Is the 10% EBITDA Margin Target Finally Within Reach for Chewy?

Chewy, Inc. CHWY posted a steady year-over-year profitability improvement in the third quarter of 2025 and remains firmly on course to achieve its long-term target of a 10% adjusted EBITDA margin. Third-quarter performance built on the momentum from the first half of fiscal 2025 and highlighted the structural strength of Chewy’s business model. Initiatives like the expansion of Chewy Vet Care and the Chewy+ membership program are designed to deepen customer engagement and support long-term margin appreciation. The recent acquisition of SmartEquine is also expected to be accretive to margins upon closing.

Adjusted EBITDA increased 30% year over year to $180.9 million in the fiscal third quarter, with the adjusted EBITDA margin expanding 100 basis points to 5.8%. Management remains confident in Chewy’s ability to deliver consistent and sustainable EBITDA expansion in the years ahead.  As of year-end, fewer than 450 basis points of improvement are remaining to reach this objective of 10% adjusted EBITDA margin target.

For fiscal 2025, management has narrowed its adjusted EBITDA margin guidance to 5.6%-5.7%, reflecting a year-over-year expansion of about 90 basis points. About 60% of this margin uplift is expected to stem from gross margin improvements, driven by high-margin contributors like sponsored ads, a shift toward premium categories, and the health ecosystem, with the remaining 40% coming from SG&A leverage. Gross margin increased by approximately 50 basis points year over year to 29.8% in the third quarter, supported by growth in sponsored advertising, a strong Autoship base and a favorable category mix. These improvements are expected to provide lasting structural margin benefits.

In addition, during the third quarter, Chewy generated 20 basis points of SG&A leverage year over year, excluding SBC and one-time items. This improvement reflects efficiencies from the scaling of the automated facility in Houston and the lapping of temporary costs tied to the Dallas FC and prior inventory pull-forward, signaling tighter cost discipline.

With accelerating margin expansion, improving cost discipline, and multiple structural profit drivers in place, Chewy appears increasingly well-positioned to steadily close the remaining gap and achieve its 10% adjusted EBITDA margin target.

Chewy Faces Competition From Petco & Bark

Petco Health & Wellness Company, Inc. WOOF posted a 3.1% year-over-year decline in net sales to $1.5 billion in the third quarter of fiscal 2025, in line with the company’s outlook. Despite the revenue softness, adjusted EBITDA of Petco rose by $17.3 million to $98.6 million from $81.2 million, reflecting improved profitability, driven by effective cost management and operational execution in the quarter.

BARK, Inc.’s BARK reported total revenues of $98.4 million, which declined 22.1% year over year due to fewer total orders stemming from a lower level of subscriptions carried into the third quarter of fiscal 2026. BARK reported an adjusted EBITDA loss of $1.6 million, within the company’s guidance of a loss of $1 million to $5 million.

Zacks Rundown for CHWY

CHWY shares have lost 25.6% in the last three months compared with the industry’s decline of 10.3%. Chewy carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

From a valuation standpoint, CHWY trades at a forward price-to-earnings ratio of 30.5, higher than the industry’s average of 21.58.

The Zacks Consensus Estimate for earnings estimates for the current and next fiscal years indicates year-over-year growth of 23.1% and 22.7%, respectively.

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This article originally published on Zacks Investment Research (zacks.com).

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