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 First Quarter 2022 Earnings Conference Call. All lines 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. Jane Gelfand, Head of Investor Relations, Treasury and Corporate Development. You may begin your conference.

Good morning, and thank you for joining us. Today, we will review our first quarter 2022 results. With me are Niraj Shah, co-Founder, Chief Executive Officer and co-Chairman; Steve Conine, co-Founder and co-Chairman; Fiona Tan, Chief Technology Officer 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 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, 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, 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 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, Jane, and good morning, everyone. We're glad to reconnect with you today to share the details of Wayfair's first quarter results. More than two years ago, we made the swift transition to a remote working environment in the early days of the pandemic. Over the past several months, we welcomed back thousands of Wayfairiens to our corporate headquarters in Boston. The energy and excitement has been palpable. Its colleagues and friends reunited and many new faces made the jump from computer screens to destinates. Being together in person a few times a week is a strong enabler of one of the most important drivers behind Wayfair's success, a collaborative culture. Our talented, hard-working and low ego team is singularly focused on building the world's best destination for the home. Despite the rapid changes over the last two years, this goal has remained steadfast. And the response we continue to see from our customers speaks to the value Wayfair brings to their lives. Even in this admittedly softer period, our active customer count was $25 million in Q1, and we delivered 10 million orders, generating nearly $3 billion of revenue. When we spoke in February, I noted we were seeing early signs of normalization in consumer behavior as a pendulum that pulled heavily towards e-commerce in 2020 and swung back to physical retail in 2021 had begun to even out. This is still the case, but in just the two months since a lot has transpired. With rising prices across the retail universe and amidst troubling geopolitical events, our mass customers in the US and internationally appear understandably more focused on where they are spending their next dollar, pound or euro. Consumer spending is still climbing for retail overall. However, even with the relatively healthy individual balance sheet, Shoppers…

Thank you, Niraj, and good morning, everyone. I'm excited to join you today to discuss our technology organization and how we are building the future of Wayfair. To give you a brief background on myself, I studied at MIT and Stanford and worked at Oracle, TIBCO Software, Ariba and most recently, Walmart, where I was the Head of Technology for the US division. I joined Wayfair in the fall of 2020 as the Global Head of Customer and Supply Technology under our prior CTO, Jim Miller, and spent the last 1.5 years working hand-in-hand with Jim as we began setting Wayfair up to grow from a $10 billion to $100 billion platform. I want to start by giving you an overview of the organization and how it's evolved in recent years and then talk specifically about some of the most important areas where we see tech as a driving competitive advantage for Wayfair. Wayfair’s technology team consists of more than 3,000 software engineers, product managers, data scientists, user experience and user interface designers and a whole host of other roles to develop sustain and support the full stack technology and products that help run every function of Wayfair’s globally. At the highest level, our mission is to create world-class experiences for all Wayfair shoppers, suppliers and employees. To do this, we build the underlying technology that enables us to deliver those experiences in a manner that is durable, scalable, resilient and consistent. You can broadly think about our organization across each of these major stakeholders with teams in each functional area dedicated to solving for the unique needs of each group. In addition to the people we have working on all our internal enterprise technology, such as our proprietary, marketing, tech stack. We have a diverse set of teams working…

Thank you, Fiona, and good morning, everyone. Before I dive in, I just want to thank Niraj for the kind words. Working with Niraj and Steve to build this tremendous company over the last eight-plus years, has been the privilege of a lifetime. While I'm not going anywhere over the coming quarters, I do want to say that this decision is purely the fulfillment of a personal commitment I made to myself and my family several years back. It could not be more bullish on Wayfair's prospects and the talented team behind it, nor in Kate's future as CFO and CAO. Kate has been a constant sounding board and partner to me over the last several years and is a proven, capable and inspirational leader inside Wayfair. I am so excited to work with Kate to facilitate a very smooth transition over the coming quarters and to reintroduce her to all of you in the process. Now let's take a look at the financial details for the first quarter, before I move on to the outlook. As you saw in our press release this morning, Q1 total net revenue was $3 billion, representing a 14% decline year-over-year. Q1 revenue landed somewhat below our quarter-to-date revenue commentary back in February. We saw some encouraging trends as the quarter began, suggesting a return to more typical shopping behavior with a strong President's Day event. While we knew that March would be a more difficult comparison with the added stimulus from last year, we also saw new macroeconomic headwinds develop, as geopolitical events served to exacerbate inflationary pressures and subdued some customer sentiment, particularly in Europe. On a segment basis, US net revenue declined 10% from Q1 last year, while international net revenue declined 31% year-over-year. We once again saw Wayfair.com in the…

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

Hi. Good morning. Thanks so much. Michel, congratulations. It has been great working with you and getting to know you, so wish you nothing but the best. Just to dig into a question, maybe I'll just turn it to Niraj. You had mentioned in the script that your business model excels when supply exceeds demand. Do you believe that inventory is shooting up with a number of suppliers and retailers. So I think, we're entering that environment very quickly. So could you unpack that a little bit for us and how your model benefits from improved supply? And what are the risks that the promotional environment might get a bit more competitive, as people try to clear out this excess inventory?

Hi. Sure, Peter. Well, thanks for your questions. So, first, let me clarify. It's not that our model sells when supply sees demand. It actually excels when supply is roughly equal to demand or supply exceeds demand, it's just that our model is very disadvantaged when supply is scarce relative to demand. To be honest, in the capitalist environment, supply is almost never scarce, but it was last year. And it was during World War II. So there's times where it is, it's just super rare. And why does it get hurt then, we're the only major retailer who doesn't write checks for inventory. So when supply is scarce, as you can imagine, if you're a producer, you can't produce anywhere near enough relative to demand, you're going to sell all of it to people who are writing checks. And so, our models, it just gets hurt a lot. And it's not even just that we don't have the best items, but a sub-function of that has been, of course, we then take that inventory before, position it, then we get the speed of delivery. That then takes out costing, which then drives the retail price. So it's kind of like a, it has a knock-on series of effects. Well, now all of a sudden, what's so good about now, what's different than the back half of last year where we lost share because of this. Well, what's happening now is, as you mentioned, inventory is recovering. Not only does it recover, it starting to recover aggressively, because demand has actually fallen some in a macro perspective. Well, we were already benefiting just as availability was getting better. Now availability is getting better at a very fast rate. Our speed of delivery has started to get better at a fast…

Okay. That's helpful. Just sticking on the topic of the competitive environment. There is a broader view out there that the COVID backdrop last year has forced some of the large mass retailers to get a lot better with e-com and specifically a lot better in the home furnishings category. What are you seeing with the evolution of that competitive environment? And do you agree with that thesis that maybe your mass competitors have become a bit more sophisticated.

I mean, there's no question that the largest retailers all recognize e-commerce is important. So here, we're talking about not just Amazon, who obviously is an e-commerce specialist, we're talking about Walmart and Target and Home Depot, Lowe’s. Again, I'm sticking with the US names, but each country has a kind of comparable set. That said, they all focus on their core business. So when you think about Home Depot or Lowe's, they talk about the flatbed trucks and the delivery network, there's a lot of focus on building materials. You talk about Walmart and Target, I'm talking about grocery, in-home grocery delivery. I'm talking about consumables, replenishment. Obviously, there, they're trying to protect their share, take share back from Amazon. So everyone is focused on their core business. I would say that home is no different than every other category, which is that, for a general merchandiser, they want to be in every category. But they have the same challenges that Amazon has, which is, if you sell AA batteries and you sell nails, do you want the picture to be one inch square on a big screen monitor, or do you want to be 8 inch square, right? The truth is, the nails at that size picture, is not really compelling. And so, I think the key thing to think about is, we're a home specialist; that comes across in the selection and the merchandising. We don't do our business at just the opening price point, which is where those folks do their business in home. We have a logistics network that's optimized for the types of deliveries that we do. It prevents damage, it lowers retail, it still drives speed of delivery in an exciting way that the others can't do for big bulky items. And our…

Okay. Great. Thanks so much for the insights. Appreciate it and good luck.

Thanks, Peter and thank you for the nice comment.

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

Great. Thanks for the question. And Michael, congrats on your excellent work over the years and also congrats to Kate on the new role. It will definitely be nice to work with her again. So I have two questions on supply chain, Niraj, in your prepared remarks, you seem to suggest that supply chain issues are abating somewhat. Is that right? And just given conditions and recent COVID shutdowns in China, are they potentially new headwinds to supply chain? And then second question on gross margin, it was right around the low end of the range. How should we think about the puts and takes for gross margin in 2Q and the rest of the year? Thank you.

Sure. Thanks, John. So -- yes -- and so, I would say our supply chain challenges -- remember, supply chain for us is a combo, we talked about availability. Availability is not just a function of production, but a function of us getting access to the production to forward position it. And then the second is, obviously, the transportation flow. I would say, those challenges are abating as demand has come off a little as our ocean freight capacity has grown, as we've gotten deeper in the planning cycle with our suppliers. Obviously, the shutdowns in China will create a new, kind of -- it creates a low and then a burst of activity. But we think, generally, we're well position to manage it. And again, a lot of what I'm describing is also on a relative basis to how it was before and a relative basis to our competition. And we feel like we're in a great position on both of those fronts, which is why we continue to share in that environment. I'm not suggesting that the supply chain is abating to the point where it's just business as usual from 2018, 2019. It's still complicated activity. But I think the fact that for six years, seven years, we've been building out our own proprietary network, ranging from ocean freight to proprietary last mile delivery, to deep integration with parcel carriers to a large fulfillment center network, over 20 million square feet of space deeply cubed out. These are the things that are making us able to manage this. On the gross margin question, what I would say there is, the way to think about it is that range, the 27% to 20% we gave you is the range you should think about. Now the gross margin has…

The only thing I'd add, John, on that is I do think that we're in a period of sort of greater volatility around all of those costs. Product margin has remained very consistent, but obviously, there's a lot of movement, both on the wholesale there, as Niraj pointed out, and then also all of the delivery cost. And so, the reason we're guiding everybody to the low end of that and is because, there is going to be some volatility in it, and we're obviously trying to manage it the best we can not only for our business, for our customers, right? There's like -- there's a balancing act there.

Thank you.

Thanks, John.

Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, thanks. Good morning, and also congrats, Michael, on your retirement. You called out success with Way Day last week. Can you share with us any additional insights, perhaps category performance and how that may help you play in your top line performance over the next few quarters? And then my second question, you talked about a return to positive EBITDA territory. How do we think about the building blocks within the P&L? And I guess, which ones do you think you expect to see inflect sooner rather than later?

Sure. Thanks, Chuck. On your first question, Way Day, I would say, what was exciting about Way Day, as we saw sort of broad-based activity, so it was not concentrated in any particular category. And in fact, we mentioned outdoor had a slower start to the season, partially perhaps due to weather. What's interesting is, if you compare it to the pre-COVID kind of curves, 2018, 2019, 2017, those seasonal curves, it looks a lot like that from where as 2021 in particular had a stronger pull forward. And what was interesting on Way Day, outdoor did very well. We saw the broad-based performance that we would expect including the seasonality sort of spikes that we would expect. So we thought that was pretty compelling. On your question about returning to EBITDA profitability and the trajectory and how do we think about that, what I would say there is, we feel very good about that. That's why we put it in the prepared remarks and we were trying to highlight it for a few reasons. The first of which is, as we've discussed, we're holding gross margins. Our unit economics are intact. So what happens is revenue grows. Obviously, the flow-through is substantial. That ultimately is a very big driver of getting to EBITDA profitability. And what's interesting is what -- I was in Europe last week. I was in the UK for the major UK furniture trade shows in Germany, and visited with quite a few folks. I was at High Point in the hardware show in the US just a few weeks ago. What we are hearing in March and in April, we've heard folks have seen their business significantly stepped down. And particularly different retailer pockets, we're hearing about warehouses being full, retailers really having trouble on…

No, I actually -- I think you covered it really well. I would say the one thing that -- the only thing I'd add, I guess, is that, all of the sort of structural opportunities for increased gross margin over time, because of the investments we've made in the supply chain, as well as across the supplier services, all of those still exist. And so, as the business returns to a more normal growth pattern, I think you're going to start to see those flow through as well. And I think that's an important driver, not just near term but certainly in the midterm and long term.

Great. Thank you.

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

Good morning and, Michael, also congrats on the planned retirement. Niraj, would love to just hear your thoughts on OpEx labor productivity and really why the recent ramp in SOTG&A and expenses doesn't change the longer-term margin walk and margin target for that respective line item.

Sure. Happy to answer that. So I think the biggest thing to keep in mind is that, so the headcount -- non-OpEx head count, like, you're talking about customer service or the fulfillment headcount, they're very much tied to today's order volume, today's order flow, the number of orders going through our transportation network, the number of phone calls we're getting tied to today's orders. And so, that, you say, well, how does that leverage over time? There's some leverage there with technology on things, but by and large, those are, to some degree, tied to the order flow, will get a little better, but tied to the order flow. When you look at OpEx, it's really not tied to today's order flow. So if you look at the technology we're building, whether it be storefront technology around visualization or different ways for product navigation or whether you talk about the ocean freight, the forwarding business and how we're going to add a lot more automation to that or you're talking about things we're doing, a great example will be physical retail. Physical retail will take a long time before it's substantial, and yet there's a very substantial sized team working on it today, because you need the team to build the offering and you need that in order to have one store. But one store doesn't move our P&L. But then one day, decade from now you have many, many stores that could be meaningful, right? So the way to think about OpEx is, OpEx labor productivity is not relative to today's revenue, is relative to the revenue X years from now. And you cannot ramp OpEx fast and get it to work, because the people need to get ramped up, and that takes a meaningful period of time.…

And then maybe just a quick follow-up on that, I'm not sure if it's possible, Michael or Niraj, to just help us maybe separate, right, or segment the SOTG&A and expenses into different classifications, right, sort of in the event that the macro were to deteriorate pretty significantly, how much flexibility is there, right, for you guys to really control the overall expense structure of the business, just given the current free cash flow profile?

Let me let Michael answer that for you.

Yes. Thanks, Steve, and thanks for the comment upfront, too. Look, I think, I don't want to get into sort of trying to parcel all these things into different pieces. As Niraj mentioned, the thing, it's worth noting is, there's a substantive piece of expense in that line that is future focused. And obviously, you've got more flexibility on the stuff that's future focused than you do on the stuff that's supporting the customers and sort of running the business day to day. And so, I do think there's a pretty high degree of flexibility there. At the same time, you want to be really careful and thoughtful when you're thinking about the trade-off between the sort of short term and sort of what the long-term opportunity is. And obviously, all the people we have working on future stuff are working against, what we believe, are really, really important, big long-term unlocks to sort of future growth. But I think there's a balancing act here. One of the reasons you have a strong balance sheet is, so you can sort of be thoughtful about that balancing act in tougher times. We're trying to do that. But just to reiterate what Niraj said, we also have some -- we have plans in place to make sure that if the macro world doesn't play out the way we think it's going to, that we know the actions we'll take.

Thank you. Best of luck.

Thanks, Steve.

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, everyone, thank you for joining for the conference call. We appreciate your interest, as always.

And look forward to talking to you in the next quarter.

Thanks a lot.

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