Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Fourth Quarter 2021 Earnings Release and Conference Call. All line have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions]. Thank you. Landry Ngambia, Director of Investor Relations, you may begin your conference.

Good morning, and thank you for joining us. Today, we will review our fourth 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 during this call, we will make forward-looking statements regarding future events and financial performance, including guidance for the first quarter of 2022. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we've been reasonable in our expectations and assumptions. Our 10-K for 2021 and our subsequent 8-K 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 as we review the company's performance during this call, we will discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin 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 our investor presentation, which contain 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.

Thank you, Landry, and good morning, everyone. It's great to reconnect with you today to share the details of Wayfair's fourth quarter 2021 results. 2022 marks the 20th anniversary since Steve and I started the business. In our annual shareholder letter, also published today, we talk about what we're doing to set ourselves up for the next 20 years. When we launched Wayfair, we used the tagline a Zillion Things Home. Today, we have embraced everything home for a space that's all you. Even as taglines change, one thing has remained consistent for Wayfair throughout, and that is our focus on the customer and building a shopping destination where everyone can find their own unique expression of home. You've heard us talk at length about how we do this through our platform business model, bringing together tens of thousands of the industry suppliers and tens of millions of customers for the widest possible selection and choice. You've heard us talk about the investments we have made across technology and end-to-end logistics to build a unique and purposeful online shopping experience, and offer Wayfair shoppers fast and reliable delivery. The customer experience is what continues to drive every decision we make as we work to optimize it for today, 5, 10 and 20 years from now. Wayfair has grown from 2 entrepreneurs who saw a massive market opportunity to a world-class team with more than 16,000 employees globally. We all share the same vision and wake up every morning eager to serve our customer and supplier partners. Most humbling is that we recognize that we have only just scratched the surface, taking stock of the more recent past, the last 2 years post unusual challenges for us and the industry as a whole, but meeting those challenges came with opportunity. The…

Thank you, Niraj, and good morning, everyone. The world of payments and financing is rapidly evolving, as our customer expectations around how and when they choose to pay when they shop. Our goal in this arena is to make Wayfair financially accessible to as many households as possible, and responsibly cater to their various needs. To do so, we offer a menu of compelling payment options with competitive underwriting and fee structures for both customers and for Wayfair. We're also incorporating loyalty benefits into our financing solutions to attract new customers, increase spend and increase purchase frequency. Across our portfolio, we have 4 types of solutions in the financing space, the most recent of which is our offering for professionals. On the consumer side, we have credit cards, our Wayfair Financing platform and buy now, pay later, all of which cover a wide range of customer use cases, profiles and project types. Each financing solution we offer is different, often coming with its own built-in brand affinity and customer networks that we can leverage. In many cases, we can customize financing options to drive Wayfair specific deals and programming. Let's talk about these in turn. First, you've heard us talk in the past about our exciting and already sizable B2B business. It continues to enjoy strong momentum, and a big part of the flywheel for professional customers is making sure they too have compelling loyalty and financing options. We're very excited to have partnered with Capital One Trade Credit to begin offering a Wayfair professional credit card with rewards for business shoppers and a Wayfair professional flex account with flexible payment terms, both of which we expect to roll out later this year. Customers will be able to apply with their business credentials to build credit, and we have built…

Thank you, Steve, and good morning, everyone. Let's take a look at the financial details for the fourth quarter before discussing the outlook. As you saw in our press release this morning, Q4 total net revenue was $3.3 billion, representing an 11.4% decline year-over-year. Q4 largely played out in line with our quarter-to-date revenue commentary back in November. Even though we did begin the holiday promotional season earlier than normal in order to mitigate potential bottlenecks during the Cyber 5 period, supply chain challenges across the industry continue to persist throughout the quarter. On a segment basis, U.S. net revenue declined 8.8% from Q4 last year, while international net revenue declined by 23% year-over-year and 24.4% on a constant currency basis. It's difficult to precisely measure the performance of the online market in real time. However, we do believe our trends largely mirrored broader e-commerce softness in the period. As was the case back in Q3, Wayfair.com in the U.S. outperformed the consolidated business for the full quarter, while the specialty retail brands in the U.S. remained a drag. As a reminder, we're in the process of more tightly curating these specialty retail catalogs and are therefore going through a period of large negative year-over-year declines. The international business faced difficult comps in Q4 due in part to more stringent lockdowns that were in place last year. Turning to Q4 KPIs at the consolidated level. In the trailing 12 months, we had more than 27 million active customers, 12.5% lower than last year. Order frequency over the last 12 months was 1.89, a slight decline year-over-year. These are continuations of the same trend we've seen over the last couple of quarters given the outsized year ago comparison. LTM net revenue per active customer grew about 11% year-over-year to $501 driven…

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

I want to just ask about some of the near-term performance. Michael, you guys talked about improving in the quarter-to-date period to a high teens two year sales CAGR. So kind of a two part question. Number one, at a high-teens rate, you're running below kind of your longer-term goal to get to over $100 billion by 2030. So a, why do you think you're running below that level here? And then secondarily, you are just seeing some near-term improvement, so could you elaborate on what's maybe driving that sequential acceleration?

[Technical Difficulty] Peter, sorry. It's Michael. We're still having some technical difficulties, And so Niraj currently muted, and we're trying to unmute him. So apologies for that. Let me try to answer your question, and then Niraj can jump in after me. I think there's a couple of things here. First, we are seeing -- as I mentioned before, we're seeing sequential improvement, and we are seeing ourselves on a normal sequential pattern now. I want to be clear, we're in a very murky environment, right? We are seeing that in January and February. We watch this on a weekly basis. And so we are seeing coming out of Q4 into Q1 very much to more normal pattern of how the sequential performance is going. And so I would say that's piece #1. In terms of the sort of the longer term, when I think -- when you think about that sort of like 2030 goal, et cetera, we continue to be in a period between post-COVID inflation and everything else that's going on in the world right now. That just makes it hard to exactly understand how the consumer is going to perform. And so I just think we're trying to be thoughtful and measured there. I will say, though, that to your point, if we're running in the high teens CAGR on 2019 basis, we're pretty close to where we think -- what you would need to believe in order to get to the long term, and that's in the sort of really murky sort of tough environment. Maybe I'll pass it over to Niraj if we solved the tech problem.

Can you guys hear me now?

Yes.

Okay. Great. I'm not sure what the issue was it. I think, Peter, one of the things -- and I've missed part of Michael's answer because of these technical problems. But basically, I think the macro is setting a lot of what the current growth rate is in some degree because of what traffic is there and what the channel mix on the traffic is. When you talk about some of the improvements you're seeing, what I will say is that on one hand, to see continued gains in growth rate when you look at how it's going to play out sequentially, you obviously need the macro to get back to kind of a stable place, which we think is headed there. But frankly, there's a lot we are working on as well that are very specific to things we are doing that drive the business forward. One is when you think about suppliers forward positioning goods through the CastleGate network, which drives up the speed badging on the site, it also drives lower retail prices because a lot of the last mile transportation cost comes out, which is the most expensive transportation leg. That's a pretty big driver of conversion. That tips in new customers drives the repeat flywheel. We're seeing that will progress nicely this year. And we have kind of a leading indicator on that because as you're aware, on ocean freight, our forwarding business has grown in scale. That ocean year is mid -- runs midyear, so May through April year. And as we talk to suppliers about what capacity they want, what we've seen is that the interest to flow goods in the network is very high. And we have a lot of flow plans that show that, that will be playing out. And then…

And maybe I'll just pivot to margin. Specifically, I would ask about CastleGate, which we think has a notable competitive advantage, yet the dollar volume through CastleGate has come down on a 2-year basis. Niraj, you talked about providing some financial and operational incentives to suppliers. So in doing so, will that provide some margin dilution in the near term in order to get suppliers to commit more inventory?

Here's the way to think about that. So the way we historically approached it with suppliers is it was very clinical and it was very technically correct, but it was complicated, which is by that, what do I mean? Well, the ocean freight cost x the drayage cost, why? The brokerage fee is this, the cargo insurance is that, the induction charge depending on the location is this, the consolidation fees are that. So it was very complicated to understand your costing. What we did is we basically simplified it. We said, "Hey, look. Move the goods into CastleGate upstream. Induct them into our consolidation operation. Here's what you're going to pay," and they think of it as covering that ocean freight drayage, that inbound cost that they would have otherwise paid someone else. And in today's world, it's even hard to access it, even if you're willing to pay, and the rates that we offer are still pretty compelling. So that's a very easy ask. And what we've done is we bundled in to one kind of price the different fees to make it easy for them to understand what the opportunity is. But what we're doing is we're managing it on a total cost of ownership basis because there's charges that suppliers never pay that we paid, like the outbound shipping. And so what we do is we look at the total cost. We manage the complexity. The suppliers are paying us for the logistic services, but in a simple manner. And by bundling it this way, we're actually making it a lot easier for suppliers to lean in, but not in a way that's margin dilutive. What we're doing is we're basically making sure that the end-to-end benefits and the end-to-end costs are reflected versus what we're getting, and that's suppliers basically paying us, as I mentioned, for the logistics cost. And obviously, we then are taking some of our own costs out. So don't think of it as being margin dilutive more than trying to simplify the offering.

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

So a couple of questions, I'm going to merge them together. But in the prepared comments, you talked about just the shifting backdrop. Post COVID, consumers going back. I think there as you may have made the comment going back to their pre-pandemic ways, I mean, to a certain extent, shopping more on physical stores. So the questions I have, as you look at the Wayfair model and all the tools at your disposal, are there levers you could -- you are pulling or you could pull here in the nearer term, but sort of to say, you drive even better recognition on the part of the consumer as this potential normalization is happening? And then second, we talked in time to time about Wayfair testing physical stores. I know that within the context of the Wayfair business model is that still a very, very small item. But is that -- are you looking more at that now? And is there something more underway as you see consumers once again gravitating towards some type of physical presence?

Yes. Sure. Thanks, Brian. So on your first question, when you talk about customers sort of reverting to pre-pandemic behavior and -- we think of it as a pendulum. Beginning of COVID, it swung very, very strongly to online. And on our way out of COVID, it's swinging the other way. We think it's now coming back towards the middle. I don't know that there are levers we can pull specifically that move it back to the middle any quicker. But I will just remind you, in our business, over 75% of the business is repeat. So we have a very large base of customers. They made 4 billion visits last year. They're very engaged. We have a direct way to communicate with them, whether that's e-mail or through the app. They're very interested in what we're doing. And so we are able to drive our business. Obviously, the pendulum getting back to the middle is very helpful as well. And we have different segments. The B2B business at Perigold, those are growing quite nicely. The Wayfair business is a mass business. It's doing well. It's resilient. It's going to be more affected by this pendulum swing than the high end right now with some of what you're seeing with inflation and the like. But it's doing pretty well. And Wayfair.com is down mid-single digits in Q4. So we're seeing momentum building there. The specialty retail brands, we are moving those to very tightly curated catalogs. We're seeing really nice progress where we've finished that curation. That curation, though, obviously, in a time where availability is low and where, frankly, you're taking out some well-performing SKUs to really get to a tighter assortment that's all specialty quality, the comp is very negative, but that's part of the plan because we're…

Our next question comes from the line of John Blackledge from Cowen. Your line is open.

Two questions. First, on the competitive environment. Aside from the lingering COVID comps, could you discuss the current competitive landscape? And as we hopefully emerge from the pandemic, do you think that competitors have gained some ground over the past few years on Wayfair? And then second, on the -- on CastleGate, Michael mentioned that Wayfair will add 2 more CastleGate facilities in the U.S. in 2022. Could you just discuss timing of opening and where those facilities are? Thank you.

Yes. Sure, John. Thanks for the questions. On the competitive front, what I would say is, I think during the last couple of years, we've been able to even more firmly advance our position as the leader in home. And I think kind of customers have known us for that. We've built a household brand going into the pandemic. We already had it there. But I would say that it's all that's happened during the time period has accelerated it. The other thing that I think has happened is it's become very clear the role that logistics plays in providing an optimal e-commerce experience. And what you hear companies talk about advanced logistics, the only companies that you really hear talk about it a lot are Walmart, Target, Home Depot, Amazon and us. And I think that, that's kind of a key point because without advanced logistics, it's very hard to provide that optimal experience. And frankly, it's very hard to control one of the major cost inputs. And so I think when you start talking about customer expectations to kind of one-day delivery, same-day delivery at competitive costs with great reverse logistics and a great experience, convenient scheduled delivery and, in our case, you're talking about a lot of 2-person deliveries and assembly and putting things in the backyard or putting them in a bedroom or what have you, that matters a lot. So I would say competitively, we feel very good about where we are. And we think actually the -- as the results play out, you're going to see that our ability to kind of keep being an outsized winner in the category is going to be very strong. On your CastleGate question about the 2 fulfillment centers, the answer on locations, one is in Baltimore or just outside of these cities, I guess. One is just outside of Baltimore and one is just outside of Chicago. And the one in Baltimore has just recently opened. And the one in Chicago will open later in the year. So I think that was sort of the specific question, John. And then the thing you didn't ask, but I just want to comment on this, where we are in the development and evolution of building out the CastleGate fulfillment center footprint is that, at this point, we do not need to build it out for locations. So we're building it out at this point for capacity. So we're -- we have an estimate of how much capacity we need, and we're building them out in order to handle that capacity. So one of the things that will play out over time is you should see the amount of percentage utilization on our network should actually grow, despite the fact that we're going to open more facilities over time.

Yes. Just let me add on that point, Niraj. The one thing I don't think we've sort of said clearly is we do expect to have increasing penetration of goods flowing through our CastleGate network. So we're opening incremental warehouses because of the volume that is flowing Niraj mentioned. We have forward visibility on that with ocean freight. And so obviously, as we run more -- as CastleGate penetration grows, we run more through that part of what gives us the confidence in our 27% to 28% gross margin targets over time and sort of how we're building the business going forward.

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

Niraj, you mentioned Wayfair.com, I think, was down mid-single digits in the fourth quarter. So can you provide more specific color on Wayfair.com during, I guess, quarter-to-date in the first quarter and then just provide sort of specifics on when the business will cycle the catalog changes within the specialty banners?

Sure, Steven. Let me try to add a little color. So kind of what I described B2B and Perigold growing nicely, Wayfair.com doing better than the total and then the drags being international and SRBs, those statements are still true in the first quarter. So I don't want to provide exact specific numbers for each of those, but those are -- those statements are all true. And the SRBs, they're a relatively small share of the total business, but because of the repositioning and the changes we're making, they're down substantially. But what will happen is as you get into the back half of this year, you're actually going to see that flip. And then as they grow, you'll see them actually be comping up very possibly. That's one of the things that makes comps right now really difficult is actually the shape of the year last year where you have COVID tailwinds in the first half and you have normalization happening in the second half, they make the comps this year look unusual. And I think Michael has said, hey, if you roll forward just a normal seasonal pattern, don't even account for all of the things that we're specifically doing that should drive outsized performance, you actually get to a very nice positive comps in the second half of this year. And so one of the things that you have when you talk about the first quarter is, you're anniversary-ing these steep COVID comps from last year two rounds of stimulus, et cetera, but we're not that many months away from where that all is behind us.

And then just a follow-up. As you think about inflationary pressures and inflation challenges among your customer cohort groups and so forth, any sort of color on how you're sort of thinking about managing and mitigating these inflationary pressures? Are you seeing price elasticity demand coming back into any of the categories? Or how are you sort of planning for the challenges that may come along with inflationary pressures?

Yes, that's a great question. So what has happened so far is the inflation has been acute enough. The magnitude large enough that suppliers have passed it on to us, and we in turn have passed it on to customers. You would expect inflation of that magnitude to demand to some degree. To be honest, we have not seen that happen. Conversion has held up. And so what do we think is driving that? The only thing we can come up with is, like in America, for example, if you look at it, folks have $2 trillion more in their savings accounts now than they did pre-pandemic. So that's a sheer amount of money, we believe, is causing this amount of inflation to be digestible. When we look out in the future, and one of the things we have on our platform is we do have the benefit of having a lot of different suppliers. And so there is a competitive tension between them. So they're not looking to take advantage of the inflation. In fact, they're loaded to pass it through. They don't want to lose their position. When we start thinking about how this will play out over time, I think we're in an advantaged position relative to some. We've talked a lot about ocean freight and the opportunity there. Not only can we reliably move goods at a competitive cost, but, frankly, we take out a lot of other expense. We talked about that last month, transportation leg. And so that actually drives lower retail. So that's going to be an advantage we're going to be able to pass through to customers. And as we talked about a few times, we expect the CastleGate penetration to ramp nicely through this year. We have some forward visibility on…

Your next question comes from the line of Anna Andreeva from Needham. Your line is open.

We have two quick questions. So the number of active customers took a pretty big step down in the fourth quarter. How do you think about new customer growth in '22? And what are you seeing from your 2020 cohorts in terms of retention and buying behavior? And as a follow-up on gross margins, you mentioned the low end of the 27%, 28% range appropriate for the first quarter. What's implied for gross margin and your guidance for the year for the adjusted EBITDA slightly profitable?

Great. Let me start -- Anna, thanks for the question. Let me start with answers and then maybe I'll let Michael jump in with any additional thoughts yet. On the active customer count, I just want to clarify that the active customer count would be any customers who have placed an order within the last 12 months. So when we talk about the 4 billion visits, they're coming from a large, large number of customers that's in excess of the active customer number. But if they haven't made a purchase in that period, they drop out of that number even if they're very engaged. And so the active customer number, you're still seeing the normalization happening from the peak of COVID. So that 27 million number, what you're noting is it's down from 29 million in the quarter before. I'll just remind you, in Q1 of 2020, as we entered COVID, we had 21 million. So it's up 30%. It's up 6 million from then. And then again, the number that are engaged is a far larger number. That's the number that made the 4 billion visits in total. So we feel pretty good about the trajectory. The next thing I would just say is when you talk about growing the active customer count, that customer count, there's far more customers to get than we have already, and we know that. We do survey work regularly to understand their awareness of us and their preference for us. And one of the things that the annual shareholder letter, which we just released today as well, if you read that, one of the things I just talked about is the awareness amongst people who purchase from us, and then that resulting in their likelihood to come back is incredibly high. The --…

Yes, Niraj, And thanks, Anna, for the question. Just to be clear, we only guide to the current quarter, and that's with the 27% to 28% range and the low end of that range, which I think is appropriate. We've already answered that question. In terms of as we think about it throughout the year, what we're trying to do is give people some perspective that we're comfortable with the 27% to 28% range throughout this year. I do think as you -- obviously, it's all revenue dependent, right? It's highly tied to sort of what's going to happen on the top line and we've already described, one, that it's murky; but two, that we've got a lot of confidence based on what we've been seeing. But I do think that if that plays out the way we anticipate, I do think we'll be towards the -- we'll work our way towards the upper end of our 27% to 28% range towards the back half of the year, and that's certainly how we think the year will play out. But we're way far away from sort of giving any specific guidance about the year or the long term or anything of that nature.

And we have reached the end of our question-and-answer session. I turn the call back over to the Wayfair team for some closing remarks.

Well, I just want to just say thank you to everyone for your interest in Wayfair. And we're excited to continue this journey with you, and there's just such a large opportunity. We're excited to be telling you about everything we're doing to tackle it. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.