Chewy (NYSE: CHWY) beat on both the top and bottom lines in the second quarter. Net sales landed at the high end of guidance, and the adjusted EBITDA margin expanded 90 basis points to 6.8%. The pet e-commerce company raised its full-year revenue and profitability outlook, signaling confidence in its subscription-driven model even as free cash flow dipped on higher capital spending.
Net sales rose 7.3% year over year to $3.33 billion, edging past the consensus estimate of $3.317 billion. Excluding contributions from recent acquisitions SmartPak and Modern Animal, organic growth was 5.7%. Adjusted diluted EPS of $0.36 beat the $0.18 estimate by a wide margin, though the GAAP figure of $0.20 was weighed down by $85.9 million in share-based compensation and related taxes.
The most telling number for the bull case is Autoship customer sales. They grew 9.3% to $2.82 billion and now represent 84.6% of total revenue, up from 83.0% a year ago. Active customers increased 3.8% to 21.7 million, and net sales per active customer rose 1.9% to $602. The Autoship penetration rate is the real story here: each percentage point of shift toward recurring revenue reduces churn risk and improves forecasting accuracy, which in turn supports the margin expansion the company is now guiding toward.
Gross margin held steady at 30.4%. Supply chain efficiencies offset cost inflation, and the company absorbed those costs through operational leverage rather than price increases. Operating income jumped to $92.0 million from $69.7 million, a 32% increase that outpaced revenue growth. This was driven by SG&A leverage, as selling, general and administrative expenses grew only 4.8% versus 7.3% revenue growth.
Adjusted EBITDA of $226.7 million was up 23.7% from $183.3 million, with the margin reaching 6.8%. The improvement came despite a $24.0 million legal settlement gain that boosted GAAP net income but was excluded from the adjusted metric. Strip that out, and the underlying operating momentum still looks solid: the core business generated $137.4 million in operating cash flow, up 2.6% year over year.
Free cash flow fell 15.5% to $89.5 million. Capital expenditures nearly doubled to $47.9 million from $28.0 million a year ago. Management ties the capex increase to investments in fulfillment capacity and pharmacy infrastructure, framing it as growth spend, not maintenance. For a company that generated $160.3 million in free cash flow over the first half of the year, the quarterly dip is manageable. But the persistence of this capex intensity bears watching.
Management raised the full-year outlook, citing the durability of recurring revenue and disciplined execution. The guidance raise is the key signal from this print: it suggests the 6.8% adjusted EBITDA margin is not a one-quarter peak but a floor to build upon as Autoship penetration deepens and operating leverage compounds. The question is whether customer acquisition can sustain its 3.8% growth rate without a step-up in advertising spend. Advertising and marketing costs rose 7.1% to $214.8 million, roughly in line with revenue growth, so the customer acquisition cost curve is flattening rather than declining. That is an improvement from earlier years, but it leaves room for further leverage if the brand's organic pull continues to strengthen.