Hello, and welcome to the Wayfair Q3 2023 Earnings Release and 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] I will now turn the conference over to Mr. James Lamb, Head of Investor Relations and Treasury. Please go ahead.

Good morning, and thank you for joining us. Today, we will review our third quarter 2023 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 fourth 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, 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 IR website. I would now like to turn the call over to Niraj.

Thanks, James, and good morning, everyone. We are excited to reconnect with you today to cover our third quarter results. While we still have a couple of months left to go, I’m confident the overarching theme of 2023 will be execution. Our team came into this year with a plan, a plan to see our core recipe return to form, to return our business to profitability, and to continue pushing our major growth initiatives forward. Wayfair is now in a place where we can both drive profitability, while simultaneously investing for growth. Q3 is one more proof point of exactly that. Today we are reporting positive adjusted EBITDA of $100 million, a second consecutive quarter of positive free cash flow and nearly 4% year-over-year revenue growth driven by strength in orders. We saw order momentum persist from the spring through the summer of 14% in the third quarter versus 2022. You're seeing this lead to steady improvement in our active customer metric, which saw sequential growth strengthened to 2% and is well on its way to getting back to positive year-over-year growth. 2023 has been an eventful year for Wayfair, as the plans we set in motion during 2022 have come to fruition. A remarkable progress against the three core priorities we set back in the summer of last year, nailing the basics, driving customer supplier loyalty and cost efficiency put us in a position to beat our own timetable to profitability. One of the analysts reports summing up our second quarter results was titled "they did what they said they would do." And we can think of no better compliment. We executed further in the third quarter to produce consistent profitability, while still driving demonstrable market share growth, as evidenced by our gains on customers and orders. One of…

Thanks, Niraj, and good morning, everyone. The third quarter was an exciting continuation of our profitability journey we laid out on this call last year. So let's dive into the details. Net revenue for the third quarter came in at $2.9 billion, up 3.7% year-over-year with our U.S segment up by 5.4% in spite of the increased slowness in the category. Niraj spoke about the major moving pieces here as it pertains to our KPIs. Order momentum showed nice double-digit strength, up 14% versus 2022, while AOV came down by about 9% against the same period. All in all, we see this as important progress as our business builds momentum. Orders today are the best indicator of orders in the future. And we're encouraged by the improvement as we see shoppers increasingly returning to Wayfair for their needs across the home. I will now move further down to P&L. As I do, please note that the remaining financial include depreciation and amortization, but exclude equity-based compensation related taxes and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin had another quarter of standout strength, landing at 31.2% for the period. There are a few moving pieces to unpack here starting with our efforts at pulling costs out of the system. We've talked about our cost efficiency efforts at length, so I won't repeat all the details now. But the important piece remember is that our operative goal is to maximize multi quarter gross profit dollars. To that end, we did carefully redeploy some of the savings dollars into the customer experience with the goal of driving results that would show up not just in Q3, but also Q4 and even into next year. This was augmented by better-than-expected performance across our merchandising efforts,…

[Operator Instructions] Your first question comes from the line of Chris Horvers with JPMorgan. Your line is open.

Thanks, and good morning. So one question two parts. So first on the fourth quarter, is a reason why we wouldn't see some sequential improvement in the adjusted EBITDA rate. I know you talked about low single-digit, but you continue to gain traction and the initiatives that you're referring to, and some of the cost savings still have yet to flow through, I think in the P&L. And then as you think about next year, I think you made a comment earlier this year that at this current level of business, you should reach adjusted mid single-digit adjusted EBITDA. So you think about an environment that's maybe a little bit tougher. If we just held these revenues, do you get to perhaps the lower end of that range?

Hey, Chris. Good morning. You have both Niraj and Kate here. Maybe I will just start on speaking to the guidance for the fourth quarter. And then as we think into sort of how some of this flows through for next year. And then, Niraj, I'll pass it off to you. On the fourth quarter, you started Chris by saying you’ve continued to achieve those cost savings and certainly, we feel very good about the progress that we're making there. And you can see some of that in the guidance. We, obviously, continued to up the gross margin guidance range. We've continued to bring down the SOTG&A guidance range and that's reflective of those initiatives panning out. If you look at Q4, specifically, what we're reflecting there is, as we've spoken about in the past on the gross margin, we're really trying to maximize growing profit -- gross profit dollars on a multi quarter basis. Q4 tends to be a great quarter for us to bring new customers in. It's a highly promotional quarter, it's a great time for us to get somebody on to the platform, and then they come back and repeat and spend more dollars with us. And so we're just balancing those pieces as we think about in particular, that gross margin for the fourth quarter. If you think about sort of 2024, obviously, we haven't guided to that, but perhaps I can provide reflecting on that thought model that we spoke about before I can -- maybe sort of reference and speak to how that might plan out in your sort of flat revenue example there. You're absolutely right that you should expect to continue to see ongoing improvement in EBITDA and that's really driven by a few factors. We started the year saying we…

Yes, maybe I'll just jump in a little bit. It's Niraj. Just to add a couple more thoughts. Because as Kate said, we're definitely committed to strong adjusted EBITDA regardless of the macro, and I think we're well poised for that. Because if you think about -- we talked a lot about the cost savings, Kate kind of recapped a lot of what we've done. But just that operational cost savings wasn't a one-time thing. There's a -- we just started working on our plan for next year, and there's a lot more to come. So there's a lot of gains. Now that will drive EBITDA, which is sort of what your question was about. But on top of that, I will encourage you to kind of just think about what's happening in the business, because as you pointed out, there's nice momentum, or what does that momentum, like, if you look sequentially, order, order -- you see orders are up year-over-year 14%, you see sequential active customers from quarter-to-quarter up 2%, that's poised to turn positive, right. We just had a great Way 2 Day 2. You see the share we're taking is for a broad range of market participants. And so when you start adding up, okay, well, you see -- you're seeing this momentum in customers, you're seeing it manifests in order growth. Order growth would be revenue growth, if AOV were flat. AOV is at negative 9% this quarter, but that's almost through, because basically as you finish -- going to finish the rest of the curve, you're basically down to all the inflation having been driven back out, which we're pretty far along on. So there's a lot of positive momentum. And I know you're pausing to say, well, let's ignore that. Let's say revenue is flat. But I would just point to that momentum as well when you think about it. But I think if you just say revenues flat, then you could think about all the things we've been doing as well as all the savings that are yet to come. And then I think that's the answer.

Thanks very much.

Your next question comes from the line of Maria Ripps with Canaccord. Your line is open.

Great. Good morning, and thanks for taking my question. I just wanted to expand on your Q4 guide. I guess, are you seeing any deceleration in consumer spending so far in Q4 versus Q3, or I guess what's driving this sort of modest deceleration in year-over-year growth rate? Is that largely coming from lower prices? Or sort of -- I guess, are you seeing any maybe consumers trading down to lower priced items or any weakness in large parcel purchases? If you can comment on that, that would be great.

Hi, Maria. It's Niraj. Let me -- so, I mean, I think your question is basically the year-over-year revenue growth number Q3 to Q4. And what I would say like first of you take a step back and look at what we're guiding for Q4 compared to Q3. If you look at it sequentially, a normal holiday ramp is you'd expect Q4 to be bigger than Q3 by 9%, 10%, something like that as a holiday step up. And what you'll see in our guide is we've stepped up revenue from Q3 to Q4 growing it by 7% or 8%, I think in the guide. And so we're actually guiding the holiday ramp, but maybe you say a little muted, and but it's in the normal band. And so why a little muted? Well, we're in a promotional environment, and most of the revenue in the fourth quarter is always ahead of us, but in this case, we do it on a promotional adjusted basis. It's virtually all ahead of us. We've had one promotion so far, which was Way Day 2, which performed very well, in fact, beat our internal forecasts and expectations. So we're seeing all the signs that say that will work, but we have that ahead of us. So we're guiding it a little slightly muted, but still with an eye to say we think we're going to do very well. There's a lot of growth there and we're going to take share. Now, year-over-year, your question is why does that compress then if you're guiding it positively? And the answer is if you remember when we got the recipe back intact and we started taking share and we are back to good form. That was at the end of summer beginning of Q4 last year.…

Got it. That’s very helpful. Thanks so much.

Your next question comes from the line of Ygal Arounian with Citigroup. Your line is open.

Yes, good morning, guys. Maybe just digging on the customers in AOV and the macro environment a little bit. As AOV normalizes here and you're seeing that kind of deflationary point. Is -- do you see that driving any of the incremental customer growth and order growth, meaning if price is normalizing, driving a better environment, if you could just parse that out a little bit? And then just did a good job kind of highlighting a lot of the questions of investors and one of the main ones that keeps coming up on our end from investors that you didn't address is just on international and continuing to see headwinds there and challenges in late that market, still not getting back to normal. Maybe if you could address your views there and if that's changed at all as we maybe get into a softer environment here? Thanks.

Sure. Let me start, and then, Kate, if you have anything, you can just jump in and add it. So let me do the first question first and then we'll do the international one second. So first, I think you have a question around AOV normalization and does that drive order growth? I think the way to think about it is, the AOV normalization, what that is showing you is that things are getting back to normal. What does normal mean? It means that no retailer has an advantage over the other on relative price, relative availability, relative delivery capability other than what they themselves are doing, okay? During COVID, people had weird advantages depending on how they were set up were the brick-and-mortar or were they online? Do they happen to buy inventory and carry 4 months of inventory, 3 months or 6 months normally versus that. Those are --those odd advantages because of the scarcity of goods have really abated. So everyone is in a great position now. Everyone is in a great position on price. Everyone is in a great position on availability. Everyone is in a great position on delivery. The question is what can they do with it? So now what you're seeing is retailers are competing with each other, the same way, in our case, they would have from 2002 to 2019 on the strength of what they're offering customers. And so now what you're seeing are the results that basically show up based on everyone competing with each other and so who can put forward the best offer for the customer. And it's not necessary that online beats offline because in our data, we track about 90 folks, we only see 3 if you look back to the 2019 period through now, having…

Yes. No, I would echo everything that you've said. I think you're absolutely right that AOV normalization certainly has driven order growth and customers. You've seen that sequential improvement in customers in the LTM active customer number. And you've, of course, seen that order growth number continue to grow. I just point out on the last point you were just making on market share and where the category is, we are obviously up 4% in the quarter with the category down mid to high teens, if you assume at some point when the category returns to growth and normalizes that gives you very significant growth for us up in the high teens. And as we've spoken about before, that flows very nicely through to EBITDA and we're poised for that momentum. I think you had another question on the International segment.

Yes. Exactly. So on that, let me -- again, I'll start and, Kate, you can jump in. That segment is like 10% to 15% of our revenue or thereabouts. Those are -- that's kind of the businesses outside the United States. And we mentioned how getting back to form on our recipe is the predecessor activity for taking share gaining ground. And again, you see the share grade driven by order strength and you'd see all the positioning that you'd want to see in terms of how we are doing. Well, on that, what I would say is that each of the countries is a different state in the recipe fully being back intact. But as we've been getting it back intact, we are seeing the momentum we want. And so what I would point out is that the KPIs that we would use to measure the success of those businesses are not necessarily evident to you. And honestly, we are very focused on making sure that every dollar we spend goes really far. And so we are not interested in continuing to invest in something that we don't think is going to give us a gain, and we've done a good job of stripping out a lot of those costs, and we'll continue to do that. But we are pretty excited about our smaller businesses, whether it be Perigold, which is in the luxury space, small that continues to take share at a nice pace. What we've done with specialty retail brands, which compete in the specialty segment. Wayfair Professional is one of the bigger of the smaller businesses that's clipping along nicely and then the international countries. And so we believe that the same model works there. There's a bit of a lag in timing. But again, you see losses compressing. And what I think is I would say that folks are focused on that segment. It's a little bit of missing the forest for the trees as it kind of my view on it.

Yes, I think that's right. I would just add that there's nothing that we structurally see about the international market that suggests it should operate over time in any way that's different than the nice EBITDA that you're seeing in the U.S. market, and we'll continue to invest for growth there, of course. But we also were mindful of the cost structure there. And as we spoke about in general, we took out these costs. those impacted us globally, not just in the U.S.

Great. Thanks. Thanks, guys. I appreciate the answers.

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

Great. Thanks so much and good morning. Thank you for all the color, guys.

Good morning.

Two questions from us. You mentioned some of the category callouts with mattresses and also pets. Just curious in aggregate, how did big ticket versus smaller more decor type of items perform during the quarter? And is the decel you're seeing quarter-to-date driven by slower big ticket purchasing, just given the macro? And then secondly, as a follow-up to Chris's earlier question. So should we think if revenues are flat in '24 year-over-year, you could be at the low end of that mid single-digit margin goal that you guys talked about? Thank you.

Yes. Let me start with some of your questions on big ticket versus small ticket and then maybe Kate can answer the guidance question. When I say on big ticket or small ticket, you could see this -- well, I guess, maybe you can't see this in AOV because again, you see the overall effect of the deceleration -- not deceleration, the normalization of AOV with the inflation turning into deflation and coming back out. Basically, no, there's no real mix effect there. So we are seeing strength across the board. Part of that is the price elasticity. When that big item which typically is bulkier and has a high ocean freight factor gets hit with those costs, it really drives up the price of that item a lot. When that comes back out, that item becomes more price attractive that basically helps that item take share. So we've basically done well across the board. There's no real mix there. And then you mentioned a deceleration in Q4. I just want to comment again, if you look at it sequentially, you see a strong holiday ramp into Q4. So I think the deceleration is based on assuming the year-over-year comps in Q3 and Q4 were both normal flat comps, and they're quite different from each other because, again, Q4 last year is when we started taking share as a much stronger comp. So as you would expect, even if we have strong comps continuing, that compresses before it expands again. That's where the 2% sequential customer count, the strong order growth, but all these other numbers kind of point to what I think is really happening. So just keep that in mind. I would model it sequentially. You can also model a top down. But if you model sequentially and then impute year-over-year, I think you better see a better trend of what's happening, and it sort of explains what I think otherwise may not. And then so I'll let Kate comment on that, and then Kate can also comment because you had a question about in 2024, what level could EBITDA be revenue at the low end. I think that's probably because as we mentioned, there's a lot of cost savings still to come. And so I don't know if you want to guide that or not.

And as you know, we don't guide to 2024. I would point you to following Chris's question, I think we talked through some of the puts and takes on that thought model. And really seeing in 2024, obviously, the full impact of that over $1 billion of cost savings up and down the P&L and work with that sort of from gross margin on down and the benefit of that should certainly drive substantial EBITDA growth beyond that, we haven't commented on 2024 guidance.

Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Hey, thanks. Good morning, everyone. I want to ask a question about -- a little bit about the fourth quarter, and then second about your posture around, I guess, promotion and ad spend versus sales. So first, the fourth quarter the chances of it getting more promotional, curious how you think about that? And then given your posture around margin, I guess, preserving margin over sales here, it sounds like you wouldn't dip your toe into that, but can you give us a sense how vendors are approaching it? Would you share some promotion versus them? And then in terms of advertising, are you inclined to ramp that up if you saw that market share was getting worse for some reason because of the promotional backdrop?

Yes. Thanks, Simeon. So what I would say is that we are expecting Q4 to be promotional. And that's part of why our guide on the sequential ramp of that 7%, 8% instead of 10% is a little more conservative is obviously it's hard with the promotional season really ahead of us other than Way Day 2. Way Day 2 beat forecast did very well. So that was a positive sign. That said, you have the whole kind of holiday season more or less ahead of you. And there's -- the macro, it's hard to read the headlines and say, oh, this is a boisterous time where everyone's jubilant, right? So I would say we are expecting to be promotional. Our merchandising calendar, everything we've worked out with suppliers, our merchandising plans reflect what we expect to be a very promotional season. If you pull up the home page of any of our sites, you can get that feeling right now, pull up any of the app. So you can see that we are leaning in on that. We are set up for that, all the guidance already accounts for that. Now could it be more promotional than we are expecting? It's possible, although we feel like we have a good feel of what's happening in the markets. If it is more promotional, do we think that would hurt us? Well, who knows. I think we've got a very good posture, and this is why we've taken share over the last year to gain back anything we lost and then a lot more than that, right? We are at all-time high. So I think we're set up really well. Ad spend, we do not think of something you just use as a dial to make yourself feel good on revenue. So we've really scrubbed ad spend to make sure every dollar works really hard for us. So we would spend dollars if we would think that the return we would get would be at that higher threshold that we've now established. But we are not going to -- it's not -- the outcome is not measured in market share. Market share is something you then end up getting if you did it well. And so ad spend is yet another cost line that we expect to work really hard for us. And then as you can tell, we've reduced it. So obviously, revenue growth would be even far higher than it is now if we didn't reduce it. But we think it was the right move to make -- expect every dollar to work harder. We are going to keep that expectation. We are seeing good results from that expectation. That's the way we think about that.

I just -- I will add one thought on the promotion piece because I do want to point out that even if the market does get more promotional, our gross margin is resilient. So unlike other retailers where you're taking inventory and you're discounting that you've already acquired. In our case, typically, our suppliers are reducing wholesales and we are passing on that benefit to the customers. But you've seen throughout the year the gross margin is actually grown even in the face of that because it's not coming from us dropping that price. And so I just -- that is a bit of a nuance to our model, and I think one of our benefits, frankly, in our structure.

Thanks, guys. Good luck.

Thanks.

Thank you. The other obvious point to is obviously the inventory in the supply chain, the inventory we are selling is owned by our suppliers as well, which is a slightly different dynamic than most retailers. But I think that partnership with our suppliers is part of why we win as well.

Your next question comes from the line of Oliver Wintermantel with Evercore ISI. Your line is open.

Yes, thanks. You guys did a great job in the repeat customer or from repeat customers growing again, but that would imply that the orders from new customers continues to decline year-over-year. Could you address that? Or when do you think that, that improves? And what can you actually do to improve that? Thank you.

Yes. So I guess the overall point and Niraj, feel free to jump in, is that sort of we are very excited to see repeat customers growing. I think that speaks to the strength in the model. and the benefits that we are getting as -- or the percentage of repeat growing. I think that speaks to the strength of the model and the benefits that we get as people experience the improved offering and come back and shop with us again. As far as what does that foretell for new customers? Certainly, we are not seeing any weakness there. And in fact, LTM active customers is actually growing sequentially. So our overall customer base is improving.

Yes, let me just -- sorry, Kate, let me just chime in a couple of things and then keep going. But -- so that repeat percentage, right, to 80% of orders or repeat orders, that is of all customers who bought ever, okay? And so obviously, we've been around for 20 years, we have a lot of customers. If you bought ever, you're in that number as a repeat order. The active customer number means you have to have bought within the last 12 months. So you could have people who bought in 2015. And if they buy again after being unengaged for 8 years, it would still be a repeat order. But they would come into the active customer number after not being there. Same thing if they weren't -- if they didn't buy in 13 months, they would also come back into the active customer number. So you need to look at those two numbers in different ways. There's still a lot of new customers for us to get, and we are going to -- we expect to get them over time. But there's a lot of people we've encountered over time. And so that active customer number is kind of this engaged base. They have to be bought within the last 12 months. are they buying? And then obviously, if they buy again and they buy again, that's the flywheel that drives the business. That's where I mentioned, there's a 2% sequential growth in the active customer number, that number is poised to turn positive. And we are still, at this point, only getting $550, I think it's $540 per customer per year. So we still have a very low share of wallet. So there's that's where there's a lot of juice.

I agree with all that. And Oli, just one thing I want to point out. I think you implied that new customers were weakening. But we don't -- we give you the KPIs and then you have to do a little bit of math. And so recognizing that we've been on the call for 55 minutes, you probably haven't been able to do the math. But if you take the percentage of repeat and then back into what that implies for new orders, you'd actually see new orders growing quarter-on-quarter. So you would see -- or sorry, growing year-over-year. So you'd see that nice improvement actually in new orders and new customers. And we continue to be excited about what that implies for the strength of the offering.

Right. So new orders is over -- it's like $2-ish million. And so basically -- Yes, that's why I was trying to explain the definition of the active customer numbers separate from the repeat order stat because you could actually figure out a lot if you use them, but to understand how they're defined separately from each other. So we're gaining a lot of new customers. But what I think is even more exciting than that is, frankly, that the customers we’ve are being engaged in coming back to that active customer number.

Got it. Thank you very much and good luck.

Thank you.

Your next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is open.

Hey, good morning. Thanks for taking my question, it's on gross margin. So for three consecutive quarters, you've exceeded the high-end of your guide on this line item by an average of around 90 bps. So just curious kind of what are your assumptions underpinning 30% versus 31%? And why should the 4Q result not top the high-end of your guide considering the recent trend? Thanks so much.

Sure, Jon. Obviously, one thing, keep in mind, there's a different mix of goods that are sold each quarter, which create some gross margin changes as well. But let me turn it over to Kate for the specific information on the guide.

Yes. I think what you're seeing there is, again, nice flow through of those cost savings that we laid out at the beginning of the year. We said in the second quarter that actually flowed through a bit faster than we had anticipated, and so we reinvested some of that in the third quarter. And we intend to be mindful of how we make that investment. We want to be maximizing gross profit dollars over a multi quarter basis. In the fourth quarter, as Niraj mentioned, seasonally, there's some impact there. It's also a great quarter to bring people onto the platform. We just had that discussion about new customers. It's a great quarter to bring new customers in and get the benefit of those customers over time. I will point out, you also, of course, saw us bring up the guidance range. So we remain confident in the direction that gross margin is going, and we are really excited about what we've been seeing there.

Thank you.

This does conclude the question-and-answer session. I will turn the call back to the Wayfair team.

I just want to say sort of thank you to all of you. We are obviously very excited for the holiday season. We are excited about the share gains we've had, the order strength, the momentum, the profitability growth, kind of the positioning we have for increased profits and everything. We thank you for your interest. And with that, we will see you next quarter.

Thank you.

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