Good morning, and welcome to Wayfair's Fourth Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. After the speakers presentation we will conduct the question and answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to James Lamb, Head of Investor Relations. Thank you. Please go ahead, sir.

Good morning, and thank you for joining us. Today, we will review our fourth quarter 2022 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that our call today will consist of forward-looking statements, including, but not limited to, those regarding our future prospects, business strategies, industry trends and our financial performance, including guidance for the first quarter of 2023. All forward-looking statements made on today's call are based on information available to us as of today's date. 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 2022 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 IR website. I would now like to turn the call over to Niraj.

Thank you, James, and good morning, everyone. It's great to reconnect with you today to share the details of Wayfair's fourth quarter 2022 results. 2022 was a challenging year for our entire industry in more ways than one. As an ambitious technology-driven company, it is a challenge to manage all facets of growth in normal rapidly acknowledge when the facts on the ground change in real time and make the appropriate adjustments to business plans in response. You've seen us do this several times over the past year with our cost efficiency initiatives, and we feel confident that when we look back several years from now, we will view these pivots as difficult but both necessary and wise. This morning, we published our latest shareholder letter, which I would encourage you all to read on our Investor Relations site. Steve and I walked through the evolution of our business over the past three years, explaining the ups and downs that the pandemic and its after effects have brought to our category and to Wayfair. We conclude with a look at the future and do so through the lens of our view around capital allocation. We hope you'll find it illuminating, especially in light of the current macro environment. Our core focus is a return to our history as a company that operates in a lean and efficient manner. We note in the letter that scarcity is actually a good thing for Wayfair. Scarcity of resources drives faster alignment, more productivity and better execution, and we are beginning to see the payoff from those efforts in our Q4 results today. We reported $3.1 billion of net revenue and 11 million orders in the fourth quarter. While we always expect a sequential revenue increase in the holiday quarter, looking at sequential order…

Thanks, Niraj, and good morning, everyone. Before we take a look at our fourth quarter results, I want to take a moment to echo something Niraj said. We are tremendously grateful that so many talented and driven individuals share our vision for creating the world's best place to shop for the home. And so to everyone on the team, I want to say thank you as well. Now let's dive into the fourth quarter results. After which, I'll walk through the cost savings measures that Niraj discussed earlier in more financial detail before wrapping up with guidance and closing remarks. Net revenue for the fourth quarter of 2022 was $3.1 billion, down 5% year-over-year, but up 9% sequentially from the third quarter. This was slightly better than we had anticipated when we spoke last November, and earlier, Niraj highlighted the strength in order volume we saw with 11 million orders, up more than 25% from Q3 more than offsetting a decline in AOV of 13% from last quarter. We're very excited to see inflationary pressures reverting and order volume reacting positively as expected. Customers continue to show strong response to promotions and we had a robust holiday calendar, starting with our second Way Day in October going all the way through the new year. The fourth quarter saw the trends between our U.S. and international segments stay largely consistent with what we observed during Q3, which was an improvement in comparison to the first half of the year. Net revenue in the U.S. outperformed the aggregate and was only down 2% compared to Q4 of 2021, while international was down 20% against last year as the macro pressure continues to weigh more heavily outside of the United States. I'll now move further down the P&L. As I do, please note…

[Operator Instructions] Our first question comes from Christopher Horvers from JPM. Please go ahead. Your line is open.

So my first question is on the top line. So you're in an advantage situation right now with better in stocks than you had a year ago as the supply chain loosened up. Can you talk about when you start to anniversary that? And then bigger picture, guide the year on sales. But how should -- how are you looking at it? Are you looking at historical seasonality and thinking about how you project on the first quarter?

Yes. Chris, thanks for the question. This is Niraj. So a couple of thoughts on that. So first, we are seeing the traditional seasonal cadence playing out so far, not just the start of this year, but sort of the shape of Q4 into Q1. And so in that sense, we -- we do feel like there is a trend there. But to take a step back to answer your question, where you started about the top line relative to availability getting better. Remember the time line on that. So availability got poor starting in '21 based on the production shutdowns and the supply chain congestion, et cetera. It's got better starting in the spring of '22. So in the spring of '22 availability gets good. And in fact, supply chain eases up to all some suppliers have ample availability. Then in the summer, basically the speed of delivery gets better and that's because suppliers are now for positioning goods to maximize sales. And then by the time you get to the fall on retail prices, get good again because the inflation that we particularly got hit with because we don't buy inventory in advance has sort of abated been pulled back out. So then when you look at this year, when you think about the comps, if you're doing it year-over-year, right now, we're in a period where last year, we had elevated demand. The first part of the year had elevated demand. This was the time of Omicron last year, et cetera. And so we're comping against that. And now we're kind of the first half of last year kind of now through the spring, you see that elevated demand come out of the market, then you see it sort of be normal in the second half. So…

And then just one follow-up on the SOTG&A side. You talked about $475 million to $485 million, but you get the full run rate in the second quarter. Can you -- how much is left? And sort of how do you think about the run rate beyond the first quarter?

Yes. Let me -- Kate, you want to fill that?

Yes. So I think it's important to remember that, that savings that we're talking about seeing on the SOTG&A line, we also expect to see some of that through the customer service and merchant fee lines. We took headcount out of both of those cost buckets. And you should see the majority of that actually flow through in Q1. As a reminder, Jan 20th was the date of our risk. So think about a little more than two-thirds of that 70% of that -- the remainder of that quarter or this quarter didn't have the cost of those folks in it. So you'll see the entirety in Q2, but the majority of it will already be hitting in Q1 is in that guide. The other thing I would note is that when you look at SOTG&A, about half of that is related to compensation costs, what we're talking about here. The remainder are things like software costs and T&E. And there are some other puts and takes there that you could see in the other cost buckets on that line item as you look at Q1 and Q2.

Our next question comes from Curtis Nagle from Bank of America. Please go ahead. Your line is open.

Great. Just wanted to quickly focus on COGS line. So that will take just a little bit longer to flow through because it's operational stuff. Just one, I just wanted to make sure I heard this correctly that the $500 million gross cuts will be realized by the end of the year? And I guess, number two, could you give a little more detail in terms of the extent of the reinvestment? And let's just say things from a macro perspective, kind of stay where they are, would that equate to something like 50% reinvestment? Or what's the framework there?

Sure. Let me start -- thanks for the question. Let me start with some thoughts and then let me let Kate answer and share some more thoughts as well. I think the way to think about it is there's a lot of operational cost savings that we've identified that are very tangible and there are projects that are underway and they generally are taking out waste that basically does not impede the experience of suppliers or customers. And so that's the big benefit. And then basically, to your point, if you pass it through manifest as lower retail prices. And if you keep it manifests profit and the quantum, as we've said, over $500 million is the quantum we've sized, it's meaningful, and so we're very excited about that. We've not made a predetermined decision on how the split will be. And in fact, that is one of the many levers we use to manage the business. And so we're executing on that. The movement of unearthing those costs is moving very well. But in terms of how exactly we let it play through, there's not an answer. I think that's fixed. But Kate, I don't know if there's any more you want to share?

I think that's fair. And I guess I would add a few points. So we've seen gross margin improve nicely throughout the course of the past year. We do expect to continue to build on some of those gains. But we want to hold this back as an operating lever for us. And I think it gives us actually a fair amount of dexterity in this environment. which is an advantage. And so we will make this decision sort of iteratively throughout the year. And as we see an opportunity to invest in the customer experience, we can use it that way as we see an opportunity to flow through, we can use it that way. But irrespective of that, you've seen nice improvement in gross margin in 2022 and should expect to see some of that in 2023 as well.

Our next question comes from Ygal Arounian from Citigroup. Please go ahead. Your line is open.

I want to dive into the macro a little bit more. Just maybe we could expand a little bit more on the U.S. versus Europe trends. I understood that Europe has more challenges right now. But how can we read through some of the positive factors we're seeing in the U.S.? And then -- and then how could we translate that forward? We've talked about promotional activity over the holidays. Is that as we're going through in the early part of this year, is that continuing to be a big factor and how are we thinking about that?

Sure. Let me field that and I don't know if Kate or Steve want to chime in. But first thought I had on the macro, the international segment in the way we report is everything outside the United States. So that also includes Canada. But I would say Canada is in the same situation as the U.K. and Germany, where the macro is significantly more difficult and challenged than in the United States. And in addition to that, the comp, so the elevated demand was heightened in those countries in the first half of last year relative to how the U.S. was heightened. So they're all heightened, but to different degrees. So there's a normalization period that you need to go through before you get to normalized comps in the back half, where the shape of the curve looks a little different in those different countries for the first half of the year. So I think it's important to kind of highlight that. The next thing is on the inflation, the inflation that came into good, some was raw materials, some was labor. A lot of it was ocean freight. And then what's happened is it's pretty clear that ocean freight has substantially reversed. So when folks think about replenishment costs, it's significantly lower for suppliers than the cost basis that they brought goods in at last year. What's happened is in the U.S., folks look at replenishment cost, it's substantially lower. They're dropping wholesales to basically work towards that number. So in fact, the shape over time is you're going to see suppliers in the U.S. keep dropping prices until they get to that replenishment cost with the margin they want. So the U.S. trajectory for prices is not discounting where it needs to go up at some point,…

And a quick follow-up. Kate, we're pulling a lot of costs out of the system here. And I just want to maybe dig into your comments that you're prepared to take additional actions like you said, depending on the environment, but how you think about your where cost profile is now versus where it might be? And where else there's room left to pull some levers if you do end up design to do that?

Yes. So we feel very good about our current cost cutting. We've taken out about $1.4 billion of costs out of the business, actually over $1.4 billion. And as we've done that, we've looked across every line item of the P&L. And so that's from our gross margin line all the way down to our SOTG&A line. What we've tried to do, and I think we've been really thoughtful about are removing places where we were inefficient. You heard Niraj speak about this in his remarks and in some of the earlier questions, we've taken out management layers. We've taken out places where teams are focused on lower order priorities. We have not impacted any of our growth vectors. And I think that's very important to underscore. In an environment where you saw a need to further cut, I think that will come in the form of sequencing things. Right now, our work has been all around improving efficiency, and we're excited about the gains that we think we'll get from that efficiency improvement. I don't know, Niraj, if you have anything to add.

The only thing I'd add is just one since I tried to allude to this earlier, but the decisions we've already made, the actions we've already taken, the things that are underway actually get us to our profitability and free cash flow goals in a wide range of revenue outcomes already. So I wouldn't say that we've underwritten a sort of case that you'd call bullish that needs to play out on the top line to get there. So feel very good about where we sit.

Our next question comes from Atul Maheswari from UBS. Please go ahead. Your line is open.

Thank you. The reason why you're not providing a firm time line on EBITDA breakeven, whether it's -- whether it's second quarter or third quarter, is the reason that you're providing that, is that because there is a lot of uncertainty in the macro, so you don't know how your top line is going to play out? Or are there other moving pieces that could move this time in out?

I mean while you can say there's always moving pieces, I think we have a pretty firm view of how it will play out. I think we've just stuck with our traditional stance for 8 years now of really not trying to provide a lot in the way of guidance. So we comment on the current quarter and then we really focus on sharing where we're headed and the trajectory, the decisions we're making, the priorities we have and we just tried not to spend a lot of time -- I'm sure it's frustrating, but trying to tell folks how to model 1 quarter, 2 quarter, 3 quarter, 4 quarters. And I think we think that's better for focusing people on how the business will play out over time. That's really the reason.

Yes. Atul, this is Kate. I just reiterate that we feel confident in our path to adjusted EBITDA breakeven. And we are focused on those cost line items. Clearly, revenue could be an accelerant one way or another. But even without that, we're committed to hitting it sooner than we had disclosed on the Q4 -- on the Q3 call in November. And we're just reaffirming what we said in our press release in January.

And then just a quick one on the free cash flow. You've reiterated that the EBITDA breakeven is going to be earlier than the fourth quarter, should we expect free cash flow positive by at least the fourth quarter?

So again, we don't guide to free cash flow positive, but let me give you a few thoughts on that, that may help how you frame the thinking. So first, I'd point you to this quarter, where we were essentially free cash flow breakeven, down only about $19 million on free cash flow. And some of that is due to the working capital seasonality of our business. We operate on a negative working capital cycle. And so quarter-on-quarter of sequential positive growth, working capital will be a use of cash. As what I mentioned on the call, Q4 to Q1, which is historically a period of quarter-on-quarter revenue decline, Working capital will once again become a use of cash rather than a store. So as you model out a year, there's both the working capital dynamics and how those may play out based on our traditional seasonality and then there's the work we're doing to aggressively manage operating cash flow and continue to manage down those costs. And so I would think about the 2 of those things in conjunction if you think about free cash flow going forward.

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead. Your line is open.

Thanks a lot, and good morning. There's still nice improvement in orders per customer, but we're also seeing still elevated customer churn. How are you thinking about customer churn rates in 2023 relative to the last couple of quarters here in '22?

Yes, Seth, thanks for the question. We're actually seeing very nice traction with our customers. I tried to reference that -- I mean I think order count will be your proxy for customers being engaged where folks are basically buying, right? And that -- an order is the best proxy for a future order. And so the way to think about that is when the recipe was not intact, it obviously was less compelling for customers to return. Now the recipe basically, again, to sequence it, right, availability got better in the spring last year. Speed got better in the summer. And in the fall, the retail prices got better, that got the full recipe intact. And obviously, having very compelling retail prices is key. During that period of peak inflation and supply chain scarcity, we were not able to have as compelling retail prices as we would like. We do now. And so you've seen in the fourth quarter, you've seen the customer count and the order count grow. That's a trajectory that's continuing. So if you play that out over time, I think you're going to see the numbers go in the direction that we certainly want to see them go.

Yes. I think I'd clarify one thing, Seth. So I think you're looking at our active customer count. As remember, that's an LTM figure. What you'll see happen there is customers cycle out that as we're anniversarying some of those COVID periods that were still elevated in the past 12 months. I think you're actually seeing the declines there moderate in the fourth quarter, and that's part of what you spoke to in the orders being elevated as you start to bring on some new customers. We also disclosed a stat in our investor presentation, which we update and release today that builds on our total customer file of customers that have ever purchased from us at being $80 million strong. Obviously, our e-mail is far greater than that. And we continue to see this as a source of strength that particularly in an environment where 1P marketing becomes important, we can go back to this group and get them to shop again. So that active customer number is a little wonky in the LTM basis that it's on.

About $80 million that is interesting, but also implies that you've touched the majority of home purchasing households in the U.S., and you think that, that still is active ground to reacquire those customers as opposed to customers who have already experienced Wayfair and will come back.

Seth, we think there's actually a lot of folks we also have not yet had purchased from us because remember, that $80 million would include not just households or consumers, it would include the B2B customers and the Wayfair Professional business is a smaller piece of our total business, but meaningful and it would include all the international geographies, both B2C and B2B as well.

Our next question comes from Steven Forbes from Guggenheim Partners. Please go ahead. Your line is open..

I wanted to start with international profitability. And really just curious if you could take a step back for us and maybe just reframe how you're thinking about the near-term and medium-term opportunity for the free cash flow needs to support those initiatives. And then maybe, Kate, if you can help us frame how the cost actions impact the segment disclosures, right? In essence, as we think about international profitability into the first quarter.

Yes. Sure. Thanks for the question. The way to think about -- so first of all, the international segment is the compilation of Canada, Germany and the U.K. And those three countries are each at different stages of maturity, Canada being the most mature household brand, significant penetration there. The U.K.'s second household brand leadership role as well, very nice penetration, not quite as high as Canada. And then Germany, would be the least mature of the three, not quite a household brand status kind of on the way. And then each of those three are in a different macroeconomic environment. All three kind of kind of similar to one another, more challenged in the U.S., stronger first half last year off the COVID sort of environment in the U.S., but different than each other as well. And so the trajectory on international profitability -- each of those countries has a nice trajectory on the path to get there. And then you add it up and you'll see that total segment. So it's not like one thing, but let me turn it over to Kate, who maybe can answer your question about how to think about.

Yes. I would think about the cost cutting that we did as being expansive across our entire portfolio of brands and geographies. So it wasn't as if anything was excluded from that work. So the cost cuts that we've talked about on, for example, on the compensation and the rest, those were related in Europe as well. where we have a team on the ground. We obviously don't have a large team on the ground in Canada. Similarly, the operational cost savings that we're making, those are impacting our international businesses. Also spoke in our press release about savings relative to plan on our advertising spend and capital expenditures. And again, those also apply to our European business and our international portfolio as a whole. So when you think about the cost savings, you should think about them as being broad-based, and we're scrutinizing every area of the business.

And then maybe just a quick follow-up to Seth's question. I took you guys putting that slide in there in the presentation, the customer filed $80 million. I'm not sure if you're trying to indicate something, but maybe Niraj, you can sort of speak to your reactivation efforts of the lapsed customer base? And then, I guess, most importantly, as we think about that LTM number that gets disclosed, have we reached a point at where you can sort of predict or foresee internally or the return to active customer growth as that disclosure is defined?

Yes. So a few thoughts. So one, that LTM number, obviously, if you believe that on that order count and the recipe being intact and these things have turned, it then takes a full 12 months before that number reflects a full year's worth, right? So that's one thing. Second thing is that number, the definition of the active customer numbers bought within the last 12 months. So there's different kind of levels of engagement. There's people who have not shown up on the site at all. And then there's folks who visit on the site. And so there's some stats in the investor deck as well on that. So I think we said that the site and app visits last year were 3 billion visits. So if you take the active customer number you divide it by the visit number, the number of visits you would get per customer would seem incredibly high, which basically tells you that, that's probably unlikely right, which means that there's a lot of people who visited who haven't yet bought. And so if you say, Oh, the recipe is back intact, they're doing things that seem to be working. Customers are reacting. Well, the conclusion I would think you would draw is that there's a lot of other people who are getting more engaged and have become coengage who haven't yet bought. So the way to think about that is that there's a cohort coming along, which is not just in the active number yet, but it's more engaged and coming behind them. So -- there's -- I mean, on reactivation, obviously, we think about that a lot. The COVID period had a very unusual shape to it with the Q2 of '20 being this huge spike up. So there's a lot of people who've had different levels of engagement. But if you look at it in a more recent period, you see this nice upswing of people who both bought, which is in the number, and people who have not yet bought but would be in the visits and the app visits type number.

Our next question comes from Anna Andreeva from Needham. Please go ahead. Your line is open.

We wanted to follow up on the guide. You said you're seeing normal seasonality, but the 1Q guide implies a trend that's below the historic seasonality for the business. So is the takeaway for us that January perhaps started off slow, but the trend has improved in Feb. Any comment on how President laid out for the business?

So let me answer -- let me just say a couple of thoughts, and then I'll let Kate opine. So if you look at the year, if you forget about what happened last year, you look at the year, you're seeing a very nice seasonal pattern which is strong since the beginning of the year. If you compare it year-over-year, the percentages shift and they shift not because of what's happened this year, but because of the shape of the COVID-related excess demand around the Omicron spike last year. So it's all and what frame you want to put on that. From a predictive standpoint, the seasonal cadence would tell you more than trying to do the mathematical formula of the COVID spike on Omicron and the downslope of Omicron and what happened next, et cetera, stimulus, et cetera. But Kate, I don't know.

Yes. I guess I would just point you to, I think what we said was that we were seeing seasonality in our core business. So as you think about our U.S. Wayfair business. And then the other thing that I would add is from a seasonality perspective, we do typically see the outdoor season start in March. That is generally what is guiding that pickup in March as we hold to the seasonality that we're seeing. And then that's how we end up at the guide of negative high single digits versus where we are quarter-to-date.

And I'll just say we also -- we were very happy with President's Day, so that did go well.

Our next question comes from John Blackledge from Cowen. Please go ahead. Your line is open.

Two questions. The ad expense as a percent of revenue has been elevated the last few quarters and into 1Q as well. Kind of what are the drivers? And how should that track over the course of the year? And then the second question is, could you discuss the key drivers of the market share gains in 4Q. Do you think they're kind of -- you're kind of holding those share gains thus far in 1Q? And at a higher level, kind of what would it take for Wayfair to get back to the pre-COVID incremental market share gains, which at times, I think you disclosed were as high as 20% or 30%?

Thanks, John. So on your first question about the ad cost, and I think you're looking at the ACR so as a percentage of revenue being elevated. I think the best way to think about that is -- that percentage reflects a mix of free traffic, which has zero cost. So this is people coming directly to Wayfair, people who have the app and open it, people click on an e-mail, et cetera and paid traffic. And this is like the paid media spend that you're all familiar with as well. And in a period of time where the category is not top of mind, and since last summer, that demand easing as we went into last summer was basically a function of discretionary spending shifting to travel, leisure and entertainment. And so you see that being above trend, and you see this category being below trend. And that's just reflective of this category in being less top of mind. Those are the categories being more top of mind. You see free traffic get softened. The paid traffic, though doesn't necessarily get soften because we manage that very quantitatively around paybacks. And in fact, if anything, we've heightened the paybacks by cutting out some of the ad spend that was more speculative that would be the highest ACR in our ad spend, which is one of the things we referenced in the $1.4 billion of cost actions. So what you're going to see is ACR of course, gets better just off cutting out that ad spend. But frankly, the biggest thing that will make it better over time is that sort of category getting back to the mean and that sort of -- the free basically is a proxy of that recovery, whereas the engaged base, but the question is…

No, I think that covers it. And I think that was our last question.

We are out of time for questions today. I would like to turn the call back over to the Wayfair team for closing remarks.

Thanks, everybody. I'll endeavor to have my voice back for the next call. And thank you all for joining today.

Thanks all.

Thanks.

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