Wayfair Inc. (W) Earnings Call Transcript

Great. So good morning, everyone. Thanks, everyone, for joining us. My name is Alexandra Steiger, and I'm part of the U.S. Internet Research team here at Goldman Sachs. We are very pleased to have Kate Gulliver, CFO of Wayfair, with us today; and also James Lamb, Head of Investor Relations and Treasury. Good to see you again, and welcome you to our conference.

Thank you. Thanks for having us. Happy to see all of you.

So maybe let's kick it off with you, Kate. You joined Wayfair almost 10 years ago. You've occupied a number of roles before being officially promoted to CFO last year. Can you briefly talk about your background, your career trajectory at Wayfair, and also touch on your current role and your key priorities?

Yes. So 10 years, it's so -- sometimes it feels much longer and sometimes it feels much shorter, and now I'm so old. But I started at the company -- I had been a private equity investor before I joined Wayfair, and I joined about 10 months pre our IPO, and my first role at the company was actually running our IPO. And I know some of you from that time period, many of you have been following us for quite a long time. Following that, I moved to a variety of different roles across the business, always working for our former CFO, Michael Fleisher, and upon his retirement last year, stepped into the new CFO job. And so it's been fun because I've gone to see our growth, at the time of the IPO, we were about a little under $1 billion in sales. We had about 2,000 people. Obviously, the business is much different today. We didn't have a logistics network. We hadn't expanded into Canada. We hadn't expanded into the B2B business, Perigold, a number of the things that we see as core growth drivers going forward weren't even fully contemplated at that time. So it's been very exciting to be a part of the growth story and think about those expansion opportunities. As I think about core priorities today, over the past 12 months, our core priority was really cost management and making sure that we were getting our cost structure to a sustainable place that we could then profitably grow from. We are excited about the cost savings that we've achieved, and going forward, what we're focused on is really driving profitable growth from here and, ultimately, over time, managing to free cash flow per share. So obviously, there's some capital structure work as part of that as well.

So you recently hosted an Investor Day where you laid out the opportunity ahead for Wayfair. Maybe starting high level for those that are less familiar with the story, can you help frame the opportunity set that you see for the company in the years ahead? And how do you see Wayfair's positioning to execute against those?

Yes, I'll start and then, James, feel free to jump in. And -- that was our first Investor Day in 10 years as a public company. So if you haven't seen it, I highly encourage you to check it out. There's a lot of good background information. We did outline, and I think this is really the core part of the presentation, the sum of how we've thought about the growth drivers going forward. And if you think about pre the pandemic, we were always a very sizable share gainer in the category. And that was driven both by the shift to online in the category and then our own share gain within that by what we felt was a very compelling offering across our core priorities for the customer, price, availability and speed. And as we think about the growth drivers going forward, the first piece is that core offering being competitive. We feel it's in actually the most competitive place it's been in many years, continuing to take share as a result of that, and then it's layering in some of these newer initiatives. So Perigold, our specialty retail brands, our B2B business, over time, supplier advertising and physical retail. So we have a number of growth vectors that were not as big a driver in the past that we do think will be meaningful going forward, allowing us to continue with sizable share gain in the category. What I think is particularly unique about the way that we're operating right now and what we tried to underscore in the Investor Day, is that much of the cost to build and grow those initiatives already sits within the P&L. Frequently folks say it's hard for me to parse the part where your investment dollars are versus sort of the OpEx dollars required to run the business. And although we don't break that apart, I'm sympathetic to that challenge because a lot of our investment comes in human capital. And so it sits on that SOTG&A line in the P&L. And what I think is compelling about the go-forward is we've built out that physical retail team, right? We've built out that B2B team. We've built out that specialty retail brands team. And so much of the overhead cost for that we are bearing today while the growth drivers remain in those initiatives. And so we should get some leverage on that over time, which drives us to that north of 10% adjusted EBITDA.

I think the only thing I would add to what Kate mentioned is we talked about an $800 billion total addressable market. We cut that up in a few different ways. We're newer. And we also took folks on a kind of a customer journey for the first part of the day where we tried to remind everybody there's unique challenges in the category that we serve, and we think we're uniquely positioned to address those across marketing, merchandising, pricing, et cetera, all underpinned by technology. So I encourage you to check it out and happy to answer some follow-ups as well.

We're definitely going to talk about some of the initiatives in greater detail as well. But stepping back for a moment, the home goods category has obviously gone through significant periods of upward and also downward volatility since the start of COVID. Can you just walk us through how the market evolved over the recent years? How Wayfair navigated that volatility? And where do we sit today in terms of the overall demand environment?

Yes. So maybe we start from sort of the 2020 time period to present. Obviously, 2020, unprecedented demand in the category. Certainly as an online player, we were uniquely positioned to capture that. And then as we moved into 2021 and 2022, the category suffered from some challenges. So part of it was from a logistics and supply perspective, like so much of the economy, our categories struggled with supply availability. We struggled with dramatically increasing logistics costs. Obviously, most of our products comes out of Asia. And so container rate had a significant influence on our prices and on inflation. For Wayfair specifically, during sort of the latter half of '21 and '22, we were not positioned well. We had rising comp due to the aforementioned container rates and inflationary cost pressures broadly in the market. We had low availability. So there wasn't -- we don't take inventory, so we weren't sitting on any inventory that was sitting here. And what we did have was taking longer to get to the end customer because of challenges in the supply chain more broadly. So across, again, those core metrics, price, availability and speed, we were not particularly well positioned. What you've now seen in the category is our suppliers coming back and actually being in a position to access supply to trying to manage that to sort of normalize supply-demand dynamic. And we're able to take advantage of that. So we're able to work with our suppliers to take out some of that inflationary pricing. We've mentioned we're seeing that in our AOVs coming down. And order volume is actually corresponding, so we're seeing order volume grow up -- or go up rather. And you're seeing stabilization there. The category as a whole remains soft. We think we saw softness in the category really starting early 2022. And the data that we look at, which we shared quite a bit on our calls, we look at much of the credit card data that many of you probably look at, shows the category down anywhere from low teens to mid-teens. And so the category has remained somewhat under pressure. We're very pleased with our share gain within that.

Great. So in that context, obviously, another important dynamic in like the broader environment has been like the higher levels of promotions and the elevated competitive intensity in the category, both off-line and also online. Can you maybe talk about how higher promotions have impacted the company's financial model and business decisions? And how would you frame the current competitive landscape?

Yes. So we think about promotions actually as a marketing lever, right? It is a way to get the customer in the door and get her excited about the category during a time period where she may be spending in other areas and wasn't as interested and engaged. And we really need that hook or needed that hook to get her to come in. Interestingly, actually, most of the product that sells during a promotional event is not actually product that's being promoted. So it's similar to a landed physical retailer, the end cap is successful to bring you into the aisle, but you're actually purchasing within the aisle. We see that same dynamic and we spoke about that a little bit on our Q2 call. So we are seeing promotions be successful and an important tool right now in getting her to come in. In terms of impacting our model, you've actually seen our gross margins grow during this time period. And it's one of the unique things about our business. We're not sitting on inventory that we're discounting, right? The supplier may choose to lower price or discount to move through some inventory, but we're passing that on to the customer. And we're maintaining our gross margins as a result because it's not us dropping the price. The thing that we're sort of monitoring going forward and what we're mindful of is we want to balance out the customer you're needing to get her attention right now with not training her to be only shopping on promotions. So that's something we're sort of constantly tweaking and we'll A/B test different types of promotions to see what works and figure out how we want to modify the promotion calendar going forward.

You already touched on it earlier, but one question that obviously remains top of mind for a lot of investors is around the health of your supplier base or supplier margins, just given the volatility we've seen in input costs over the past 24 months. And on the other side, how that could potentially impact consumer prices going forward. Can you maybe talk about what you're hearing from your supplier base and share your view on like the sustainability of the lower consumer prices on the platform?

Yes, I'll start and then, James, you should definitely jump in, it's something we both look at a lot. So a few thoughts there. Just in terms of the -- what's happening on prices, our products have 3 components to price. It's the actual raw material, the labor and then the freight cost of getting that product to the U.S., which is a significant portion of our products, given that they're large, big and bulky. If you look at all those things, there's certainly been inflation across all of those fronts. Inflation has come down some in raw materials. Labor is a little bit stickier, although we're starting to see some movement there, but it's a little bit stickier. Freight is probably the place we've seen come back the most dramatically. Container rate bites us to 10x what they were pre the pandemic and now have come back down, right? So what we're really working with our suppliers on and what our suppliers are aggressively working on is removing that inflationary increase out of their prices. And you see that in our AOV. So if you look at our AOV sort of pre the pandemic, to 2019, pick a stable 2019 year, and then look at AOVs in 2022, which is really the peak of that inflationary pricing, you saw AOVs up 20% year-over-year, compounding obviously more than that. So very significant inflation in our category that is now coming back out quite rapidly, which is contributing to that AOV decline. That's a dynamic that we're actually comfortable with and we like, where actually the AOVs are still above where they were pre the pandemic. We think there is a little bit more price to come out. As suppliers are bringing in new products, they're pricing to that future price point. And they're telling us they're starting to clean out some of the landed inventory, which may have been at that higher price point. And they're doing some of that by moving out of that higher cost bases by moving that down to that lower price point. The dynamics between AOVs and orders, generally, we'd rather see growth through order volume, right, as those become customers who then come back and repeat purchase with us.

I think I would just underscore the point that Kate made where the input costs for the suppliers are diminishing in such a way that the wholesale cost they charge to us may not have to move significantly from where it is now. So that the componentry of this core recipe that we always discuss: availability, speed and price, can remain very competitive on the pricing dimension.

I think it's a core point. I think many folks assume that maybe the prices dropped because suppliers have a ton of inventory that they were trying to burn through. They dropped because the actual cost to make that good and get that good to the U.S. has changed.

That's very helpful, actually. So looking longer term, you recently shared at the Analyst Day your expectation that Wayfair will return to double-digit growth over time. First, can you talk about the path towards revenue acceleration in terms of the elements that are inside versus outside your control? And then second, can you frame some factors that give you confidence in your ability to continue to gain market share?

Yes. So the way that we mapped this out in the Investor Day is there's the what you think the category returns to, and that certainly is outside of our control. Prior to the pandemic, this category is a 3% to 4%-ish grower. We tend to not be actually as correlated to the housing market as folks often think we are. Our average AOV is around $300, no one is doing their whole house. But you can make your own estimates on category growth and where that returns because the category is sort of a steady GDP grower. Then you have the shift from offline to online. So that's the next component. That's both in and out of our control. We're driving some of that, obviously. If you look at the trend line there, certainly, that spiked up in 2020 and then pulled back 2021. But if you were to draw from, say, 2017, 2018, 2019 to where it is now in 2023, it's been a pretty consistent trend, and we believe we're actually back on trend line there, and that's moving as it should. So then it comes down to our own share gain within the category, how we accelerate that share gain. And in terms of what gives us conviction, again, it really goes back to where we are positioned in that core recipe, across price, availability and speed. We've been in the business over 20 years. We know what resonates with the customer. We know how we have to be positioned to get her attention and to get her to come back and continue shopping with us. And as we look at our opportunity there, we want to be well positioned across each of those areas. That was similar to how we were positioned pre the pandemic and our effectiveness there. And then we want to expand our share of wallet with her. So our customer shops with us on average 2 times a year. She's in the category about 8 times a year. So we think there's significant opportunity to grow what she's buying with us. That comes through category expansion and development of newer categories for us. So how effective are we in large appliances, things like that. It also comes through targeting different sectors of the market, like the high-end segment, which we now charter with Perigold. That brand is about 5 years old for us. We've in the past spoken about a very nice growth trajectory there. And it comes through the accessing different customer types. So through our B2B segment, getting more of the sort of B2B trade customer as well as expanding into other sectors within that, like hospitality or education. And so it's across all of those areas that if we have the core recipe working, we can leverage our brands, we can leverage our logistics infrastructure, we leverage our supplier relationship, and we are attacking the customer from many different verticals, helping to grow that share of wallet over time. James, I don't know if you have anything to add to...

I think just, again, that last point is critical, right? A lot of the ways in which we will grow physical retail, professional, specialty and luxury are inherently based on the same advantages that we enjoy in the core Wayfair.com B2C business. Kate just talked about it, technology, supplier relationships, branding, marketing, all of those elements. So a lot of that core differentiation is applicable to the growth drivers.

Great. Maybe let's pivot to your international strategy before actually coming back to discuss professional, your omnichannel strategy and so on and so on. So you recently talked about how you're taking a more focused approach in international. Can you help us frame how investors should think about the balance of growth versus investments in international from here? And also if you can double-click on your competitive positioning in markets outside the U.S.

Yes. So the international segment for us is Canada, the U.K. and Germany. And we actually spoke about our Canada business on our Q1 call. That business has been growing nicely or had sort of been growing nicely for us. And we believe we have a share leadership position in the Canada market. And then the U.K. and Germany, obviously, there's been much more macro complexity in those markets. And we've seen some stability in the U.K. in particular, we like our positioning there. In Germany, we're ensuring that price, availability and speed, that those core metrics are getting into positions that we like there so that we can be well positioned. What we're excited about there's this sort of current state of play. What we're excited about in the International segment is when we look at that $800 billion TAM that James mentioned, about half of that sits across those international markets that we're in today. And we don't see any reason why the technology that we've built in the U.S. and the knowledge that we've built can't be leveraged to win and play and compete in those markets. And as we think about building the business, we want to address that entire $800 billion TAM. We believe we have a right to win across the entirety of that TAM. And the international component is certainly a key element of that. So as we look at it, it may take some time to get to the sort of ideal operating place in those markets, but we don't see anything that would have impede that. The other thing I think is important to note is, as we've gone through the cost takeout over the last year, that has been impacting us across the board. So it's not as if we carved out the international segment and said, we're actually going to protect that, we're not taking cost out there. We've actually taken out costs everywhere. You can see that we do break out the international segment on the P&L, and you can see those cost takeouts that have flown through there in terms of the operating losses that are being significantly mitigated. And that's really been driven by the actions that we took across the board on labor cost and ongoing improvements in logistics cost.