21.7 million, with the company adding 208,000 net new customers in the quarter and net sales per active customer up 1.9 percent to $602. Chewy also returned $400 million to shareholders through buybacks in the first half of the fiscal year, more than double the $152.6 million repurchased over the same period a year earlier.

The veterinary bet and who is watching it

Much of the market's unease centers on Chewy's push into physical veterinary care, a capital-intensive departure from the e-commerce model that built the company. Chewy struck a deal in April to acquire Modern Animal, a technology-driven veterinary platform with 29 clinics and a membership-based care model, on undisclosed financial terms. The transaction instantly scaled Chewy Vet Care's footprint from 18 locations to 47 and is expected to add more than $125 million in annualized run-rate revenue, though the company has said the deal will be roughly EBITDA-neutral this year, with earnings contribution not arriving until 2027.

That timeline is exactly what has some analysts hedging. Mizuho Securities cut its price target on Chewy to $32 from $40 even as it raised its EBITDA estimates, citing what it called a less certain recovery for pet-industry spending broadly. Jefferies described the guidance as implying stable core growth "alongside heavy reinvestment," calling the veterinary expansion strategically sensible but its payoff timing uncertain. Management, for its part, told investors on the call that pricing across the pet category remains soft and that it is not assuming any meaningful consumer recovery in the back half of the year — a note of caution that a raised sales forecast could not fully offset.

What is affected and what comes next

The results are the clearest data point yet on how discretionary pet spending is holding up as households remain selective about spending, a dynamic being watched closely by retailers, investors in consumer staples, and rivals such as Petco and Freshpet that compete for the same shopper. Chewy's active-customer growth and Autoship penetration suggest its subscription base remains resilient even as growth in average spending per customer slows.

The company's next test comes with third-quarter results, when investors will look for confirmation that the free-cash-flow dip was indeed a timing issue rather than a structural one, and for early signs of returns from the Modern Animal integration. Chewy management is scheduled to continue discussing the results with investors in the weeks ahead, and the company's full financial disclosures, including its quarterly report, are available through its investor relations site.