Chewy, Inc. (NASDAQ:CHWY) reported fourth-quarter financial results on Wednesday. The transcript from the company’s earnings call has been provided below.

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Operator

Hello everyone. Thank you for joining us and welcome to the Chuwy fourth quarter 2025 earnings call. After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. I will now hand the call over to Natalie Nowak, Head of Investor Relations. Natalie, please go ahead.

Natalie Nowak (Head of Investor Relations)

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

Sumit Singh (Chief Executive Officer)

Thank you Natalie and good morning everyone. I am thrilled to be joined today by our newly appointed CFO Chris Chris Depe. Chris has been with Chewy since 2022 and brings valuable continuity and deep institutional knowledge enabling a particularly seamless transition. He has a strong understanding of our business and the opportunities ahead for Chewy. I look forward to having many of you engage with Chris as he steps into his new role as cfo. I want to start by thanking our Chewy team members for executing a strong finish to the year. Once again, we delivered strong net sales growth, significant margin expansion and record free cash flow in 2025. As we enter 2026, we are focused on repeating this formula for success disciplined execution, profitable growth, continued margin expansion and strong free cash flow generation all in support of sustained long term shareholder value. Instead of taking the traditional approach of diving straight into our results, I’d like to share my perspective on what we are seeing in the pet industry and Chewy’s place in it in 2026 and beyond. So let’s begin. Pet is a uniquely attractive industry fueled by increasing pet humanization, premium product adoption and expanding lifetime value per household. Spending in this category is driven by an emotional attachment and recurring non discretionary needs which translates into resilient demand across economic cycles. We expect 2026 pet industry dynamics to largely mirror 2025, steady and resilient to macro trends, but without cyclical acceleration, pet household formation appears stable with no evidence of deterioration. However, we are not underwriting a meaningful rebound in that variable. Current estimates suggest low single digit industry growth with DOG at the lower end of that range and CAT at the higher end. Further, we expect industry growth to be predominantly volume driven with little or no contribution from pricing. Importantly, we expect the secular shift towards e commerce penetration to continue and as consumers increasingly prioritize convenience, transparency and auto replenishment, structural advantages that persist across economic environments and benefit scaled digital platforms like Chui. Against this backdrop we once again expect to deliver share gaining growth. We believe that Chewy is unique with a differentiated flywheel like operating model powered by a leading sales engine with over 80% of net sales on autoship, supported by a world class fulfillment network delivering best in class consumer satisfaction. The algorithm supporting our underlying growth remains balanced and durable driven both by active customer growth and nest back expansion. We reached an inflection point in NET adds in 2024 and and built on that progress throughout 2025 adding approximately 150,000 to 250,000 net adds per quarter. In the current environment we believe we can continue to deliver quarterly sequential net adds within that range. At the same time we see a long Runway to grow NESPAC through premium and health mix shift, private brands expansion and and deeper engagement. Now shifting to margins on margin expansion including its trajectory and durability, we remain equally bullish. As I noted during our last earnings call, our long term margin framework is unchanged and the underlying drivers of margin expansion are strengthening. In 2026, we expect to further expand profitability with the rate of expansion expected to build relative to 2025. SGA leverage will further strengthen as we move through the year, supported by the continued ramp of our next generation Houston Fulfillment center and efficiencies from the use of AI that help structurally lower our cost to serve. I will talk about these shortly. And finally, we believe Chewy remains well positioned to compound growth, expand share and drive sustained margin and free cash flow expansion in 2026 and beyond, independent of a macro reacceleration. Said simply as we look to 2026, our model does not depend on a minimum net sales growth threshold to expand profitability. Now an update on some of our strategic priorities and then Chris will take you through our financial results and 2026 guidance. Starting with Chewy Vetcare, we opened 10 new practices in 2025 reaching the high end of our target range, bringing our CVC footprint to 18 locations across five states. Performance continues to exceed expectations supported by strong utilization and consistently high customer and veterinarian satisfaction scores. CVC is also driving compelling ecosystem wide value, serving as both a customer acquisition engine and an engagement flywheel that deepens relationships with high value health customers. And the results are compelling. CVC is the fastest Nest PAC compounder in the business. We believe veterinary care is a powerful growth vector and a key pillar of value creation for Chewy. We are confident in the path ahead as we continue to execute and scale this platform. Turning to AI for those of you familiar with Chewy, it will come as no surprise that our ability to adopt technology and and drive rapid innovation is a core strength. We operate on a modern, nimble and scalable tech stack supported by a world class team of designers, product managers, marketers and technologists who excel at building applications that enhance the customer experience while lowering costs. The arrival of AI only amplifies this advantage, enabling us to innovate faster, operate more efficiently and unlock entirely new capabilities. And that is exactly what we focused on. Over the past several quarters we have focused on building the foundation required to deploy AI at scale across Chewy. Today, with our unified enterprise data platform and central AI tooling in place, we are embedding AI across key layers of the business, specifically the purchase experience, our service and operations layer, and our supply chain and fulfillment network. Let me elaborate. Within the purchase experience, we are progressing quickly to apply AI across our platforms to improve search, relevance, product discoverability and personalization. Externally we are closely following the emergence of agentic commerce models and view it as a future incremental demand and distribution channel for Chewy Pet remains a deeply emotional category where trust, relationships and empathy matter and these are enduring strengths of the Chewy brand. Combined with our leadership in price selection and recurring convenience, both purchase and delivery, we believe our competitive position remains strong across the broader organization. We are already deploying AI to drive greater structural efficiency. Functions such as customer service, fulfillment, pharmacy and marketing operations are leveraging internally developed AI tools to streamline workflows and and improve productivity. As we move through 2026, these efforts will translate into measurable financial impact. Based on our current roadmap, we expect AI driven efficiencies to contribute a low tens of millions of dollars benefit in 2026 with a meaningful step up in 2027 where we see a path to approximately 50 million or more in annualized savings as these capabilities scale. Moving on from AI, let me briefly talk about Chewy Private brands. After the launch of our fresh brand get real in Q2 last year, we are entering an exciting new chapter for Chewy Private brands with the launch of Chewy Made. Chewy Made is our unified owned brand platform designed to deliver trusted, high quality products while driving durable, profitable growth for Chewy. Starting in April and throughout 2026, we will expand our presence across both dog and cat consumables. This includes a balanced offering of dog food positioned at more accessible price points to broaden our reach into everyday nutrition, a broader assortment in everyday and gourmet cat nutrition, as well as entry into high demand formats where we currently have low penetration. In addition to the expanded assortment, we are consolidating some existing brands under this platform, creating a more cohesive and streamlined experience for customers. We look forward to keeping you updated on the progress of Chewy Made. In closing, we continue to execute from a position of strength. We are delivering share gains, expanding margins through structural efficiencies and generating growing free cash flow. Looking ahead to 2026, we are well positioned to further build on this momentum and drive sustained earnings growth. With that, I will turn it over to Chris.

Chris Deppe (Chief Financial Officer)

Thank you Sumit and thank you all for joining us today. Having been part of Chewy’s journey for nearly four years, I’m excited to step into the CFO role and continue building on the strong foundation our team has established. I look forward to engaging with many of you in the quarters ahead. Let’s start with a review of our financial results as we get into the details. A reminder fiscal year 2024 included a 53rd week and comparisons for Q4 and full year 2025 are discussed on a comparable 52 week basis where applicable. Fourth quarter net sales reached over $3.26 billion, bringing our total fiscal year 2025 net sales to over $12.6 billion delivering year over year net sales growth of 8.1% in Q4 and 8.3% for the full year 2025, reflecting strong execution, continued share gains in a stable category environment and consistent performance across both customer growth and spend per customer. We continue to grow active customers ending the year with 21.3 million increasing by approximately 4% year over year and net additions up by more than 810,000 year over year in fiscal 2025, we once again saw year over year improvement across all elements of the active customer equation. We also continue to grow with a high quality revenue base. Autoship customer Sales reached over $2.7 billion in Q4 and $10.5 billion for the year, representing 84% of total net sales in Q4 and 83.3% for the full year 2025. Growth in autoship customer sales outpaced overall top line growth, increasing by nearly 13% in the fourth quarter and 14% for the full year 2025 on a comparable basis. Reinforcing the strength of our recurring revenue model. Nest PAC reached $591 in Q4 2025 increasing by approximately 4% year over year on a comparable basis. Moving to profitability, we reported fourth quarter gross margin of 29.4% and full year 2025 gross margin of 29.8% representing approximately 90 basis points of year on year margin expansion in Q4 and 60 basis points of expansion for the full year. Strong gross margin performance was driven by sponsored ads growth premium mix into high margin categories including health and wellness verticals and a rational promotional environment shifting to operating expenses. Please note that my discussion of SG and A excludes share based compensation expense and related taxes. Fourth quarter SG&A fourth quarter with $607 million or 18.6% of net sales and full year 2025 came in at $2.4 billion or 18.8% of net sales. Q4 and 2025 SG&A include approximately $10 million of one time transaction costs primarily related to the Smart equine acquisition excluding SPC. In these one time costs we delivered SGA leverage of approximately 20 basis points in Q4 and full year. SG and A as a percentage of net sales came in flat year over year. Fourth quarter advertising and marketing expense was $233 million, bringing full year 2025 A&M expense to $825 million, or 6.5% of 2025 net sales reflecting approximately 30 basis points of leverage year over year. Fourth quarter adjusted net income was $115 million and full year 2025 came in at $541 million, which translated into $0.27 adjusted earnings per share in Q4 and $1.27 in full year 2025. Fourth quarter adjusted EBITDA came in at $162 million, representing a 5.0% adjusted EBITDA margin up 120 basis points year over year and adjusted EBITDA flow through of approximately 19%. Full year 2025 adjusted EBITDA came in at $719 million or 5.7% adjusted EBITDA margin growing approximately 26% year over year, reflecting 90 basis points of year over year margin expansion and flow through of over 16%. This level of profitability expansion at our scale reflects the structural strength of our model and continued operating discipline across the business. We are consistently expanding earnings at a rate meaningfully above net sales growth, demonstrating the operating leverage embedded in the model. The results we are delivering today are a clear reflection of the underlying strength of the business and where it is going. In the fourth quarter we reported free cash flow of $232 million, and in fiscal year 2025 we generated $562.4 million of free cash flow, both record highs for the company, highlighting the continued improvement in earnings quality and capital efficiency. The consistency scale and continued growth of our free cash flow underscore the quality and resilience of our model. Our full year 2025 free cash flow reflects $691.6 million of net cash provided by operating activities and $129.2 million of capital expenditures. We ended the year with approximately $879 million in cash, cash equivalents and marketable securities, and we remain debt free with an overall liquidity position of approximately $1.7 billion. Over the course of the year we repurchased and retired approximately 6.8 million shares, spending approximately $257 million on share repurchases in 2025 over overall, our capital allocation priorities are unchanged. Advance the strategic priorities of the business where returns are attractive, maintain a strong balance sheet, and return excess cash to shareholders. Share repurchases will remain a key part of our capital allocation strategy, and we expect our level of activity to increase relative to 2025 reflecting both the strength of our cash generation and our view of the current valuation. Now turning to forward looking guidance as we enter fiscal 2026, I want to clearly frame how we expect the year to progress both from a full year standpoint and in terms of quarterly cadence. In addition to our guidance ranges, I will provide perspective on pacing so that our expectations for growth and profitability are well understood and appropriately reflected in how you model the year. Our 2026 outlook is built around three consistent priorities. First, continued share gains supported by stable demand and balanced growth across active customers in nespac second, ongoing margin expansion driven by a combination of mix improvement and increasing operati

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star1 on your telephone keypad. To withdraw your question, press star1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by now while we compile the Q and A roster. Your first question comes from the line of Mark Mahaney with Evercore ISI, your line is open. Please go ahead.

Evercore ISI Analyst

Okay, thanks. Two questions please. One on this A and M leverage going forwards. Just talk about where you think that can go. The biggest drivers of that going forward. Since you’re such a heavily subscription, you know, auto ship type model, you think that, you know, you’re showing leverage, you should be able to continue to show leverage I would imagine for the next couple of years. Any thoughts on when we could break below 6% and then Sumit, could you talk a little bit about the Chewy made strategy a little bit more the impetus behind that and what do you think the financial. So what of that will be? Do you think that is that more of a kind of a? With lower, you mentioned some lower price points. Is that kind of a more of a TAM expander or is it something that could just expand a nest pack per customer? Thank you very much.

Sumit Singh (Chief Executive Officer)

Hi Mark, good morning. I’ll take them one by one. So on the first one, yes, we expect to show A and M leverage going forward. I will refrain from commenting as to what the extent will be on an annual basis. I’ll take you back to our long range plan that we communicated or the targets that we communicated in December 20if you recall. From that point we’re essentially running ahead of our profit targets at this point. So we’ve got roughly 350 basis points to go to hit the 10% and then we start the journey of moving beyond the 10% EBITDA. If you look at the remaining left to go, we believe roughly half or a little bit less than half will come from gross margin and the rest will come from, you know, SGNA and marketing. And so you know, we believe at art levels, you know, spending somewhere in the six, six and a half percent is reasonable in the near, near term. And then you know, as our brand continues to build even further with you know, the CVCs that we’re putting in ground or you know, the upper funnel connections that we’re making that is giving us really good leverage. Plus the way that the app, the mobile app strategy is essentially progressing, you know, we do believe we’re shifting the mix from third party mixes to direct mixes quite effectively and that strategy should essentially continue to fuel the leverage that we’re talking about. Now the second question, Chewy made strategy. So if you again I’ll take you back to the high level view of the forest first. So we believe private brands should be mid teens level, low to mid teens level penetration of net sales for Chewy at that scale. We Expect private brands to be roughly 500 basis points higher gross margin than the base business. And so this essentially is a step in that direction because today we’re sitting at, I would say low to mid single digits of penetration of net sales. And especially when you look at our penetration, we are penetrated quite reasonably well on the hard goods side. So on supplies were mid teens to high teens level penetration and therefore the opportunity staring us in the face is on the consumable side. Now it also happens that consumables is the largest tam of the 90 billion food and supplies. TAM consumables is about 50 to 60 billion of that. So for us, the way that we are bringing forward assortment, it allows us to fill in, you know, gaps in assortment at the high end. So you saw that with the launch of fresh food, that is a very high nest back compounder. We’re also looking at, you know, value offerings across the surface and going, okay, where can we inject strategically, you know, utilize the power of a scaled E comm network to be able to lower our cost to serve and deliver those price points effectively without really sacrificing margins along the way. And so in that way it becomes, you know, a margin boost for us. So for us this will ebb and flow relative to the assortment that we bring to life. But we’re filling in assortment both in dog. In cat. We’ve been, I would say, anemic in the past. And so you’ve seen me talk about two new assortment categories in cat this time around. We’ll continue to keep you updated, but we’re excited about where we go from here. Thank you. Sumit. Sure.

Operator

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open. Please go ahead.

Goldman Sachs Analyst

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

Sumit Singh (Chief Executive Officer)

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

Goldman Sachs Analyst

Great, thank you. Sure.

Operator

Your next question comes from the line of Doug Anmuth with JP Morgan. Your line is open. Please go ahead.

JP Morgan Analyst

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

Sumit Singh (Chief Executive Officer)

Hey Doug. So I agree with your thoughts. You know, if you’re selling a commodity, I think that this intermediation issue is likely one that needs paying attention. But from that point of view, we believe Chewy is quite well insulated given our value proposition is not primarily search aggregation and because our customer relationship is not primarily built around one time discovery. So we have continued to view ourselves and are more and more seen as a trusted recurring service rich pet care platform. So in categories like food, pharmacy, broader healthcare, the customer is often not asking where to buy. They’re asking for a seamless, dependable experience that consistently meets their needs. And that essentially plays to our strengths. So now in terms of how we think about Agentic developments, we essentially believe that these developments may over time perhaps shape the interface of where the consumer is interacting. But it doesn’t necessarily change who wins the order. And that’s where our focus is in making sure that Shui remains the most trusted and convenient platform behind that transaction, whether it’s through an owned experience or through future integrations that we are also pursuing amongst others. And we are leading with many of these partners out there that make our assortment service and capabilities easy to access. So in that way we see it as an opportunity. So broadly, we think the right strategy is to be present wherever pet parents choose to engage, including emerging agent ecommerce interfaces, because those platforms in our opinion, can expand discovery and put Chewy in front of a much larger pool of high intent users. And so for us, you know, success is not just showing up, it’s to make sure that, you know, behind the transaction our assortment service, healthcare capabilities and recurring relationships are durably integrated. And we have quite high confidence in being able to do that. Now another thing that I’ve heard is, you know, will that impact, you know, sponsored ads business? That’s another question that I’ve gotten. So I’ll just kind of proactively hit that. And there again, I believe that Chewy’s retail media proposition is differentiated because it is highly tied to an engaged pet audience, strong first party data, recurring purchase behavior and closed loop conversation. So said otherwise, right? Our ad proposition is not just we have page views, it is that we have a very high intentful pet audience, strong first party data, recurring behavior and the closed loop attribution that I talked about. If you look at us, we convert a large portion of ad attributed purchases directly to auto ship orders because that’s how our ads model is built. And so then we combine that with on site and off site formats increasingly tied together through Chewy data. So it continues to give suppliers a very strong reason to advertise with Chewy even if agentic interfaces grow because we sit close to that conversion repeat behavior. That’s kind of my point of view externally. Internally I’ve talked about sponsored ads and AI. I talked about creating applications that will allow consumers not only to self serve so post purchase support, but also in purchase discoverability and conversion with the use of AI that drives personalization driven by memory recall, injection of pet Profile data type to order data that then delivers a highly curated and personalized in app experience to you as the customer. That’s the future that we’re headed into and in our opinion we’re not that far off.

Chris Deppe (Chief Financial Officer)

And Doug on fuel in the near term we’re relatively well insulated given the scale of our auto ship business and the strength of our relationships with key partners. And so our guidance for both Q1 and the full year, you know, stands and is what we expect.

Operator

Your next question comes from the line of David Bellinger with Mizuho. Your line is open. Please go ahead.

Mizuho Analyst

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

Chris Deppe (Chief Financial Officer)

Yeah, David, appreciate that. You know, on Q1 we’re not seeing material change in our underlying demand trends when we look across the business, across customer engagement, retention, overall spend behavior, that the trends we see remain stable and consistent with what we’ve seen over the past several quarters. You know, from a quarterly perspective, Q1 is simply the lowest point in the growth profile for the year. And we move through the year, we do expect growth to build, supported by continued share gains, consistent execution across the business. You know, we, we have a high level of confidence there because it’s really all driven by the core components of our model which are stable and consistent. Right. We’re seeing strong customer ads, steady customer ads, strong retention. You know, customers continue to engage more deeply and you know, third, we continue to take share in the category which is growing in a low single digit rate. So when you put all those together, the stable customer growth, the consistent spend expansion and our ongoing share gains, you get a model that builds in a predictable way. And so you know, we’re not, we’re not relying here on any one driver for the Q2 to Q4 3 growth. It’s really broad based execution across the business. And so that’s what gives us the confidence in that ramp and delivering on our full year outlook.

Mizuho Analyst

Got it. And then just one follow up on the EBITDA margin guidance about 100 basis points of expansion. Can you help us understand that the lapping of any one time like or non repeatable items that hit the P and l in 2025 you had the chewy plus investments in the back half. Also the get real launch some front loaded SGA costs ahead of the tariffs. So how much of a benefit on EBITDA or EBITDA margin is assumed in 2026 as you lap these and are there any other offsets we should consider any flexibility around further reinvestment in the business? Thank you.

Chris Deppe (Chief Financial Officer)

Yeah, if you remember correctly David, we talked about the back half of the year last year it was a low single digit million investment number. And so there are not material one time impacts that we’re lapping there that drive that 100 basis points. That 100 basis points really is driven by leveraging the model and improvements in the business. And so that’s kind of where I would guide you there, David.

Sumit Singh (Chief Executive Officer)

Just to elaborate on that, if you recall the number we’d given a guidance of somewhere around 18 to 20 billion dollars at what we had expected to spend and in Q On the Q3 call we said, you know, we’re, we’re on track to spending roughly half of that. So that was about you know, $10 million or so. And ultimately as Chris said, we spend you know, kind of mid, mid low to mid single digits in revenue because we were keeping some to see if we want to invest in pricing as Q4 played through. So that you know, gave that we, you know, were keeping some to see if we wanted to accelerate the fresh demand if the demand didn’t come in as for expectations. And then the third one was we were sort of navigating Chewy plus but we were pleased with the level of efficiency that we saw there. So it’s low to mid single digit millions. And then on the sgna, you know, the Dallas and the inventory impact was also, you know, two to four million dollars. So that’s how you should size it. Appreciate it. Thank you both. Sure.

Operator

Your next question comes from the line of Steve Forbes with Guggenheim. Your line is open. Please go ahead.

Guggenheim Analyst

Good morning Samit and Chris. Given the growth in that ads last couple years and I think your initial comments and the prepared remarks about expanding lifetime value, I was wondering if you can maybe revisit and update us on spending trends by cohort, maybe some of those newer customer cohorts and then, and then what type of growth are you still seeing within your most, most mature cohorts as we think about building conviction around NSPAC.

Sumit Singh (Chief Executive Officer)

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

Guggenheim Analyst

And then maybe just a quick follow up Regarding QE penetration, I think it commented on low single digit penetration by year end, during year end 2025. Any sort of initial thoughts on what the guidance implies or the expectation around penetration to end 2026? Again, once the build conviction.

Sumit Singh (Chief Executive Officer)

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

Wolfe Research Analyst

Hi, this is. Thanks for taking the question. I want to double click on that customer ad.

Operator

Sorry, can you, can you speak up a bit? We’re having a hard time hearing you.

Wolfe Research Analyst

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

Sumit Singh (Chief Executive Officer)

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

Chris Deppe (Chief Financial Officer)

No, I think that’s right. If we’ve missed some of the question, you’re just a bit hard to hear. Happy to follow up and callbacks and double click. Appreciate it. Thank you. Sure.

Operator

Your next question is from Anna Andreeva with Piper Sandler. Your line is open. Please go ahead.

Piper Sandler Analyst

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

Sumit Singh (Chief Executive Officer)

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

Chris Deppe (Chief Financial Officer)

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

Sumit Singh (Chief Executive Officer)

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

Piper Sandler Analyst

Right. Fair enough. Thank you so much guys. Sure.

Operator

We have time for one more question and this question will be coming from the line of Michael McGovern with Bank of America. Your line is open. Please go ahead.

Bank of America Analyst

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

Sumit Singh (Chief Executive Officer)

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

Bank of America Analyst

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

Sumit Singh (Chief Executive Officer)

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

Operator

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

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