Good day, and thank you for standing by. And welcome to the Wayfair Q2 2021 Earnings Release Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Jane Gelfand, Head of Investor Relations, Capital Markets and Corporate Development.

Good morning, and thank you for joining us. Today, we will review our second quarter 2021 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Michael Fleisher, Chief Financial Officer and Margaret Lawrence, Vice President of Wayfair Professional and Perigold. 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 third 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 this call, we will discuss certain non-GAAP financial measures as we review the company's performance including 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 and investor presentation which contains descriptions of our non-GAAP financial measures and reconciliations of our non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, Jane and good morning, everyone. It's great to reconnect with you all today to cover the details of our second quarter results and to share some of our observations during this dynamic period. Let me start off by saying that Q2 came in slightly differently than we initially expected, a bit more subdued on net revenue and stronger than we had forecasted on profitability and free cash flow. Many of you have had questions as to whether Wayfair can be sustainably profitable as the pandemic recedes. And this is clear evidence to make that case. This quarter represented the toughest year-ago comp, as we lapped the surge of pandemic driven demand in the Spring of last year. Against that backdrop, vaccination rates picked up, the economy more fully reopened, and consumer behavior understandably adjusted. At $3.9 billion, Q2 net revenue was down about 10% year-over-year but grew 11% relative to Q1 and the two-year CAGR was north of 28%. As we discussed when we last spoke in May, sequential growth rates and two-year growth metrics will likely be more telling for investors until we get past 2021. Despite any short-term noise, the underlying structural elements for continued long-term category demand and share transfer to e-commerce remain in place. Consumer balance sheets are strong, and interest in the home is not going away post-pandemic even if there is some shorter-term normalization. As an example, our Annual Way Day event in Q2 proved to be the largest in the company's history, even as consumer spending began to flow back to experiential categories. Our customers in particular tend to shop one item, one room, one project at a time. And while there may be rebalancing their spend some, home to-do lists are nearly endless, supporting the large size of the category. Wayfair…

Thanks, Niraj and hello, everyone. I'm glad to be joining you today to discuss Wayfair Professional, our dedicated business brand, which I hear many of you have been eager to explore more. I joined Wayfair over four-years ago, and have led Wayfair Professional since the beginning of my time here. Over the last six months, I've also assumed responsibility for our Perigold brand. We'll leave the Perigold discussion for another time. But it has some clear similarities and synergies with B2B and I'm very excited about its potential. Prior to Wayfair, I held leadership roles at Google and in the venture capital world. Our vision for Wayfair Professional is to be the destination for all things furniture, fixtures and equipment for every business. There are more than 45 million businesses in North America and 30 million businesses in Europe. Our focus is to serve each of these in a differentiated way, particularly when it comes to those design driven purchasing decisions where our professional customers benefit from the same core elements that make our overall business special selection, service, value and speed. Wayfair Professional first evolved as many business customers initially came to the Wayfair platform through our consumer facing site. We recognize that these customers were very different in nature, and that there was an opportunity to build a customized experience for them. We started the early work in 2015 and officially launched the Wayfair Professional brand in the U.S. in 2017. Since then, we've grown meaningfully with the number of active customers growing at a more than 30% CAGR. In addition to our vast B2C catalog, the number of commercial grade products on site has grown by approximately 25 times from when we started and nearly all inquiries are now handled by dedicated B2B service reps. As we…

Thank you, Margaret and good morning, everyone. Let's take a look at the financial details for the second quarter before discussing the forward outlook. As you saw on our press release this morning, Q2 total net revenue was $3.9 billion. This was $447 million less than the second quarter of last year, representing a 10.4% decline year-over-year. We're now comping what was a truly extraordinary period a year-ago. So the moderate year-over-year decline is not a surprise. We're seeing a change in the macro environment as consumers embrace a reopening economy and are beginning to rebalance spend towards categories they have surely missed over the past 18 months. This makes complete sense though we would not expect interest in the home category to meaningfully wane sequentially. So rather than dwelling on year-over-year noise, we're instead focused on quarter-over-quarter trends. On this basis, Q2 net revenue dollars were 11% higher relative to Q1. Gross to net translation did normalize year-over-year, leading to percentage growth rates in net revenue terms that were above the gross revenue rates. The U.S. net revenue declined 15.2% over Q2 of 2020 down by $554 million year-over-year. Quarter-over-quarter, U.S. net revenue grew by 9.8% compared to Q1. Our international geographies are a bit behind the U.S. in terms of reopening. So Q2 momentum was stronger in this segment. International net revenue grew by 16.3% year-over-year, or $107 million and was up by 15.6% compared to Q1 2021. On a constant currency basis, international net revenue grew 3.2% from the prior-year. Turning to Q2 KPIs at the consolidated level. The last 12 months active customers surpassed 31 million this quarter, nearly 20% higher year-over-year, while order frequency over the last 12 months was 1.96 up close to 4% year-over-year. Both these metrics showed sequential declines, which makes sense…

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

Hi, thanks, good morning everyone. Interesting comments on Wayfair Professional, it sounds like it's down about 10% of sales already. I was wondering if you could comment, how that's trended up as a percent of sales. And then longer-term where do you think Wayfair Professional could go as a percent of sales within your mix over the next couple of years?

Thanks, Peter. Let me yes - let Margaret take shot at the question.

Peter, thanks so much for the question. We have very large ambitions at Wayfair Professional, the trend has increased over the four plus years that I've been at Wayfair and frankly, we're doing everything we can to serve the professional customer with the high touch experience, the broad selection, adding things like consolidated delivery and financing options in the future. So we're doing everything we can to increase as a share of Wayfair overall and feel like there's a huge, huge opportunity ahead, given the size of the market and where we are now.

Okay, thank you, and then maybe pivoting over to advertising. So might be played out, it was pretty efficient in Q2 below your regular run rate. Maybe could you hit two topics, what are you seeing now with some of the privacy changes? Is that impacting your ad cost and then more recently, with this slowdown are you seeing any irrational competitive behavior within the advertising landscape?

Thanks, Peter. Yes, let me try to answer this. So yes, as you noted ad cost came in round about 9% of sales this quarter, which is a little lower than it had been. But just to remind you how we target ad spend, we don't actually spend a budget, we in fact, our goal would be to spend as much as possible, but however we tightly manage it with the payback, in the payback, we're inflexible on. And because we can tightly measure that we have a pretty strong advantage, because we'll then use technology in terms of targeting, we'll use creative optimization, we'll build new channels, we'll do all these things to grow our access to customers, while keeping that payback tight. And so as you noted, there's a couple of things that have happened recently in the market. One is obviously the privacy considerations continue to get tightened, we actually have a significant advantage there both because we have our own proprietary ad technology and because we have such a large house file of customers that we already know, and we can reach them on email, we can reach them with App notifications. And what this lets us do is in a very low cost way, have a one-to-one relationship with them that isn't reliant on using one of the large media providers and their targeting and so when someone like Apple doesn't let you know that apps cross track, that doesn't really hurt us in a way it hurts others who are really counting on third-party ad vendors helping them with that. In terms of your comment about irrational ad spending, I will say we've seen inflation in the market as sort of the world has reopened significantly in the countries we're in. But to just remind you, we don't chase that. So anytime we see inflation that we think is irrational, we just won't spend into it. And what we always see as any kind of burst like that tends to come back to rational is folks realize that they're overspending or what have you. And then we're able to grow our spend through all the methods I described around targeting and creative optimization like so we feel really good about our ability to grow our ad spend over time, but just keeping it very efficient in terms of not changing on paybacks.

Okay, thank you. Very helpful. Keep up the good work.

Thanks, Peter.

Thanks, Peter.

Your next question comes from John Blackledge with Cowen.

Hi, two questions. One, just curious, on back-to-school impact, is that a tailwind or a headwind this year? And then the gross margins were a little bit better than we thought, despite the slightly lower top line, could you just talk about the levers there and as we round through the year, just kind of the levers for the gross margins? Thank you.

Thanks, John, back-to-school, back-to-school, I would say should be a tailwind. But I guess I would take a step back and say, our business has like all these different piece of seasonality in it. For example, the holiday, over indexes and housewares and people gifting things to themselves. Right after holidays in January, that's one of the best seasons for entertainment furniture, because a lot of folks get a TV during the holidays, and then they want their living room set up for the Superbowl, then the sort of textiles tend to do well in the spring, you have things like the outdoor season, which is a very big season for us that starts in the late winter and runs through the spring into the summer. Back-to-school obviously you just refer, so there's sort of like this ongoing pattern of different seasonal events that cause certain categories to kind of grow at certain times, relative to others. So but I would think back-to-school should be a tailwind and we're just entering back-to-school now. Schools are just opening now and that sort of runs through the next six, eight weeks. In terms of a question on gross margin, one things we've tried to highlight first, I would say multiple years now is that there's four main pillars that contribute to the growth in gross margin, and that there's a very long runway in gross margins. And back when we were running at the 24% or so gross margin, I talked about how there's over 1,000 basis points of runway between these pillars, and how at the time when our guidance was 25% to 27%, that kind of few 100 basis points at any one of the four pillars could cover off that entire range. But in fact, there's four pillars Now,…

Yes and John, it's Michael, the only thing I'd add is I think when you look at the last few quarters, we've delivered 29%. The reason we continue to guide 27% to 28%, particularly as we look at what the period we're in right now, when we think about, as you've just pointed out supply constraint - supply chain constraints, inflation, et cetera. I think the 27% to 28% is the right place to be targeting sort of for the near-term, not taking anything away from the long-term opportunity to drive increased gross margin and increased EBITDA over time. And I think you saw that in the changes we made over the last couple of quarters to how we're talking about the long-term and what we think the long-term opportunities are. And I continue to point everybody, it's near just back to that, when you start to think about what the opportunity is over the next few years.

And your next question comes from Steve McManus with Exane BNP Paribas.

Hey, good morning guys, thanks for taking the question. So just wanted to follow-up on B2B. You spoke a bit about international but I was just wondering what you're thinking in terms of the timeline there for a full rollout in Europe, any color there will be great.

Steve, thanks for the question. The way that we're thinking about market expansion generally is probably following the recipe that we've built and the success we've seen in the U.S. So as we build a robust business on the B2C side, there's an advantage to us waiting for that to happen and then layering on our Wayfair Professional platform, leveraging the customers that are shopping on the B2C site, bringing them into our Wayfair Professional experience. And then having a gated site experience focused on the verticals that we will then be serving. So that's kind of how we're thinking about it at a high level following the B2C success.

And Steve this is Niraj. Let me just chime in. I guess, if you want to think about B2B rather, you can maybe think about it as three phases. Phase 1 is where we just sort of do in a very light way if we have account managers, but that's really all we have, that we've already done that in Europe, but in Europe, as the results only 1% of revenue was brought about 10%. Phase 2 is where you really operationalize that business, you're adding the selection, you have category teams, you're really managing the sales force. We've already done that in North America. That's what we're embarking on in Europe now. In Phase 3, which we're now embarking on North America is where you really go deep in these verticals and you make each vertical bespoke experience. So just think of them as sort of like one follows the next and Europe's like, running one phase behind, but progressing on the identical kind of trajectory.

Okay, thanks. And then just a quick follow-up on international margins, any update on how we should think about kind of the cadence in the back half and maybe a bit longer-term? How international profitability is tracking for initial expectations?

Yes, international is developing very nicely. I would caution you that the problem with international is it's not really like a thing, right, it's like international of Canada, and it has the U.K., it has Germany. And we add them together, and we call them International, but they're a very different life stages. And just even if you zoom in on Europe, we first we headquartered in Berlin, because our goal was to build a broad European business. The first market we focused on is the U.K. We're the leader in the U.K., the U.K. is sizably larger for us today than Germany, we're in the number one position, we have a household brand. The teams based in Berlin, we only have 100 people in London, we have over 1,000 in Berlin, then but once the U.K. was working, we then focus on Germany, Germany is now growing really well. But it's only a little over two years into the four year cycle to build a household brand. But it's tracking very nicely. It's growing quite well. So what happens if you zoom into for your question on profitability if you zoom in, you would see the margin profile of the U.K. is meaningfully farther ahead than the margin profile of Germany. So these things sort of go sequentially. And so for the overall segment P&L to show the kind of profitability, we have in the United States, that will take some time because you need the bulk of the countries in it to really be mature to the degree that the U.S. is mature.

That's helpful. Appreciate it guys. Best of luck.

Thanks, Steve.

Your next question is from David Bellinger with Wolfe.

Hey, good morning. Thanks for taking my question. So first on passing through higher costs onto consumers. Are you anticipating some type of change in buying behavior near-term? If I recall correctly, I believe shoppers were taking a bit longer to convert into some of the tariffs went through a few years back. So are you seeing any early evidence of that now, or other notable changes in buyer activity, and just any thoughts on how that could affect this holiday season?

You know what I would say we're seeing consumer demand remain really high. And just to kind of give you some context, I mean if you think about our business, 75% of our orders were repeat orders. So the business is really driven by people we already know, if you look at the active customer count with 31 million people in the active customer count. And if you just look even five quarters ago, we only had 21 million, so it's grown 10 million active customers in just the five quarters. But in truth, the number of people come to our sites far more than that, one of the stats we gave out is that we have 4 billion visits last year, so if you think about the number of active customers, that they wouldn't do for because let's just write this way, say we had 100 million people visit last year, that would mean they came 40 times each. Or if we had 200 million people visit last year, they would have come 20 times each. So what's really happening in the business is you have a tremendous number of people coming and visiting regularly than buying on some frequency. We're not seeing any of the kind of delays you mentioned, or whatnot. And in fact, we're seeing our brand gets stronger. So I would think as you think about a holiday, while we certainly could be buffeted around by the macro market. And so the question is like what overall demand levels are, I think you're going to see us taking share quite nicely as we roll through time. And then I think overall, on the macro, we believe the macro market is, we think the summer is sort of a little softer, but we feel pretty good about where things are headed.

Got it. That's very helpful. And just a quick follow-up. Can you talk about where you're seeing in terms of labor pressures within your fulfillment centers or even at your suppliers operations? Is that having an impact on the timing and volume of deliveries and yes, at this point, are you building in some type of incremental costs into the business over the next few quarters?

Well, what I would say there, labor markets no question tight, I would say the congestion we see is more on the transportation side than it is on the fulfillment center side. But part of that is we've been very proactive, we raised the minimum wage in the company widely to - the whole company, minimum wage to $15. And that was some period of time ago. I think that puts us in the kind of the bucket of kind of leading employers and so I think as a result between the culture we have and the wages we pay, we're able to attract people fine. So we don't have a shortage in our fulfillment centers. I think the transportation congestion will take some time to play out, but we've been able to continue to access the transportation capacity we need so far.

Thanks, Niraj. Appreciate the color.

Thank you.

Your next question is from Steven Forbes with Guggenheim.

Good morning, Niraj, maybe just a quick follow-up on the International segment. I think someone mentioned in the prepared remarks right that the strength was mainly a function of the delayed reopening cadence overseas, but anything we call out on a country-by-country basis in terms of the maturation of the business and what it tells you about the opportunity ahead, because I think in general, the strength here was higher than expectations, and any sort of key metrics or data points, we should think about for the back half strength, yes just in that segment, as a whole whereas on a country-by-country level?

Well, so as you know, we operate, we sell in four countries today. And so the U.S., Canada, the U.K., and Germany, and I would say what's happening in all four is very similar to one another, although the exact timing is shifted in each one, sort of this way or that way, by some period of weeks or months. And so we're seeing the same cycles play out. And so I don't know that there's anything significantly to know, we're obviously a smaller player in some markets than others, which means we have a lower percentage of the total, which means we can grow at a faster rate more easily. But we're a small player in all of them. So the growth is really ahead of us in all of them. And there's no real thing to point to. Michael, do you have anything to add?

No, I think the only thing I would say is, as we've talked about the last few quarters, the U.K. business is sort of hit what we would call the sort of flywheel working really great, we feel really terrific about how that sort of continuing a pace and all of this is sort of ex-COVID registered, like where we're at those businesses, which I think is the question you were asking. In Germany, it is sort of coming up that that ramp, but coming up in a really nice way. And I think in terms of the sort of the brand work we've done there, understand how customers are sort of seeing us and our brand and the investments we've made, they're starting to see some really good payback in Germany. And so I think we feel, we continue to feel good about the entire international segment, as Niraj pointed out a couple questions ago, each of those businesses is quite distinct, right, so that we operate them as a segment, that is the international segment, but they're all different places in their maturation.

And maybe a follow-up sort of a bigger picture, right as we think about the KPIs specifically active customers, you talk about sequential change. And yes, I guess the slight moderation in active customers in the second quarter. Is there anything that sort of would prevent the business from seeing sequential improvement from here on out? Or is that the international cadence or some other factor right still at risk here in terms of where the active customer base is, in absolute terms?

Let me just jump in real quick, Michael sorry. And then you please chime in. I think there's a math optical illusion there, as well as point to like Q1 to Q2 of last year, we added 5 million active customers, the way the math works is if you don't buy for a 12 month period, you fall out of the number. And so as you noted, we went push down 2 million sequentially from Q1 to Q2. But Q2 year-over-year goes up by 5 million. That is that 12 month cycle with a particularly large jump up from Q1 to Q2, that makes the Q1 to Q2 of this year look a little odd. But if you zoom back out, the underlying trends are all very strong, you can see that in the repeat as a portion of total measure. And so you'll see the normal pattern kind of come back now that you're past that one-time blip from a year-ago.

Yes, I was going to sort of say something similar I think last year, during the early periods of COVID on its first few quarters, we saw much higher new customer growth, not surprising, right, folks were sort of trying us out for the first time. It's not surprising for us at all, that some of those folks would fall out of that 12 month, right, that metric. The thing that's so important to remember, and I sort of harp on this all the time is, that's not how we actually manage the relationship with our customers, right. So the fact that a customer purchased from us during that immediate COVID pandemic period in Q2 last year and hasn't purchased since then, doesn't mean that they're not actively engaged on site, opening emails, putting stuff in their idea boards, like all of the things that we look to manage engagement, is how we work it every day, and where we choose to sort of spend our ad dollars and sort of how we want to be in front of the customer. And we have a lot of customers who might buy every 15 months. And those are really, really good customers, even though from an external reporting perspective, they fall in and out every 12 months.

Thank you. Best of luck. Stay safe.

Thank you.

And your final question comes from Chuck Grom with Gordon Haskett.

Hey, good morning. Thanks. Just my question is on July and the slowdown that you've seen so far, and I'm just curious if you guys could speak to how much you think you can attribute to seasonal timing versus a lack of interest in the home. So Mike, why don't you comment on this is going to be [indiscernible] moment of 2021. So I'm just curious how you think the backdrop will unfold from here?

Yes, thanks, Chuck. Let me say a couple of things. And then Niraj can add in. The one thing I would say that July, just to point out is July was not markedly different than April and May, and June. And so I want to be careful here and there is sequentially, we're sort of continuing to see I think, over the last few months of very similar level of engagement from our customers and sort of where the revenue is coming in, particularly when we look at it on a year-over-year basis. And so I do think that you've got this, it is murky, because right now, there's a combination of macro factors are just really hard to read, right? The combination of folks are vaccinated, folks are out enjoying summer, now you've got variance, masked mandates, sort of the world is changing in sort of a very rapid way, and how that's going to impact consumer buying behavior, particularly as we start to go into what I would call the sort of more regular season of people getting back into offices and back-to-school. I think it's just really hard to read, which is why we basically said, look, we think we're at quarter-to-date is probably as good a read as we can give you.

Yes, I don't have a lot to add, other than the only thing I would comment is, if you look at the shape of the revenue last year, you see this COVID obviously starts in the United States March, but you really see this acute spike. And so started like, heavy in May, and then June, July, then it kind of like taper, it tapers over time. So a lot of the year-over-year comps, I think are not really great numbers to look at, because you're kind of comparing them to a very non-traditional pattern a year-ago. So the actual year-over-year numbers look really weird. But what's really weird is actually last year's pattern, not this year's pattern. And so I think as you roll this year forward, I think you're going to see it play out the way you'd expect it to play out. And then I think once you comp that next year, you're back to more normal comps. But last year's comps are very unusual. So right now the year-over-year doesn't - it looks very odd.

Makes a lot of sense. And my follow-up would be something you could speak to the performance of the customers that chopped you guys for the first time last year, perhaps in the first half of last year and what their performance looks like relative to typical patterns?

This is one of the many things that gives us a lot of confidence about the business is we're seeing the behavior we would expect. And I try to cite this from five quarters ago, we're up 10 million on the active customer count from 21 to 31. From four quarters ago, after the big spike up, we're still at 5 million active customers. So that's the huge number of active customers that are still in the count. Never mind all the other folks who have may or may not have bought in 12 months, but are still engaged with us and they're visiting the site and et cetera. That was my point about the number of visits we had last year as an example. And so I think you're going to see, this is one of the many, many reasons you're going to see this kind of normalized growth we've had historically, you're going to see that continue, where we're doubling every two to three years. And that's where, in our investor deck, we have that one stat saying by 2030, we would be eight times as big, $112 billion. If you took some conservative assumptions around share shifting online, the share, we can take et cetera and multiply them out. In truth, the numbers have actually been getting better. And so the averages we used end-up being conservative, so that that kind of 8x you'd actually expect to exceed that. And we have less than 2% share of our TAM right now. So even if you multiply the percentage of share we have by eight, you still don't have us being that biggest share owner. So there's a lot of headroom and it's fundamentally sound because the offering keeps getting stronger, the customers are reacting very positively to it and we're getting more and more customers.

I will now turn the conference over to the Wayfair management for closing remarks.

Well, I just want to thank everyone for joining today. We appreciate your interest in Wayfair and we'll look forward to talking to you next quarter. Thank you.

This does conclude today's conference. You may now disconnect your lines.