Chewy (CHWY) shares have declined approximately 10.3% in the month following the company's latest earnings report, underperforming the S&P 500. The drop raises questions about whether the recent negative trend will persist or if the stock is positioned for a rebound before the next earnings release.
In its second-quarter fiscal 2026 report, Chewy delivered adjusted earnings of 36 cents per share, a 9.1% year-over-year increase that met the Zacks Consensus Estimate. Net sales rose 7.3% to $3,330.2 million, slightly exceeding the consensus mark of $3,322 million. The results reflected customer growth and disciplined execution, with the company adding 208,000 net active customers sequentially, excluding Modern Animal additions.
Organic net sales, excluding SmartPak and Modern Animal, increased 5.7% year over year. Active customers grew 3.8% to 21.705 million, while net sales per active customer advanced 1.9% to $602. On a normalized basis, accounting for an extra week in the prior-year period, net sales per active customer increased 3.8%. Management attributed these gains to customer cohort maturation, increased engagement in health and pharmacy, and broader cross-category adoption.
Autoship customer sales climbed 9.3% to $2,817.2 million, representing 84.6% of total net sales. While consumer pressure remained visible in discretionary areas like treat sales, mid-teens hard goods growth outpaced the broader market. Pet Health and Specialty Products also delivered strong organic growth.
Financial margins held steady with gross margin at 30.4%, flat year over year but up 30 basis points sequentially. Adjusted EBITDA increased 23.7% to $226.7 million, supported by sponsored ads and lower variable costs. Approximately $10 million of this upside came from timing-related benefits such as earlier tariff refunds, while more than $5 million came from discrete items including gift-card breakage. Adjusted SG&A declined to 18.4% of sales from 19.1%, reflecting productivity gains.
Strategic initiatives showed progress, with Chewy Vet Care generating triple-digit revenue growth and the fresh and frozen portfolio posting triple-digit unit growth. The company's AI assistant, Kai, resolved about 30% of chats through self-service in early use. Management anticipates that AI efforts will yield annualized savings of roughly $50 million by fiscal 2027, after generating low tens of millions in fiscal 2026.
Despite operational gains, free cash flow fell 15.5% year over year to $89.5 million. Chewy ended the quarter with $612 million in cash and marketable securities and over $1 billion in total liquidity. The company deployed $200 million toward share repurchases, buying back 9.9 million shares, and completed the $400 million Modern Animal acquisition.
For fiscal 2026, Chewy expects net sales between $13.46 billion and $13.57 billion, implying reported growth of 6.8% to 7.7%. The adjusted EBITDA margin is projected at 6.7% to 6.8%. For the third quarter, net sales are expected at $3.323 billion to $3.358 billion, with adjusted earnings around 39 cents per share.
Analyst sentiment remains mixed despite upward trending estimates in the past month. Chewy holds an A Growth Score and a B Value Score but an F Momentum Score, resulting in an aggregate VGM Score of A. However, the stock carries a Zacks Rank #4 (Sell), with expectations for below-average returns in the coming months.