Chewy, Inc.CHWYNYSE
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Operator: Hello, and welcome to the Chewy Third Quarter 2025 Earnings Call. My name is Emily, and I will be coordinating your call today. [Operator Instructions] I will now hand over to our host, Natalie Nowak, to begin. Please go ahead.
Natalie Nowak: Thank you for joining us on the call today to discuss our third quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh; Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer; and [ Chris Depee ], our Head of Commercial Finance and FP&A. 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 really 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. 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. 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.
Sumit Singh: Thanks, Natalie, and good morning, everyone. Chewy continues to outperform the pet category and expand market share with profits once again growing faster than sales. We are delivering consistent year-over-year profitability gains and remain firmly on track toward our long-term objective of 10% adjusted EBITDA margin. Q3 results build on the momentum from the first half of fiscal 2025 and highlight the structural resilience of our model as well as the efforts and execution quality of every team member at Chewy. We exceeded the high end of our net sales guidance, expanded margins and accelerated free cash flow generation. Let's get into the details.
Sumit Singh: First, our financial and customer performance. Q3 net sales grew over 8% year-over-year to $3.12 billion, primarily driven by unit volume growth, not price. Growth in Autoship customer sales outpaced total company growth increasing 13.6% to $2.61 billion. As we have discussed before, Autoship revenues are highly predictable and allow operational planning to reduce cost and grow margin in a way that gives Chewy unique structural competitive advantages. We ended Q3 with 21.2 million active customers, up nearly 5% year-over-year and delivered improvements across every part of the active customer funnel. Marketing efficiency continues to strengthen as we deploy spend with greater precision, attracting high-quality customers, driving stronger conversion and improving LTV to CAC ratios. Enhanced mobile app functionality is lifting direct traffic with app customers and app orders up approximately 15% year-over-year. These improvements supported marketing leverage in the quarter while enabling year-over-year growth in both new customers and reactivations alongside lower churn. Net sales per active customer reached $595, up nearly 5% year-over-year.
Sumit Singh: Now let's review profitability and free cash flow. After which, I will comment on some of our ongoing initiatives. Gross margin expanded roughly 50 basis points year-over-year to 29.8%, driven by sponsored ad growth, a strong Autoship baseline and favorable category mix. We believe that these gains will structurally enhance our margins going forward. Adjusted EBITDA reached $181 million, up 30% year-over-year. Adjusted EBITDA margin reached 5.8%, representing 100 basis points of year-over-year expansion and flow-through of about 18%. Margin gains reflect strong gross margin execution disciplined SG&A management and continued efficiency in advertising and marketing. And finally, we generated approximately $176 million of free cash flow in the quarter up nearly $70 million sequentially. Our profitability and cash generation enabled us to repurchase $55 million of shares, while self-funding strategic investments that position Chewy for durable long-term value creation.
Sumit Singh: Now I would like to provide an update on some of Chewy's ongoing initiatives, starting with Chewy's health offerings. Chewy Vet Care or CVC, continues to exceed expectations, driving strong utilization, supporting ecosystem engagement and strengthening customer loyalty through recurring high-margin services. Each clinic acts as both an acquisition channel and a retention driver supporting deeper Autoship and health program participation. We have opened two additional CVC practices since our last earnings call including our first one in Phoenix, bringing our total to 14 locations across five states. Two more clinics are opening soon keeping us on track with our previously stated plan to open 8 to 10 locations this fiscal year. Staying on the topic of Chewy's health offerings, on October 30, we announced the acquisition of [ Smart Equine ] a leading [ Equine ] Health brand with strong loyalty and repeat purchase behavior. The transaction is expected to be accretive to adjusted EBITDA margins upon closing. [ Smart Equine ] enhances Chewy's premium health and [ nutraceutical ] assortment and strengthens our position in high-value wellness categories. By layering its premium assortment over Chewy's network and scale, we see significant opportunity to enhance our health and wellness mix and expand both net sales within this category as well as margins. Our paid membership program, Chewy+, continues to outperform our expectations, driving higher order frequency, broader category engagement, higher mobile app adoption and stronger auto ship participation. After launching at an introductory price of $49 per year with a 30-day free trial, we raised the annual fee to $79 at the end of October. Early data shows continued growth and strong conversion from free to paid memberships. Paid Chewy+ members are already delivering gross margins in line with the overall enterprise and with higher pricing in place, we remain confident in the program's growth and margin potential. I would now like to turn the call over to Will for a detailed recap of our results and guidance. After which, I will make some final closing remarks about 2026 and Chewy's future. Will?
William Billings: Thank you, Sumit. Third quarter net sales grew 8.3% year-over-year to $3.12 billion, above the high end of our Q3 guidance range. Gross margin expanded approximately 50 basis points to 29.8%. Q3 SG&A, excluding share-based compensation and related taxes, was $588.6 million or 18.9% of net sales and includes approximately $2.7 million of onetime transaction costs primarily related to the pending [ Smart Equine ] acquisition. Excluding SBC and these onetime costs, we delivered SG&A leverage of 20 basis points year-over-year. Consistent with our expectations, we returned to SG&A leverage as our newest automated facility in Houston scaled and as we cycle past certain transitory costs related to the Dallas FC and inventory pull forward. Advertising and marketing expense was $197.9 million or 6.3% of net sales, reflecting about 40 basis points of year-over-year leverage. As Sumit noted, this leverage is driven by higher productivity of spend, not reduced investments. We are attracting high-quality customers and are quickly converting them into Autoship, Chewy+ and health programs, which deepens loyalty and increases lifetime value. These efficiencies reflect more discipline, allocation of marketing dollars and stronger flywheel effects that we expect to build as we scale. Q3 adjusted net income was $135.7 million, up 59.6% year-over-year and adjusted diluted earnings per share of $0.32, landed near the high end of our prior guidance range. Third quarter adjusted EBITDA was $180.9 million, representing a 5.8% adjusted EBITDA margin, up 100 basis points year-over-year and adjusted EBITDA flow-through of 17.9%. Free cash flow for the quarter was $175.8 million, driven by $207.9 million of cash from operating activities and $32.1 million of capital expenditures. For full year 2025, we continue to expect to convert approximately 80% of adjusted EBITDA to free cash flow. In addition, based on year-to-date performance, we now expect 2025 capital expenditures to come in around 1.3% of net sales, below the low end of our prior target range of 1.5% to 2% of net sales. During the quarter, we repurchased approximately 1.5 million shares for $55 million. We ended Q3 with $304.9 million of remaining authorization under our existing repurchase program. We closed the quarter with approximately $675 million in cash and cash equivalents, remain debt-free and had total liquidity of approximately $1.5 billion.
William Billings: Turning to guidance. Recall that in Q2, we raised our full year net sales guidance by $175 million at the midpoint, reflecting our bullishness to outperform a market which is expected to grow low single digits in FY 2025. Today, we are narrowing our full year 2025 net sales outlook to between $12.58 billion and $12.6 billion, or approximately 8% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024, with even greater confidence in our ability to deliver incremental margins. We are also narrowing our full year 2025 adjusted EBITDA margin outlook [ to 5.6% to 5.7% ] or approximately 90 basis points of adjusted EBITDA margin expansion at the midpoint year-over-year. Consistent with our comments last quarter, we expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin. We expect fourth quarter 2025 net sales of between $3.24 billion and $3.26 billion or approximately 7% to 8% on year-over-year growth when adjusted to exclude the impact of the 14th week in Q4 of fiscal year 2024. Our fourth quarter guidance takes into account the strong year-over-year comps of approximately 7% net sales growth in the fourth quarter of last year. We also expect Q4 adjusted diluted earnings per share in the range of $0.24 to $0.27. The which includes an estimated $10 million of closing costs related to the pending acquisition of [ Smart Equine ]. And finally, given our performance in the first 3 quarters of the year, we now expect advertising and marketing expense to come in at approximately 6.5% to 6.6% of net sales for the full year. For the full year, we are also expecting share-based compensation expense, including related taxes of approximately $315 million and weighted average diluted shares outstanding of approximately $430 million. We now expect 2025 net interest income of approximately $15 million to $20 million. And lastly, we expect our effective tax rate to be between 16% to 18% for 2025. I would now like to turn the call back to Sumit for some closing remarks.
Sumit Singh: Thanks, Will. Before we take your questions, I would like to make a few important remarks. First, on Chewy's margin expansion and its path cadence and durability as we head into 2026. Chewy has an unmatched position in a uniquely attractive industry. In chewy.com, we have the leading sales engine in our industry, evidenced by the 84% of our sales on Autoship layered on top of a built-out world-class fulfillment network. The best-in-class consumer satisfaction that results from this combination leads customers to trust us with ever-increasing levels of business. As you can see from the growth of our pharmacy business, and our multiyear steadily rising NASDAQ. Q3 shows the result. We delivered both revenue growth and margin expansion even as we made high-return targeted investments in the business. Gross margins continue to expand on a structural basis, supported by sponsored ads, category mix and a growing health ecosystem. SG&A leverage is returning as automated facilities scale and as we cycle through transitory costs. And marketing is becoming more efficient as we increase direct share of traffic and grow our business inside the mobile app. And to be clear, we grew at approximately twice the market rate, taking share again without pricing below inflation or sacrificing margin. In 2026, we intend to press these competitive advantages and continue our pursuit of scalable self-funding initiatives that simultaneously enhance profitability. While we will always prioritize disciplined customer-centric growth, our unique flywheel-like operating model gives us high confidence in our ability to deliver consistent durable EBITDA expansion over the next several years. Our long-term framework is unchanged, and the underlying engines that drive margin expansion are strengthening. We remain firmly on track towards the long-term margin profile of 10% adjusted EBITDA that we outlined at Investor Day.
Sumit Singh: Turning to investment levels into 2026 and beyond. What is temporary versus structural? We are highly disciplined in how we deploy capital. A number of the cost impacts you have seen in recent quarters, such as inventory pull forward one-time launch expenses within fresh food, for instance, and early stage Chewy+ incentives are all temporary by design. Our structural investments include automation and health services. And all investments have clear ROI thresholds and measurable payback periods. As we move into 2026 and as we press our unique competitive advantages, we expect the balance of investment to shift towards operating leverage. The framework is simple. Invest where returns are compelling and durable moderate spend where benefits have been captured and drive leverage using our scale across the platform. We look forward to wrapping up 2025 from a position of strength and to a successful 2026. With that, we will now take your questions.
Operator: [Operator Instructions] our first question today comes from Eric Sheridan with Goldman Sachs.
Eric Sheridan: Maybe two, if I can. Curious as the team continues to scale offerings like Autoship and Chewy+ how you continue to evolve your learnings about the lifetime value of customers on the platform. And the second part of the question would be how does those learnings feed back into your strategic initiatives in support of growth given the commentary right there towards the end of the call can submit on some of your priorities over the next 12 to 18 months.
Sumit Singh: The way -- first of all, it's a broad question. So I'll try not to ramble and give you some frameworks on how we're thinking about this and why we believe these sort of build on top of each other. Like an intersecting one diagram, there's a strong intersection and strong complementarity between the programs. So I want you to visualize three sort of flywheels, the Autoship, Chewy+, CVC. And I want you to then imagine all of these built onto a closed-loop, highly personalized app mobile app. And so as you envision that these are separate programs that essentially compound NSPAC curves, increased retention, cohort retention, reduced churn and drive both top line as well as greater efficiency in the way that we deliver profitability. Autoship is a rinse-and-repeat product merchandise program that has high reliability and accuracy both in terms of planning, in terms of delivery and high satisfaction rating. Chewy+ is a program that is designed to accelerate the process of discoverability of multiple offerings at Chewy beyond consumables and health, which are sort of top discoverable categories. And in addition to accelerating discovery, it is meant to accelerate NSPAC consolidation. Chewy+ Autoship is applicable to the entire cohort of customers that Chewy. Chewy+ is more propense in our intention to grow NSPAC for customers that spend somewhere between $300 and $700 with Chewy so that there is tremendous incrementality that we can extract from them. A proof point of Chewy+ now that we've continued to run the program, another 6 or 7 weeks since the last time we spoke to you, penetration in categories like hard goods and specialty is running higher than the average penetration for Chewy+ indicating the power of Chewy+ to consolidate discretionary categories, build AOE and provide larger basket sizes. And then CVC, as the -- as we've spoken in the past, and as I spoke on the script, is a lever that essentially expands TAM to incremental $40 billion of health services but also creates an entire health ecosystem where the customer can start the journey online or offline, and ultimately, their Chewy is better off for it and the customer is better off for it. The mobile app, obviously, is a closed-loop system that pushes more and more direct traffic, much more personalized interactions, repeat purchase rates and apps are stronger, AOEs are stronger Autoship subscriber rates, there's a lot of complementarity of Chewy+ and Autoship inside the app, et cetera. So if you think about the way that we're making investments at the top level, we have multiple top line and margin driving initiatives. Then comes the automation and the power of scale that we are -- and in the future, not too long, not too far out the power of AI to compound those gains across our fulfillment, customer care and the rest of the company. And then at the bottom, it built on a really strong unified data layer and modern architecture built around a world-class fulfillment network. So I'm not sure if I hit kind of exactly what you were looking for, but happy to take a follow-up.
Operator: Our next question comes from Doug Anmuth with JPMorgan.
Douglas Anmuth: Sumit, the active customer growth was the strongest it's been in a few quarters. Can you just talk about some of the drivers there and then just how you're thinking about that in 4Q and into '26 along with just health of the industry. And then just a follow-up on the investment levels in '26. Is there a way to frame just kind of how you're thinking about that relative to what we've seen in '25?
Sumit Singh: Doug, thank you for the questions. So let's start with the active customers. So yes, so Q3 active customer performance exceeded our expectation and was driven by improvements across the customer fund. The strength in active customer reflects sort of both gross adds strengthening as well as churn lowering or improvements in retention as we would call it. . On the acquisition side of gross add side, we're benefiting from higher direct traffic, increasing engagement in the mobile app and improved conversion across our platforms, both app and web. To give you data points, we lowered first time to have conversion. We increased daily active usages. We improved SEO performance by double-digit gains on a year-over-year basis. our traffic was up mid-single digits on a year-over-year basis. So the combination of SEO plus app and overall increased traffic was then met with better experiences on the platforms that drove higher conversion and as such, new customer conversion was better. So these things added up in Q3 and in our opinion, are durable moving forward. Retention at the same time, continues to strengthen as customers deepen their engagement especially across categories like premium consumables, health care, our goods, once again, was strong, I think, 18% year-over-year growth. And as customers increasingly consolidate their spend with us, given that they're finding both value and convenience set. Now moving to the subpart of the same question. So you're asking about how we're thinking about Q4 and then in '26. So '26, we expect durability in net adds file continuing to increase. Let me hit Q4 more directly. So the implied moderation in Q4, if you calculate the fill in the blanks kind of question, you'll end up at the high end of low single digit for Q4. And that perhaps offers some moderation of roughly 150,000 customers from Q3 on a sequential basis, right? So the implied moderation in Q4 is largely comp driven and reflects timing more than anything else. We're cycling a much stronger Q4 from last year in terms of net adds, that naturally creates a tougher comparison. I should also note that when looking at Q4 quarter till date, we like the momentum that we're seeing on net adds, and we're running ahead of our forecast. There's still half the quarter left to go. So for now, it's prudent to hold kind of the conservatism that we're bringing forward here. What else. Okay. Now moving to the second part of your second question, which was investment levels on second let me just read this frame up for. Can you repeat the second question?
Douglas Anmuth: Just really just trying to understand your comments towards the end there just on investment levels in '26 relative to what we've seen in '25.
Sumit Singh: Yes. Okay. So first of all, I would like to perhaps just say that we've seen 2025 being characterized as an investment year. And the reality is, I mean, we're driving both strong top line growth and meaningful margin expansion. We're growing at more than 2x the market. We've narrowed our margin guidance, delivering 90 basis points of expansion at midpoint. And we're doing this simultaneously growth in margin kind of moving together. '26 going to be better, right? So we expect to take share. And at the same time, investment levels are more structural and durable investment levels moving forward, while we continue to self-fund a bunch of the temporary investments that you've seen us take in kind of Q1 or Q2 of this year. So overall, we're going to be thinking about investments in a much more strategic manner and fund structural investments while pulling back on temporary investments because we feel they can self-fund them. The business is continuing to perform better and better each quarter as we move from '25 into '26, especially as our fulfillment center scale, our customer service skills and our marketing drives greater efficiency into '26.
Operator: Our next question comes from Steven Zaccone with Citigroup.
Steven Zaccone: I want to follow up on Doug's question there. When you think about '26, can you share a little bit more on your mining outlook for demand you talked about net adds, but how do you think about the overall backdrop of the industry? And obviously, '25 has been an improvement versus '24. So how do you think about '26. And then in that context, pricing, we haven't really seen it in the industry. Do you see that being more of a tailwind as we get into next year?
Sumit Singh: Yes, sure. So as of this point, we're looking at '26 more or less like 2025. When we'd entered '25, we were expecting stronger industry normalization by the time we exited 2025. A as defined in terms of net household formation in terms of pricing returning back into the industry and strong demographic growth across the category. As we exit 2025, we -- our current read is to view '26 more or less like '25. So industry growing at low single digit, perhaps the low end of mid-single digit. Net household formation kind of remaining flattish. We are -- if you look at the shelf in adoption numbers, we're running at about 100,000, 150,000 surplus between adoption and returns we would like to see this number probably 5, 6x higher to be able to call it a normalized industry. Pricing, if you look at pricing growth in the industry, typically, you'd see a 1.5%, 1% to 2% pricing improvements on a year-over-year basis. And we'll wait for 2026 to kind of the signals to become a little more clear. I'll address your pricing question here in 1 second. But for the most part, we're viewing '26, much like '25. Underneath of it, as you've heard us comment we plan to bring forward a plan that is very clearly share taking in '26. I'll stay away from guidance and we will come talk to you more in March, when we report Q4 and discuss 2026. In terms of latest perspective on pricing, so pricing has remained rational and stable, with no material benefit or detriment from inflation or deflation in recent quarters, right? And as I alluded, we're maintaining healthy and regular dialogue with our supplier partners, and so far, we're watching this very closely. For the most part, we believe is going to be a structural unit volume growth here, perhaps the pricing benefit is going to be slightly larger than what we've seen in '25, which was nearly muted or 0. So more to come when we talk 2026.
Operator: Our next question comes from Nathan Feather with Morgan Stanley.
Nathaniel Feather: [indiscernible] my end, first, we talked about the strong net adds, and with that marketing still showing really nice leverage year-on-year. So what's working in the customer acquisition funnel to help you be more efficient in acquiring cohorts should that persist? And then on the margin side, the full year '25 margin guidance does imply 4Q EBITDA margins take a step down on a sequential basis. Can you just help us think through the margin puts and takes at the end of 4Q.
Sumit Singh: Sure, Nathan. So on marketing, I think you have to go back 2 years and build from there. And I'm sorry to take you back 2 years. But really, this is the compounding effect of the journey that I have been very transparent and articulating over the last 2 years. If you recall, we started with connecting the funnel all the way from lower middle and upper funnel. And that takes time to sort of build and mature because you have to essentially rev up your creative engine, you've to rev up your concepting and go to market. And so that takes a little bit of time. Underneath of that, we were pushing for -- I came to this call 2 years ago and I said, we're going to be mobile first and mobile is going to be a priority. And so we have continued to see the mobile app become stronger in terms of the percentage of traffic going through a percentage of owners going through it and overall metrics of retention of the customer file that we essentially extract through our mobile ecosystem. Number three, we last year, you heard me come to the call and talk about rebuilding our CRM engines, rebuilding bidding protocols, improving models and connecting these together. And so essentially, if you step back from the details, two things have happened, right? The output of these efforts have been, a, there's increased traffic that we are pulling which is the result of net new assortment programs like Autoship strengthening, much more offerings, [indiscernible] program. So we've continued to innovate and bring new offerings to customers. We've continued to improve the way that we go to market. These two results, we have continued to improve these results in higher traffic. Then we -- underneath of it, there is the power of SEO and the power of apps that actually converts a bunch of the third party into one traffic. Then when traffic hits the website, you're working on improvement and experiences, and our app fundamentally looks different from how it looked 18 months ago. Next year, it is going to look even better than what it looks right now. So we expect continued improved conversion. And so it's basically a calls and clicks and conversion-driven sort of phenomena underneath of it is a lot of activity and built around a lot of innovation that we are bringing to the market in leading as a single category [ captain ]. And then -- so yes, as we do this, marketing is getting more efficient. We've talked about it now for a couple of quarters. This one, this quarter was more definitive than the previous one. Signals are more clear to us. We expect to take these signals into 2026 and come talk to you more in greater detail in March. Was there a follow-up?
Unknown Executive: Margin [indiscernible].
Sumit Singh: Yes. So on margin, it's not atypical for us to view Q4 as an investment quarter, right? Multiple things are going on. A, promo levels are higher, pricing is generally not help -- not your friend in Q4. On top of that, structurally, you're essentially pushing a lot more units through your fulfillment center. So leverage that you expect in other quarters, you don't get the same type of leverage in Q4 and then marketing intensity and media rates are elevated in Q4. So it's kind of hard to evaluate Q4 on a sequential basis. We feel very good about the momentum that we have right now and the quality of execution that the team is delivering through. On a year-over-year basis, we're delivering at midpoint 90 basis points, and that equates to roughly 25% profit increase year-over-year on growth that is roughly -- that is at 8% levels. So 3x incremental profit than growth on a rate basis. We're quite pleased with that.
Operator: Our next question comes from Shweta Khajuria with Wolfe Research. .
Shweta Khajuria: Can I please try to -- first, Sumit, on gross margins, can you please talk about the trends in gross margins and how we should be thinking about it going forward, especially as we think of 2026 and just the puts and takes, how much of 2025 will actually apply for 2026 when we think about gross margin trends? And second, is when you think about the customer adds for '26 and the durability of customer adds, how should we be thinking about how much of retention is a driver versus gross adds? Where do you feel more confident? And which of the two factors do you think will be a bigger contributor.
Sumit Singh: So on the first one, gross margin. So again, I'll stay away from specifics on '26. But let's look at the view the forest rather than the trees on this particular call, and we'll come talk to you on the trees in 2026. So the view of the forest is the following, right? At exit of this year, we have less than 450 basis points to go to hit the 10% long-term EBITDA margin. We expect roughly half of that will come from gross margin. The other half will come from OpEx. And so what that tells you is, first of all, there are expansion opportunities, growth opportunities and gross margin that we will continue to bank upon. Now what are the -- now there are several gross margin expanding levers, and these expand gross margin on a structural basis. There is adds that is continuing to grow steadily. There are premium category mixes that we are very well known for and continue to capitalize and consolidate share in private label is strengthening with the launch of fresh. We will have more exciting news on private label to share with you on our March April call, the health ecosystem is continuing to strengthen Chewy+. There were concerns coming into last quarter about margin headwinds. We've kind of clearly articulated our position on it. So there's not a drag from that point of view moving forward. We expect incrementality perhaps. So when we look at our scale, continued growth of Autoship, there are so many different vectors that are on different arcs. Now there will be a few years where these vectors will compound and you will see amplified gross margins for that particular year. On other years, we might essentially choose to -- in other years, you'll see more similarly focused returns coming from a handful of these vectors versus the cumulative effect. But when you take the long view, when you take a multiyear view, these are compounding vectors that give us confidence on the trajectory of gross margin. As we've continued to educate and earn trust relative to the fact when we came to market in 2018, '19, when gross margins were at 20% levels. So that's how I would characterize gross margin. In terms of customers, as I mentioned, we expect customer adds to be durable. On the backdrop of a market that is going to look very much like '25, we're in the middle of forecasting 2026. And so I'll stay away from guidance, but we do expect the performance that we've shown this year alongside some of the improvements that I've talked about the marketing and the engine and the innovation to be durable as we move into '26. In terms of gross adds versus retention, look, this is actually -- it's not which one is more important. The purpose of a business is to both acquire and to retail customers. So it's an and, it's not an or, in our opinion, but it's a mathematical equation. If you look at the overall market, there is 90 million U.S. households on a normal year when normalizations kicked in, you're seeing 10 million to 15 million new pets incrementally in each sort of household. On top of that, we believe we have roughly 50 more million people that we should be touching out there. Of which 15 million of these are highly propense to online. And the last 5 million, 7 million, 10 million are perhaps not the right type of Chewy customer. So the point is that we have a very large set of households that we can still touch. The refresh rate is not a static refresh rate. So when normalization kicks in, you should only expect tailwind on top of the results that we're delivering. And then our internal engines like Chewy+, like Autoship, like app, CVC, the health ecosystem, et cetera, this helps us continue to improve retention. So it's an and equation to us, and we are squarely focused on both, not just one.
Operator: Our next question comes from Anna Andreeva with Piper Sandler. Please go ahead.
Anna Andreeva: Let me add my congrats. Nice quarter. Curious on Chewy+, can you talk about if you've seen any changes in retention when you raised the fee to $79 from $49 previously. And great to hear about expectations that the program is no longer dilutive. How should we think about that penetration into next year? And then we had a follow-up.
Sumit Singh: Okay. So in terms of the elasticity, the conversion that we saw once we raised price, conversion has remained quite strong, and has exceeded our internal expectation from an elasticity point of view. So the percentage of price increase and the loss of demand conversion is essentially the ratio that I'm talking about, that is better than what we forecasted. So we like that. . Number two, yes, on the margins, like, look, I mentioned that our paid -- is members are already delivering gross margins that are in line with the enterprise and the higher pricing only strengthens the profile. So from an economic standpoint, we feel good about where the program is today and how it scales. It is early. Another data point that I'll give you is, at this point, 80% of our member mix is now paid right? So you can kind of see that as the program scales, right, it will continue to become more efficient, right? So the initial investments get recouped very quickly even quicker with the increased pricing and then the conversion is holding better than expected. Obviously, it's slightly lower than what it was at 49%, but nothing that we're too concerned about at this point. Let me see. How should we think about penetration next year? So I'll stay away from comments on next year. In terms of what we've said about last quarter, our expectations for the program haven't changed since we've spoken last quarter. Another data point that I shared on this call today was we're seeing strong member penetration in categories like hard goods and specialty that aid basket building and drive NSPAC consolidation. So we kind of like all the signals that we're getting. It's acting as a complementary program driving discovery across platform especially across some of the discovery discretionary categories.
Anna Andreeva: That's really great. And just as a follow-up, on the 4Q guide, you mentioned that a running ahead of plan. Just anything else you can share what are you seeing in the business quarter-to-date? Just any learnings from the Black Friday and Cyber Week. I think you had mentioned previously that Chewy might lean into promotions in the fourth quarter. So far, I don't think we've seen that any update on that thinking?
Sumit Singh: Yes. So we were pleased with the performance during this important peak period, the Black Friday, Cyber Monday week. The week came in, in line, very much in line with our expectations. The team performed really well. Execution was strong. Supply chain backlogs were healthy in-stock levels were maintained at really healthy levels. So overall, we were very pleased with it. The discipline around promotional spend and marketing efficiency we talked about in the call continued through this important holiday event. So your observation is spot on. Net sales in Engage sessions were up year-over-year, while total event spend and customer acquisition costs were down year-over-year. right? Overall, we've built this -- as I answered Doug's question, we are running ahead of plan currently. So I don't want to get into revised guidance given that we just gave guidance, but yes, quarter-to-date, we like the momentum that we're -- that we've headed into December with still sort of a lot of the quarter left to go. So we'll come talk to you about this in April. And all of our scenarios are built into the guidance that we've just provided for a few minutes ago.
Operator: We have time for one final question. And our last question today comes from Dylan Carden with William Blair. Dylan, please go ahead.
Dylan Carden: Really appreciate that. I'm curious the interaction between Chewy+ and Autoship is the idea that the number of auto ship customers could equate to the number of plus customers and it's just expanding the basket, reaching into more discretionary categories. And to the extent the scalability of that, you've provided numbers on box productivity, which, given your current scale, it doesn't move the needle much. But can you provide -- you kind of mentioned some of the broader ecosystem implications, Kind of where are you seeing the benefits and maybe some of the markets where you have those open.
Sumit Singh: In, so the interaction of Chewy+ and Autoship. So I think I was trying to articulate this at the beginning of the call with Eric's question, let me take a crack at it again. So these two are complementary programs. Autoship to us is a merchandise product level membership program. It's free in nature, and it delivers, it works like -- it works like a quasi subscription, very much predictable and highly reliable. It's sort of a rinse and repeat, fill it, shut it, forget it kind of a model. What we like about Autoship is it's not a dormant program. So we see continued activity on customers from customers that participate in core seasonal events and attach rates. At the same time, Chewy Plus, right, the purpose of launching Chewy+ is multifold. A, it is a discoverability driver given that Chewy has so much more to offer than just consumables and health. So it is a discoverability offering. Number two, it accelerates NSPAC consolidation. And number three, we're early, so the data is still sort of building for us. But hopefully, next year, we're going to come and talk to you about this when the cohorts are large enough, it should aid in a very healthy way in improving our retention from already strong levels that we are seeing currently. So those are the three sort of net purposes. As you can see, the purpose is kind of aligned back and forth between Chewy+ and Autoship. The difference is live here Chewy+ is targeted and propense to members that are spending $300 to $600, $700 with us so that there is incrementality of spend. Number two, it's driving consolidation of basket. So faster discoverability of hard goods, the toy that you have to add, you don't have to think about kind of reaching shipping thresholds. So it's improving order frequency, the repeat sort of traffic that we've seen on the website is multifold increase from customers, et cetera, et cetera. So those are the two -- and they layer on because if you combine the two, the value and convenience essentially increases multifold, and so underneath of it, we'll make sure that the program retains economic sensibility. But from a customer end point of view, these are very good programs to go to market with. On CVC wet, you said box productivity not overly material. Can you expand on the ecosystem benefits. So I mean recall, again, at the end of the year, we will come forward with a detailed review memo on how CVC is performing and our expectations for the future. So we are going to open up a look under the hood in the next few months. For now, I'll stick to the commentaries that we provided. We're seeing customer incrementality, 4 out of 10 customers that are walking into CVC, our net new to Chewy. In a very short time, we see 50% of customers in CVC reach out and expand their connection to chewy.com by adding many more categories. Our Retention rates are running high. Our CSAT has continued to run at 4.8%, and these are not internal metrics. These are Google ratings that I'm quoting. So overall, the product is resonating really well. Wet recruiting and retention has remained really well for us, and we continue to expand. At the end of this year, we expect to be in the 16% to 18% range that we have originally forecasted.
Dylan Carden: Great. I'll wait for that. I guess the question on Autoship versus plus -- I mean, is it simple math to think that all Autoship customers are available to become plus numbers and therefore, expanding you mentioned sort of net bet consolidation? .
Sumit Singh: Yes. Yes. But remember, the comments that I'm making now, Chewy+ affords us the ability to be targeted and segmented. And that's the power of running programs on digital platforms. We can consume unified data signals in a much more accurate and precise way and target and segment the program to customers who we believe will benefit from the programs or who will find the program attractive, but also Chewy will benefit equally well from those type of sign-ups. So while Autoship is applicable to 100% of customers, Chewy+ may or may not be and the overlap, you have to sort of combine my two statements in terms of NSPAC thresholds. And penetration in X categories, ex being nonconsumer and health categories to be able to find the intersection there.
Operator: Those are all the questions we have time for today. And so this concludes our call. Thank you all for your participation. You may now disconnect your lines.