Good day and thank you for standing by. Welcome to the Wayfair Q1 2021 Earnings Release and Conference Call. [Operator Instructions] I would now like to hand the call over to our speaker today, Jane Gelfand, Head of Investor Relations, Corporate Development and Capital Markets. Please go ahead.

Good morning and thank you for joining us. Today, we will review our first quarter 2021 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Michael Fleisher, Chief Financial Officer. We will all be available for Q&A following today’s prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance including guidance for the second quarter of 2021. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2020, our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information, future events or otherwise. Also, please note that during today’s call, we will discuss certain non-GAAP financial measures as we review the company’s performance. These include measures such as adjusted EBITDA and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release, which contains descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast will be available for replay on our Investor Relations website. I would now like to turn the call over to Niraj.

Thanks, Jane and good morning everyone. We are excited to share the details of our first quarter results, which were again characterized by strong revenue growth, solid profitability and positive free cash flow. While macro conditions are always changing and promise to be especially dynamic in 2021, Wayfair’s focus remains squarely on connecting all of the industry’s customers and suppliers on our unique platform, which is custom built to address the specific needs of shopping for the home. As a reminder, we refer to ourselves as a platform, because we bring together the best aspects of a marketplace model while also incorporating the benefits of a first-party or 1P retail experience for the customer. Jumping to the category is fundamentally unlike nearly every other vertical of retail. Each purchase is a personal, highly emotional expression of one’s feeling of home. And much of the category is unbranded and differentiated. These are high consideration purchases and require a 1P experience for the customer. Shoppers need inspiration through relevant content, discovery through a wide assortment and confidence that is built through strong merchandising, fair prices, reliable delivery and effortless customer service. Our aim is to set the bar ever higher on each of these dimensions with a best-in-class customer experience as our north star. In the process, we are building the preeminent destination for shopping for the home, a trusted household brand that tens of millions of customers return to again and again as they seek inspiration, explore our vast selection and discover the products they love. To do this effectively, Wayfair has flipped the script on what powers the business and adopted the most attractive aspects of a marketplace model when it comes to our suppliers. Instead of working with a select few suppliers, we embrace an inventory-light, third-party model and…

Thanks, Niraj and good morning, everyone. One of the key enablers to our supplier success on the Wayfair platform and frankly to Wayfair itself are the services and tools we develop for their use. These currently spanned offerings across media, merchandising and logistics with more to come. Rather than speaking the abstract, I want to use our time today to bring each of our current offerings to life. I will do so through some real examples of how these services have benefited individual suppliers over the last couple of years. I’d like to start with our media business, through which our suppliers can purchase advertising to enhance their competitive positioning on our platform. We take a different approach here than other e-commerce retailers, because the very unique nature of the home category requires a browse-oriented customer shopping journey. Our foundational guiding principle is that advertising done right should be accretive to the customer experience. As a result, we have been very deliberate about our media inventory, including the type, quantity and the pace at which we release it. We first launched media services in the U.S. a few years ago, consisting predominantly of our onsite display ads. We followed in late 2018 with the launch of Way Up, our sponsored products format. Today, we continue to expand the sophistication of our media services, including by adding functionality like keyword bidding and options to display several related SKUs in a single promotional unit. We are driving education across our diverse supplier base to encourage adoption and are pleased to report that the media business has scaled quite nicely over the last 2 years with a lot more to go. We are just starting to launch a similar suite of services in Europe, leveraging the same technology and playbook that has proven…

Thank you, Steve, and good morning, everyone. Let’s take a look at the financial details for the first quarter before discussing the forward outlook. As you saw in our press release this morning, Q1 total net revenue was $3.5 billion. This was $1.1 billion more than the first quarter of last year, representing 49% growth year-over-year. We saw strong growth and sequential acceleration in the growth rate year-over-year in both the U.S. and International segments. The U.S. reported revenue growth of 43% over Q1 of 2020, up $846 million. As we mentioned back in February, we did see some benefit from stimulus in both January and once again in March, though we estimate the net lift from the 2 was relatively mild. International momentum was also very strong at 85% growth over the prior year. A slower vaccine rollout and continued COVID related restrictions across Canada, the UK and Germany, all likely contributed to the results. And reported growth also benefited from a weaker U.S. dollar year-over-year. On a constant currency basis, international revenue grew 73% from the prior year. Niraj discussed our KPIs earlier, so I will now move further down the P&L. As I do, please note that I will be referencing the remaining financials on a non-GAAP basis, which includes depreciation and amortization, but excludes stock-based compensation, related taxes and other adjustments. Q1 gross margin was 28.9%, showing 400 basis points of leverage compared to last year. Positive year-over-year drivers included merchandising gains and strength in media supplier services. These gains were partially offset by category mix, as outdoor got an earlier start than expected and tends to operate at a lower gross margin profile. While we are not totally immune from sequentially higher shipping costs, we believe Wayfair is better insulated than much of the industry,…

[Operator Instructions] Your first question comes from the line of Peter Keith with Piper Sandler.

Hi. Thanks. Good morning everyone. Thanks for taking the question. I was curious on the supplier services that Steve outlined with media merchandising logistics. If any one of those has been gaining particular traction over the last year or even in the recent months, I would think potentially on the logistics side with the container issues would be a stand out. But I would be curious if there is any specific call outs amongst the 3?

Thanks, Peter. I will start, and then I don’t know, I will ask Steve or Michael might want to jump in. Yes. Thanks for your question, too. So on the supplier services, what I would say is we are seeing nice growth. The 2 that are the farthest along that are growing nicely, I mean they are all growing nicely, but the 2 that are farthest along would be what we are doing on logistics, which is both the warehousing offering, which is the traditional cascade offering. But then what we are doing with the CastleGate logistics inbound services, the ISC ocean freight brokerage business. And then the other one is what we are doing on advertising, supplier advertising on our site, which we have been calling Media. That said, I would say all of these are still very much in the early days. So, while they show really nice percentage growth, they are quite small relative to potential. And then what I would say we are doing on other supplier services like merchandising, it’s still very much – or super early. So, they are all working really well. But from a contribution to the total, I would say that the vast – the runway is really all still in front of us.

Yes, I don’t have anything to add to that, Niraj.

Okay. Thanks. Maybe a question for Michael, just on the gross margin guidance, 27% to 28%, I guess kind of quarter-on-quarter, it seems like the guidance continues to get a little bit better. We know there is concerns around maybe increased promotions coming down the pipeline. Can you just talk about the structural benefits that you are seeing that’s given you a little more confidence in that gross margin guide?

Thanks Peter. So yes, as you noted, we have tightened the range a little bit to 27% to 28% and sort of brought up the bottom end. And I think that’s just around the confidence of now having delivered a few quarters consistently at about 29%. Look, I think there is some potential near-term for downward pressure from shipping costs. I don’t think we are worried about promotions and the promotional environment right now. And so – and at the same time, as you know, we have got a huge set of logistics investments that are starting to bear fruit in a meaningful way that offset the other shipping cost potential pressures. So, I think 27% to 28% is a good place to target, particularly sort of in the environment we are in today.

Okay. Thanks a lot guys. Good luck.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Good morning. Great quarter, congratulations. So, the first question for Michael. You are recognizing, obviously, a very fluid environment and you are not guiding revenues – you are not guiding specifically revenue for Q2. But can you provide some colors for us as to how we should think about the full quarter and how revenues should trend maybe through May and June?

Thanks, Brian. Look, as you guys know, we have held up giving net revenue guidance for about a year now because the pandemic has created all sorts of volatility. And frankly, Q2 is likely to be the toughest quarter to forecast due to the sticky nature of Q2 last year. In particular, April last year had a very strong back half. May was the biggest month from a comp perspective. And then by June, comps were coming back down, though still somewhat elevated. So in many ways, I think your educated guess, the last I heard consensus is somewhere in the sort of negative 7%, negative 8% net revenue range is probably as good as any. The year-over-year result is going to end up being whatever it’s going to be. I think most importantly, we are very focused on sequential dollar stability and growth. That’s what we spoke to about in the prepared remarks. And frankly, we are really encouraged by what we are seeing.

And let me just add, this is Niraj. I just want to chime in for a second. Because I think there is obviously a traditional modeling focus on year-over-year growth. And what’s interesting, year-over-year growth matters when you are growing nominally above inflation, if inflation is 2 and you are growing at 4. Year-over-year trends matter. If you look at our growth rate, 2014, 2019 is 48% CAGR, last year is higher with the pandemic at 55%. What happened a year ago really doesn’t matter. So, if you really want to understand the business, really the sequential trend tells you a lot more. And if you look at our historic sequential trend, the way that 4 quarters kind of roll, Q4 to Q1 generally is a little bit down because you are coming off holiday into the first quarter of the year. Q1 to Q2 is generally a nice step-up in growth. Q2 to Q3 is generally flattish. And Q3, Q4 is a step-up in growth as you go in holiday. And if you look over the last 7 years where you have all the quarters, you kind of see that pattern play out pretty clearly in normal years. And so what happens in our business, if you think about how it’s driven by repeat, now 75% of the orders are repeat, you look at this last quarter, repeat orders grew 58%. New orders grew 28%. So we’re getting a lot of new customers. But really where we make the ton of money, they enjoy the experience, they come back and we keep making the experience better and better, so they come back more and more, right? It’s a real flywheel. So then what happens is what matters the most for next quarter is really what we did this quarter. How many more customers do we get? What was their repeat behavior? What improvements do we make? And that affects them what they do in the next quarter. And then that affects what they do in the next quarter. So the sequential trends, I think, actually, even though they are particularly helpful because of the pandemic, I think they actually tell you a lot more about the business in general.

That’s very helpful. I appreciate all the color. And then just maybe a quicker follow-up, I – it was mentioned in prepared comments about stimulus and I think the comment you made is that you think any benefits of the stimulus, I guess, this most recent round of stimulus have been mild. That seems different than what I’m hearing from a lot of other companies I cover, the benefits have been much more substantial. So I guess the color questions there is how are you looking at them as mild? And why do you think that is in the case of Wayfair?

Yes. So I think there is a couple of things. So I think the first round of stimulus was very significant for everybody, particularly based on their online business, because if you remember the first run of stimulus, brick-and-mortar was closed. So brick-and-mortar retailers didn’t benefit from the first round of stimulus. So a bricks-and-mortar-based guy is going to talk about the current stimulus being great, and they are going to say that the first round was really not that as great. But it’s because they closed all their stores and they didn’t have much going on online. So they have a relative difference. If you’re online, you’ve been beneficiary through the whole thing to a significant degree. So now you’re comparing it to kind of the peak of the COVID, the very beginning of the lockdown where effectively all the money went back out. If you look at what’s happened with the stimulus broadly over time, an increasing amount has gone into savings with each round of stimulus. And that’s why the U.S. consumers are sitting with close to $4 trillion in savings in the bank, up from $800 billion before COVID, right? So those who have money have way more, and they saved an increasing amount of the stimulus checks. So I think if you look at how it plays out, what we’re describing is the effect it had on us, and we’re describing it relative to the effect of the one last April. And you can kind of – if you think about really just focusing on online, which is really where all the gains have been, is very significant kind of that you kind of get it all back out in the market versus less now. But if you’re a brick-and-mortar guy, obviously, you’re benefiting from your stores being open now. So that’s basically, I think, the difference.

Got it. Really helpful. Congrats again, best of luck. Thanks.

Thanks, Brian.

Thank you.

Your next question comes from the line of Justin Post with Bank of America.

Great. Thanks a lot for taking my question. Just on an industry level, you guys were innovators in the category and really got ahead of a lot of the offline guys. They are definitely refocused on online. How do you think that could affect the overall industry? And specifically, as you think about marketing channels, does that change anything? And also the online promotional environment, how do you think about that? And do you think you can keep gaining share as we look forward over the next couple of years? Thank you.

Thanks, Jeff. So I appreciate you saying that we were innovators. I would just like to argue my point, which is I think we are innovators. And so I think we’re doing a lot that’s actually – the moat of us versus the main competitors we have were a handful of very large retailers, the general merchandise guys who focus on groceries and the home improvement guys who focus on building materials and then, obviously, the generalist e-commerce platforms. That’s really our main competition, even though it’s a fragmented world, and there is a lot of competitors out there, hundreds and hundreds thousands of them. What we’re finding is that none of them really focus on home. And so they want home to just be another category that they fit into the mix, even down to how they think about logistics, even though the – there is only a couple of them who are really investing in the logistics in standing way. And if you look at where the investments are, it’s into these networks optimize for grocery, these networks that are kind of 1-hour delivery networks or they are into networks that benefit the bulk of their business. But if you look at what we’re doing on home, if you look at our digital brokerage business for the inbound freight and how it’s optimized for our industry, if you look at what we’re doing with the optimization around large parcels, you’ll find that we’re actually – the moat is widening. Similarly, if you look at the merchandising that we’re doing and what we’re doing with imaging and rendering imagery, there is still significant differences of us versus the large competitors we have. And it’s all because we’re specialized on this category. And if you look at their innovation, groceries…

Great. Thank you.

Your next question comes from the line of Seth Basham with Wedbush.

Thanks a lot and good morning, and congrats on a great quarter. My question is around the cohorts that you guys have acquired over the course of pandemic and what you’re seeing from them thus far in terms of the behavior relative to pre-pandemic cohorts. Are you seeing them behave similarly or are they turning out or spending less than pre-pandemic cohorts?

Thanks, Seth. We’re seeing them play out very similar to any other customer cohort. And the thing I would point you to where you really see that is if you just look at the share of orders that are repeat versus new, and you see how that’s continued to pick up, And following a pattern that was there well before the pandemic. We just hit 75%, like 74.5% or something. And if you – in our IR debt, I’m sure you have a 5-year view of it, you just see how it keeps cleanly ticking up. And it doesn’t mean we’re not getting new customers. We just got, whatever, 3.75 million orders from new customers this last quarter. So we’re getting tons of new customers. But the growth is driven by the repeat people coming back. That was up 58%. We had like 11 million repeat orders this quarter. And that’s still a huge run rate because as I mentioned, we have less than 2% market share. So even with the customers we had, we’re still only getting about $500 per customer per year, which has a huge amount of running room. And obviously, there is a lot more customers to get to.

Got it. So as you look at the balance of the year, you start facing tougher comparisons in search of customer growth and you expect those trends to continue and you expect to continue to grow your new customers at a material rate like we saw in the first quarter?

Yes. The way I would encourage you to think about it is, I was kind of touching on this earlier in one of the earlier questions. If you just think about it sequentially, I think that gives you the way to think about it and model it, but then you can back out whatever you want to call it year-over-year. So year-over-year doesn’t really matter. The question is, hey – so we got this bunch of new customers this quarter, okay. So now we go into next quarter, we have 33 million active customers. What happens next quarter? Are they repeating the same frequency or does the frequency tick up a little and it continues to tick up a little every quarter, right? And then are there still new customers again, okay, yes. So the new customer number, how many are going to be in market. And so if you kind of take out those COVID quarters, you can see a clean line going back many years of how many new customers are tipping into the bucket. And remember, they are new in the sense that they placed their first order with us. But they are not necessarily new entirely to us, meaning we have a huge reach to customers. I mean we have tens of millions of customers who are on our e-mail list, millions and millions of customers who downloaded the app who haven’t yet bought, right? So what happens is those folks kind of eventually tip in. And then, of course, we’re getting new folks into those kind of early-stage aspects of the funnel, too. So if you look at it sequentially and just kind of look at what trends were like and you say, okay, hey, are these guys investing things and make the customer search better, so will repeat continue to slowly pick up will customers continue to tip in, that sort of gives you a way to think about growth. And then if you look at EBITDA, we have all those structural pillars. We talk about those four pillars that are going to keep driving up the EBITDA margin and mainly by giving up gross margin. And that is still early, too. And so you can kind of get your head around, well, if that to getting them the scale that the customer kind of tells you, do you think that these pillars will actually accrue to more margins. It’s pretty easy to see how that will happen. And so that kind of gives you the way to think about it.

Got it. That’s helpful. Thank you very much and good luck.

Thank you.

Your next question comes from the line of Steven Forbes with Guggenheim.

Good morning. So Niraj, maybe just a quick follow-up, right, on the sequential trends. If we look at sort of the LTM net revenue per active customer strength in the first quarter, is the commentary you’re laying out here lead to the expectation of continued strengthening sequentially in that particular line item? Or what is all the visits, right, the millions of members who move down on it, what does that mean for that particular line item?

So I think you’re asking about the LTM revenue per active customer, the number that would be like $461 right now.

Correct. Yes.

Yes. Okay. So that’s the number when I refer to like we’re only getting $500 per year, that’s exactly what I’m referring to. And when I talk about ticking, repeat is picking up slowly. If you can look at that number and if you take a long view, you see it’s picking up, but you see it picks up slowly. And the reason it picks up slowly is you’re getting tons of new customers in who just made a purchase for the first time, and you’re mixing them with what’s significant number in absolute count, but it’s small in a proportion who went from first to second. And that’s bigger than who went from second to third order and third to fourth order, fourth to fifth order. But these are each growing. And as they grow, they spend more with us. And so that number moves up but it moves up slowly because you have so many customers piling in the top of that funnel, right? And obviously, that number is weighted by the customers who are in each tranche and how loyal they are and the age of the customers, because you’re mixing the cutovers who bought yesterday with customers who bought a year ago, right, because it’s a trailing metric. And so yes, we would look for that number to go up over time. It bounces around a little bit, but that number would be basically the easier number to look at, I think, is the repeat order growth and the new order growth to really think about it. This number will be impacted by that because as customers repeat more often, become more loyal, they do spend more per year with us.

Yes. The only other thing I – the only thing I’d add there is, if you look at the investor deck where we take that number back over time, you can see back in 2016, it was $395 right? Like as Niraj said, we’re meaning wallet share year in, year out, and we think there is a long runway for that to continue.

And then just a quick follow-up, I don’t know if you could provide some color on the anticipated cadence of international EBIT margin or just simplistically, if we should assume the first quarter is sort of the trough year in terms of the performance for 2021?

So I think the way to think about international is the same way I was kind of guiding you to think about the whole business, but effectively, it’s earlier stage, meaning, right, if you look at it, we’re getting tons of new customers because we have so few on a relative basis to the size of the market compared to the U.S. And then, in fact, the repeats continuing to expand, and it’s expanding nicely. So in other words, all those metrics underneath in the International segment keep going the right way. So revenue will compound, should grow faster in international over time than it can in the U.S. even though both will grow at a very significant rate. And then – so then if you look at the EBITDA, your question specifically, I think on profit and international profit, what you’ll see there is, ultimately, we basically are – we have been investing in International for our long-term plan, not for the near-term plan. What I mean by that is when we really decided to invest in international in 2014, we started summer of ‘14. We purposely decided to headquarter our business in Germany, headquarter ourselves, as you know, in Berlin, Germany, but the first market we focus on is the UK. So it goes a lot. So you put headquarter in Berlin. Why would you do that if you’re focused on UK. Well, the reason is our long-term plan is to be expand throughout Europe and have – basically, this is a North American playbook, but the UK was the first market. Well, as we prove that out, and became the leader in the UK today, we’re a household brand in the UK, we’re the leader online in home in the UK, and that business continues to grow…

No. I think you covered exactly how we’re thinking about the trajectory there. We’re obviously not going to sort of guide out international forward quarters anywhere for the whole business, but the whole – the international business continues to be on a great trajectory. We’re making the investments in a really balanced and thoughtful way there. And you’re continuing to see the leverage show up on, as Niraj pointed out, the leverage show up on the substantive investment we’ve been making in the International business over the last few years.

Thank you.

Thanks, Steven.

And we have reached our allotted time for questions. At this time, I would like to turn the call back to Niraj for closing remarks.

Well, thank you all for joining for the call. We appreciate your interest in Wayfair. And we’re really excited about the future. We see a tremendous growth ahead, and we will update you again next quarter. Thank you.

This concludes today’s conference. Thank you for participating. You may now disconnect.