Wayfair Inc. (W) Q4 2024 Earnings Report, Transcript and Summary

Good morning. My name is Aaron and I will be your conference operator for today. At this time, I would like to welcome everyone to the Wayfair Q4 2024 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise and after the speakers remarks we will have a question-and-answer session. [Operator Instructions] Thank you. With that, let's begin. It's my pleasure to turn the call over to James Lamb, Head of Investor Relations and Treasury.

Good morning and thank you for joining us. Today we will review our fourth quarter 2024 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 2025. 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 2024 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're excited to reconnect with you this morning to discuss our fourth quarter results. The fourth quarter was a strong conclusion to the year across multiple fronts. From a top line performance perspective, we ended 2024 on a high note with net revenue showing positive year-over-year growth. This was driven by healthy performance in our U.S. segment, which grew by more than 1% in the period. These results enabled us to drive nearly $100 million of adjusted EBITDA in the quarter and deliver on our goal of approximately 50% year-over-year dollar growth for 2024. Our strong financial performance enabled us to tap into the high-yield markets for the first time and bolster our capital structure. We're now in the strongest balance sheet position in many years, having paid down a substantial portion of our 2025 and 2026 upcoming convertible maturities at an attractive discount and have nearly $2 billion of total liquidity available to us. In our shareholder letter last year, Steve and I wrote about the three factors that have defined Wayfair at our best. These include: one, a singular focus on what's most important for both our customers and our suppliers underpinned by category defining technology capabilities; two, a believe that our team is strongest when nimble, relentlessly execution focused and lean. And three, a long-term owner's mindset to focus on driving the best ROI over time versus optimizing for the short-term. 2024 captured all three of these in many ways, even as we continue to operate in a challenging macro environment. Our relentless customer and supplier focus has resulted in another quarter of healthy share gains in the face of a category that remains under pressure. I've talked in the past about how the overhang, a depressed housing cycle, has had on customers' willingness to spend on their homes. The forward outlook, especially in the core of our business, big and bulky furniture, is as unpredictable as any point in the past four years, with uncertainty over the state of inflation, global trade policy, and interest rates, among other factors. What is much more predictable is our own ability to outperform the competition. For decades prior to the pandemic and since late 2022, we have been a consistent share winner through our unmatched expertise across marketing, merchandising, supply chain, and technology. We have a wide range of competitive advantages across each one of these pillars, all aimed at building a better experience for our customers and our suppliers. In our updated investor presentation published today, we highlighted many of these competitive advantages, providing details on a few that are in earlier stages, and a deeper level of data on several that we have discussed here before. There are a number of stats that will be new to investors, so I'd like to walk you through a few of the noteworthy ones now. We've invested in our proprietary logistics network for nearly a decade, which has given us one of our most potent and durable competitive advantages. Suppliers are eager to leverage the services we offer because CastleGate gives them access to a world-class logistics network, one with a degree of scale and sophistication that very few of the industry's suppliers have the ability to replicate on their own. CastleGate can provide a meaningful growth unlock for our partners by driving a better customer experience. And much of that revolves around the benefits of forward positioning. Approximately 90% of the orders from CastleGate have a speed badge, due to our ability to intelligently position products across the network and integrate our fulfillment centers into the last mile delivery operations. This advantage, combined with the nature of a logistics network custom built for home, is demonstrable. Compared to items fulfilled by third-party logistics providers, CastleGate fulfilled items see order to delivery dates nearly halved, return rate percentage down by about a fifth, lower rates of incidence, and higher NPS. Suppliers routinely experience a considerable uplift in conversion rates as a result of the speed badge and lower retail prices. Going from no speed badging to a one-day badge can drive a conversion uplift of over 60%. Alongside logistics, curation is another one of our competitive advantages. Our work around making the catalog fun and engaging to shop is a key driver of trust for our customers, especially when they are making an investment in something for their home that they haven't been able to see or touch. There are many ways we do this, including an initiative we launched late last year called Wayfair Verified. The Wayfair Verified stamp on a product page gives customers a quick and easy way to identify products that we've specifically chosen to highlight and that have been physically audited by our merchants. This means our team handles the products themselves to ensure that they meet the highest quality and value standards. In addition to the attributes on our typical product page, like high resolution imagery, reviews, and other details, Wayfair verified items often also include a short editorial video where a merchant showcase the key features that make these products stand out and explain why this item is one of their top choices. The benefits to both the supplier and the customer are clear. Today, Wayfair Verified items tried more than 15 times the number of visits per skew than the catalog at large and drive over 20 times the amount of revenue per skew. Students of Wayfair will know this well, but fundamentally our competitive advantages are derived from leveraging our scale to solve the multitude of challenges that suppliers face in the home category. This is perhaps no more evident than in our efforts around physical retail. Last spring we opened our first Wayfair branded store just outside of Chicago and the response has been tremendous. We combined our deep supplier relationships, the strength of our brand, and our logistics and curation capabilities into a shopping experience that is resonating with customers, more than half of which are entirely new to Wayfair. While we built the store on the basis of our expectations around four-wall economics, we've been extremely pleased at the wider halo uplift we've seen around the store. To use one basic metric for halo measurement, in 2024 we saw more than 15% spread in the growth rate of the state of Illinois versus the U.S. overall. There is still much more for us to do here, and we're already fast at work on our second Wayfair store, as well as the launch of our first Perigold branded stores later this year. Zooming back out, we hope this new version of our presentation is a helpful tool for investors, both new and old, as they think about our competitive advantages and how those apply across the set of growth initiatives we have in flight. If you look back over the past couple of years, I would describe 2023 as a year of driving meaningful cost efficiency. Our focus was on returning the business to a place of positive adjusted EBITDA and free cash flow. The theme for ‘24 was in many ways about laying the foundations for a return to growth, which we saw in the tail end of the year. Looking ahead, we intend 2025 to be a year where our investments in competitive differentiation return the business back to a state of expanding growth, even as the market remains challenged. Our enthusiasm is further enhanced now that our tech re-platforming is far along, which means that over the year we can focus an increasing amount of our technology resources on driving growth. We spent much of last year talking about some of the new investments we made into marketing. Early in 2024, we rolled out a significant brand refresh with our Wayborhood campaign, which brought fresh creative in top of funnel. The Wayborhood was designed to be a platform on which we could build out future marketing campaigns. And the results we've seen so far from these efforts have been encouraging. In the fourth quarter, we launched our first holiday installment of the Wayborhood and continue to see powerful positive impacts across awareness, brand linkage and recall rates. This is resonating across the business in multiple ways. We saw healthy double-digit growth and app installs during the fourth quarter, and we saw new customer order growth in the U.S. outpace repeat for the first time since 2020. Pinterest continues to be one of our most powerful channels to speak with home shoppers. And we saw very robust double-digit growth and visits during the fourth quarter. We're very excited about our plans ahead for 2025. We've got new campaigns, new influencer partnerships, and continue to test it in newer channels for us, such as YouTube and AppLovin. This testing stage has been a core part of our expertise in digital marketing for years. We take a thoughtful and considered approach as we look to develop new channels, testing customer response aggressively, and only choosing to scale where we see clear evidence of payback. These investments are table setting for substantial returns, not just in the quarters ahead, but also for years down the road. We're able to make these investments, because of the considerable financial discipline we've exhibited over the past three years as we continually improve multiple areas of the P&L. Financial discipline is a key driver of how we think about return on investment, especially the return of our longer-term investments, which are the initiatives we expect to have the highest payoffs. We hold the high bar and strive to bring intellectual honesty as we evaluate efforts where our investment thesis came to fruition and times that it did not. Last month, we announced our decision to exit the German market, largely due to the opportunity to pursue higher ROI initiatives elsewhere. Scaling our market share and improving our unit economics in the German market had proven difficult due to the challenging macro in Germany, our limited scale there, and our current brand awareness in the country. If you didn't get a chance, I'd encourage you to read the letter we published at the time of the announcement for more details. One key takeaway I would reiterate here is this. Like every company, we operate with a set of constraints dictated by the budget we have to deploy against our goals. We've always been proud of the rigor and analysis we put behind each dollar of spend to ensure we are maximizing return. We scale investments that are at a point of proven success, but every effort has to start somewhere. And to lead up to that, we have small teams that are focused on low cost and high potential ideas. In that spirit, I want to call out one of the projects our team focused on far future R&D just launched. Muse, our latest innovation in personalized home shopping. Nearly two years ago, we launched Decorify, our first foray into leveraging generative AI to drive inspiration in the shopping journey of our customers. Muse is our evolution in how customers discover, personalize, and shop for their dream spaces. Muse can explore an infinite possibility of room ideas populated with items to inspire purchases on Wayfair. News elevates our best-in-class search experience by utilizing generative AI to blend inspiration in shopping. And we can't wait to see what our customers are able to come up with. You can start right now at wayfairnext.com/muse. I opened today with a reference to our 2023 shareholder letter and the core tenets of how we have run Wayfair for more than two decades. As a wrap up, I'd like to now close with an excerpt from the letter we published just this morning, which I would encourage you to read. Under the umbrella of those core tenants, we enter this year excited about the opportunity to continue to. One, focus on tight execution to drive profitable growth through taking market share. Two, continue improving the financial position and strength of the business. And three, further build out our five long-term notes. We're making smart, high-return investments across the business, and at the same time, remain committed to growing adjusted EBITDA dollars year-over-year. We are confident this approach sets us up well for a compelling payoff over 2025 and we are excited to bring all of our stakeholders with us on this next leg of the Wayfair journey. Thank you and now let me pass it over to Kate to go through our financials.

Thanks, Niraj and good morning everyone. Let's dive into our fourth quarter results. Starting with the top line, net revenue for the fourth quarter ended at $3.1 billion, up 0.2% compared to the fourth quarter of last year. This was driven by outperformance across our U.S. segment, which was up by 1.1% year-over-year. We saw nice strength across the holiday period with 8% sequential growth, compared to the third quarter, which was a healthy step up from the sequential performance we saw a year prior. This was driven by orders that were up about 15% sequentially, offset by AOV compressing by roughly 6% versus the prior quarter, both in line with the typical patterns we would expect to see in the fourth quarter. Let me continue to walk down the P&L. As I do, please note that the remaining financials 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 for the quarter was 30.2% of net revenue due in part to some deleverage on contracting orders, as well as our own proactive reinvestments. We continue to see attractive opportunities to lean in on competitive take rates, the benefits of which are beginning to manifest on the top line. We see our pricing levels today at one of the strongest positions in Wayfair's history, helping to reinforce one of the core elements of our recipe. Customer service and merchant fees were 3.7% of net revenue, while advertising was 13.7%, which we expect will represent the high watermark for this line item. Niraj mentioned this earlier, and we talked at length about it in our call in November, but this is a reflection of the exciting opportunities we are seeing to lean in with incremental advertising spend to drive strength in customer and order acquisition. To add to some of the examples Niraj shared, the number of unique influencers producing Wayfair content was up by more than 40% in December, as we've been scaling up the Wayfair Creator Program, our direct line to working with influencer talent interested in partnering to share their passion for Wayfair. One of the most prevalent questions we heard from investors last fall was how to think through the nature of timing on advertising spend. As many of you know well, all our ad dollars are payback driven, spent against channels with specific expectations for ROI over a defined time frame. These time frames will vary depending on where in the customer acquisition funnel each channel falls. But even the shortest payback windows can be in the 60 to 90 day timeframe. This means that a significant portion of the dollars spent in the quarter won't pay back until the following quarter or beyond. It's worth bearing this concept in mind if you consider advertising spend as a percentage of net revenue, because there is a timing mismatch. Not all the dollars we deployed last quarter hit their target payback windows within the period. Some of that will carry over into one or more quarters of 2025. As the revenue dollars associated with the incremental marketing spend begin to flow in, that serves as a levering force to bring advertising as a percentage of revenue back down. Consequently, we anticipate this metric improving, compared to the peak level we saw in the fourth quarter. As we've previously discussed at length, we are constantly measuring and evaluating the efficacy of ad spend on a channel-by-channel basis. Our industry-leading expertise, underpinned by our proprietary technology tools and decades of experience, enables us to have the agility to lean in where dollars are generating the highest ROI, while simultaneously pivoting from channels if their efficiency weaken. The important point to take away here is that we are constantly adapting our spending plans to the reality of the advertising market and the state of consumer demand, which affords us the flexibility to swiftly pair back budgets if the ROIs across certain channels in our portfolio begin to deviate from the targets we set out. Now, as I've mentioned before, the end result we are solving for is maximizing adjusted EBITDA dollars over a multi-quarter period. To that end, we can fund this incremental investment in advertising through savings in other areas like our selling, operations, technology, general and administrative expenses line item, which came in at $392 million for the fourth quarter. We showed further discipline here in Q4 and you should expect this to continue as we get deeper into 2025. Altogether, we generated $96 million of adjusted EBITDA in the fourth quarter for a margin of 3.1% and $453 million for the full-year 2024 at a 3.8% margin on net revenue. Early last year we made a commitment to driving approximately 50% year-over-year growth in adjusted EBITDA dollars and we're proud of the work that went into making that happen even in the face of a category that showed a third consecutive year of market contraction. We've said many times before that our North Star is driving adjusted EBITDA in excess of capital expenditures, as well as equity-based compensation. Our cost efficiency was well reflected on that last piece, with equity-based compensation declining by nearly 35% or over $200 million year-over-year in 2024. Again, just like the cash expenses in our SOTG&A line, we expect equity-based compensation to further compress as we get deeper into 2025. We ended the quarter with $1.3 billion of cash and equivalents, and over $1.9 billion of total liquidity. Cash from operations was a positive $162 million in the quarter offset by $60 million of capital expenditures for free cashflow of $102 million. All told our $83 million of positive free cash flow in 2024 was another year of meaningful improvement in our financial profile. But our work doesn't stop there, as we've made a commitment to drive growth and adjusted EBITDA dollars and free cash flow in 2025 as well. Let's now turn to guidance for the first quarter of 2025. Beginning with the top line, quarter-to-date we are just below flat and would expect to end Q1 flat to down year-over-year. This outlook for the full quarter includes approximately 100 basis points of drag from the exit of our German business. Turning to gross margin, we would hold our guided range of 30% to 31% and expect to be closer to the midpoint here for Q1. Customer service and merchant fees should be just below 4% in line with where they have been the past several quarters. We expect advertising to be in the range of 12% to 13% of net revenue. We leaned-in quite heavily in the fourth quarter, and while we continue to see very attractive opportunities to spend, we do expect to see our spending Q1 stay within the upper end of this range as we get the benefit of some of the dollars spent in Q4 now beginning to pay back. Finally, we expect SOTG&A to be in the range of $380 million to $390 million in the quarter, showing continued improvement. Following this guidance down, we anticipate adjusted EBITDA margin to again be in the 2% to 4% range. Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $80 million to $100 million, depreciation and amortization of approximately $82 million to $87 million, net interest expense of approximately $18 million, weighted average shares outstanding of approximately $127 million, and CapEx in a $60 million to $70 million range. As we wrap up, I want to take a moment to thank our team for their incredible work throughout the past year. Despite a challenging macro backdrop, we continue to gain share, grow adjusted EBITDA dollars, as well as free cash flow, and improve our balance sheet. None of these achievements would be possible without the hard work and dedication of Wayfairian’s across the globe. Collectively, we are as excited as we've ever been about what we're building at Wayfair and look forward to sharing more with you in 2025. Thank you. And with that, Neeraj, Steve and I will take your questions.

Thank you. [Operator Instructions] Our first question is from the line of Ygal Arounian with Citi. Your line is live.

Thanks. Good morning guys.

Good morning.

Maybe just first on I guess the relative app performance in 4Q on the top line, what the biggest drivers of that were for you guys? And on our numbers, the AOV was better-than-expected and customer count and orders were a little bit worse, but it sounds like that was in line with your expectations. Was it still predominantly pricing and discount driven? Just how to think about what happened in fourth quarter? And then, thanks for all the color on the letter and on the presentation as we look forward to 2025, share gain seems to be a big factor here. You know, what do you think drives that the most this year and how much share gain is contemplated in the comments around the profitability of each of those?

Thanks for your questions. All right, let me start by answering some of this, and then I'm going to pass it off to Kate to try to answer some of the last bit about the guidance kind of contemplation. In terms of the fourth quarter, so we were happy with how the fourth quarter came out. The way to think about it is, you're obviously describing kind of the revenue came in well, but you're talking about kind of orders, AOV. I guess the way to think about that is, the main thing you think about is sort of what's the right offering for the customer, what's the right marketing, the right event cadence, it's holiday. How are you assorting the seasonal goods? How are you assorting sort of kind of door busters and other items? And then how are you just going to, like in our business, it's not like gifting where it's a rush right before Christmas. It's sort of preparing to host at Thanksgiving. It's getting your house ready for the holiday, festive holiday season. It's been hosting again for Christmas. So there's all these things outside of just getting a gift for yourself or for someone else. So I feel like we did a good job with that. And I will just say, we're now in the finished the third year where the market was copying significantly negative. And our strategy has been, how do we deliver the experience that allows us to take share? So the gains are coming out of successfully taking share by the customers choosing to shop with us, even though maybe they're not shopping the category that much. So that's sort of like the way I would kind of frame what we saw with holiday and why we're happy with it and kind of the fact that it was a solid holiday season and how it played out. Now you had a question about now looking forward, you know, share gain's been a big piece of the story, which I totally would agree with. And I think I’m very -- I would point to that as a very important piece of the story, as you'd see in the shareholder letter that we released that today. I talk a lot about that. As we look forward, and I'd say super high level, and you can see this in the shareholder when I talk about the coming year, I'd say that we underwrite a base case that the market does not get that much better. That's a tough market. And why do I say that? Well, you know, housing is in a tough place, the 30-year mortgage rates in a high number. It doesn't make sense for a lot of folks to move. And so rather than underwrite, hey, this is going to get a lot better, we say, well, let's make the base case that it's not. Now, it's a cyclical category. And there's no question that we're down. We've kind of gone through the down cycle. And we must be near the bottom. But rather than try to call the bottom, we just say, hey, we're going to be a big beneficiary now and later and during an up cycle if we focus on just executing well. And what are the things we can do this year that are in our control that let us take market share? And it's a very big and fragmented market. We talk about it being over $0.5 trillion, and it's very fragmented. $12 million for one of the largest players in it. But there's a lot of areas in our business where we say, hey, there's specific things that we think we can do that would let us take share. And when you make a list of these and you say, okay, these are ones we can do, who could own each one or does own each one, what are the metrics, what do we need to do to accelerate them? And you add up what do we think these can do, it could be substantial. So that's the plan we have. And it is based around taking share off the market being tough and we have one big advantage as we go into this year that we didn't have in past years, which is just that we have a large technology organization, but we focused over the last few years I've talked about this going back three years ago in the shareholder letter, that we were putting our technology resource very focused on re-platforming our systems. We had put that off for a long time, but we got to a point where developer velocity was very slow and it was very hard to have stable systems and introduce new feature function into them. And so we made the right, I think, but tough decision to really focus the technology resource on that. So we've had multiple years where we've not been able to drive feature function. And this whole type of product led growth has historically been a big piece of how it's grown. We now have those resources back as the tech re-platforming has gotten to this advanced stage. So a lot of the things we talk about, and I mentioned a number in the letter, are ones that we can now do this year that we couldn't do in the past year. So in our mind, there's a lot of opportunity that's entirely in our control that's low-hanging fruit. Now, in terms of how we think about guidance, let me turn it over to Kate.

Yes. So I think what you're referring to, Ygal, is the commitment to grow adjusted EBITDA dollars in 2025, and how much of that is tied to topline versus potentially other levers. I think Niraj shared a bit around how we think we can continue to gain shares throughout ‘25 and our commitment to that. But if we look at sort of how do we grow adjusted dividend dollars even in an ongoing challenging environment, we believe there are a number of levers at our disposal. Niraj just talked about what can we control. One of those is obviously our ongoing reduction in the fixed cost base, so the SOTG&A line. You've seen that continue to come in quite nicely. And obviously in our guide for Q1, we had that coming in again. So we think that through ongoing expense management, even with a challenging top line environment we can continue to grow adjusted EBITDA dollars.

Great. Thank you guys. Very helpful.

Thank you for your questions. Our next question is from the line of Maria Ripps with Canaccord. Your line is live.

Great. Thanks so much for taking my questions. First, can you maybe expand on how you're thinking strategically about pricing investments, especially in the context of tariffs? And then secondly, one of the focus areas you highlighted in your shareholder letter was going after the low-hanging food. Can you maybe expand on two initiatives that you sort of mentioned there? One is modernizing your merchandising platform and the other one is developing kind of more nuanced promotions capabilities. I guess what are some sort of aspects of functionality that you feel like you need to add on those two fronts to compete sort of more effectively?

All right. Thanks, Maria. So let's go through questions one at a time. So on the first question around price investments and tariffs. So on tariffs, let's just take a step back and I just want to provide a little bit of background for those maybe who haven't followed us for five, six years now. If you go back to during the first Trump administration, tariffs in our category, it went from really no tariffs on our goods coming out of China through a couple of different iterations, up to 25% of tariffs on goods coming out of our category. And that happened, it was -- I would say, a surprise to most folks. And so it happened fairly quickly. That of course then caused our suppliers to make decisions that their supply chains that would then optimize the cost of their goods, because they want to make sure that there is cost competitive as they can be. Otherwise obviously it's hard for them to grow their business and succeed. But then what's happened since then is that, that understanding that, hey, these tariffs, they may change, they may continue to evolve. That was then kind of firmly set in folks' minds. So what you've really seen happen is that there's sources inside Asia, so places like Cambodia, Indonesia, Thailand, Philippines, and Vietnam for sure, that have grown as places where folks have factories and where goods are coming from. And that's been a growing trend. And in addition to that, there are places like India, Brazil, Turkey, that have really been growing as a source of goods. And so the supply chain has been diversifying and then obviously there's production in the U.S., in Mexico, Canada. And we as a platform, because we have 20,000 plus suppliers, we work with all these folks. So we haven't like made a bet, hey, we're buying from these Chinese factories. So we want to change our mind. We need to build a sourcing operation in Mexico. And we want to now buy from Mexico. Instead, we're working with everybody. And so our different suppliers may get advantaged or disadvantaged as different things happen. That could be something like global trade policy, but it also could be something like ocean freight pricing, right? It could be there's a variety of things. And our suppliers are doing what they can to optimize their business, so that they can provide that price value to customers otherwise they don't win and then we are basically taking a margin on these goods, so meaning if you have opening price point barstools, we have a certain margin we take on opening price point barstools. So anyone who is selling us opening price point barstools are competing against one another. But mid-priced wooden barstools, when they have a different margin, we've decided to take. But again, anyone providing those, regardless of their sourcing and their location, their cost structure, we're taking the same margin. So different folks could win or lose if they end up advantaged or disadvantaged depending on the setup they have. As you can imagine, they want to make sure they're advantaged. So they've been making changes to try to advantage themselves. We try to help them by providing advice and guidance on what we're seeing, what we think is happening. As you know, on ocean freight and shipping costs, we try to help them by being a provider of those services. You know, we move tens of thousands of containers on our NVOC as one of our logistic services we provide. So we're trying to help them, but ultimately they need to optimize their outcome. And you see them being pretty smart about that. So the price actions we make are around price elasticity. What we think optimizes the outcomes for us, not about what the cost inputs are to our suppliers. So they're sort of like obviously related in the sense that you're talking about a retail price at the end of the day, but they're two very different dynamics. But before I go on to the two things with the shareholder letter, let me -- I don't know if Kate maybe wants to add anything on that first part.

Yes, no, I think that covered the tariff piece. Well, I guess I'd just add on sort of the conceptually how we think about price, too. You heard us talk about investing in price over the last few quarters. What we said there was that we were focused on growing gross profit dollars on this multi-quarter basis. And so really the framing there is we think of price as a lever, and we're quite selective about how we use it. We understand from the copious amounts of data we collect on where the consumer is price sensitive and where we should lean in, where we should pull back. And that's really based on guiding towards this gross profit dollar growth and ultimately this adjusted EBITDA dollar growth. So as we go into ‘25, think about us as having that at our disposal in terms of how we lever that up and down.

Now let me jump to the second question. So thank you for reading the letter. Anyone on the call, I definitely, if you have a few minutes, encourage you to read our shareholder letter. We try to zoom out and try to be concise, but also try to share thoughts that we think would be interesting to think about what we're thinking about, what we're focusing Wayfair on, where we are, what we're doing. Specifically, when we talk about the plan for 2025, one of the things I talked about was low-hanging fruit, meaning these are things that, again, in our control, where we can take share through actions of our own and the low-hanging fruit comment refers to, we think there's some real juice to squeeze on these things. And so we're going to go after them. And as I mentioned a minute ago, there's a set of items on that list that wouldn't have been possible for us to do in the recent past because of the technology re-platforming efforts. Hard not to kind of overemphasize that because obviously in our history, you go back you know over 20-plus years, we really built the business through very focused execution, but by using technology as a key lever to really let us get advantage. So obviously taking a multi-year period and focusing on setting up our technology to be scalable, flexible, enable developer speed, but not do future function in the meantime is really change and painful and not ideal in the near-term. But we think really smart for the long-term. So we did that. But now where we are is we are getting that technology resource back. So the two, Maria, the two things you asked about are both ones that do leverage technology resource. So on the merchandising platforms, what that refers to is, you know, we built our platform for the complexity of the home categories a long time ago. So in our categories, you know, there's items that have a lot of options, you know, there might be, you know, fabric choices and leg choices and arm choices on a sofa. So there's a lot of complexity in how you want to show items. Some items come in multiple boxes. There's a lot of dynamic in how the catalog needs to be structured. So we set it up for that. Now over time, as the world advanced, there's things that we now know, hey, there's easier ways that we could set it up for our suppliers to work inside our extra net that they work on called Partner Home to work with us. They now have catalogue product information management systems, PIMs, that they now store data in that we want to just automatically integrate, so just through direct connection through the PIM or through an API that they can write to. And these are things that in the old tech stack were difficult to do. So as a result, it creates friction for our suppliers to be able to do the things they want, makes it harder, makes it slower, makes it more error prone. And so what we’ve now are able to do is rather than sort of band-aiding, quick fixing the things that we need to do in the near-term, because the main focus is the re-platforming, what we're able to now do is tackle kind of the bigger solve to make it, we want to be the easiest platform for them to work on where they have the most flexibility and they're able to do things that they cannot do on other platforms, getting at the nature of the goods we sell, the way they want to merchandise these goods. So that's the kind of like the merchandising platform broadly. It's that type of work. We're meaningfully far along in that now, and we think there's a lot of gains to come from that. The other one you mentioned is talking about what we do with promotions. And there are just kind of like two facets to that. One is just, as we've talked about, obviously it's a category that customers have a lot of passion for. So they browse, they shop, they want to know about trends. But the ticket size and the category, it's not de minimis. So it's not like I need some new iPhone cables, 10 bucks, no big deal. So you may care a little more about sale events or when it comes to sale, you may really want to browse and see what's out there. And so the experience for customers when they're shopping on sale events, interfacing that with our ability to personalize those events and really let them find what they're looking for. There's a set of technology around how to sale events manifest that we want to let them experience. And then there's also the supplier side of making it easier for suppliers to launch new promotion types. So on other platforms you may see things like coupons or buy one get one free. There's certain types of very specific promotion types that today in our system we don't support. They're not necessarily the primary way suppliers market in our category. We support those, but they add up. And so we want to make those available. Again, those are not particularly difficult, but when you really have a very scarce amount of technology resource or feature function they wouldn't make the cut. Now all of a sudden, hey, we can add those in the platform. Those in different categories will unlock nice pockets of growth. And so those are two examples of what's a much longer list that you can see how these things add up, I think.

Great. That's very helpful. Thank you very much.

Thank you for your questions. Our next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is live.

Thank you so much. And I'll echo the thanks for all the detail and the letters really, really, really helpful. In terms of the part of the letter where you talked about advertising, both from a stimulant of growth and then the rate of pace of cost reduction. I want to know if I could follow up there with maybe just a few questions. One, what were the key learnings about channel mix from 2024 that inform the way you want to arc and spend your advertising dollars in ‘25 and beyond? And could you talk a little bit about the evolution of direct traffic and rewards and how that could offset advertising and actually create some leverage on that line item over the longer term? Thanks so much.

Thanks, Eric. Yes, so let me talk a little bit about advertising. So the first part of your question was about like learnings from channel mix. And so what I would say there is kind of a few thoughts. So one, there's the concept of channel mix in terms of upper funnel, mid funnel, lower funnel. And so if you think about the total top of upper funnel might be something like our television advertising. Obviously, the Wayborhood campaign was a big launch last year. We're very excited with how that's going. We have the new set of that campaign that will launch shortly in the spring. And obviously, there's the holiday phase. And then there's mid-funnel, lower-funnel. I would say the thing is that channel mix, one, we do a lot to try to measure mix and the mix effects. The mix effects are hard to measure. So you have a kind of margin on error on that. But what you do find is like the basic premise that you want to be wherever customers are is obviously very important. And so what I would highlight there is I think when we look back over the last few years, we'd probably say that we're probably a little slow to experiment and optimize for some of the more emerging channels. And so to give some context, one that merged a handful of years ago that's grown quite large would be what happens with influencers or creators. When you think about some of these social media channels, whether it be on TikTok or Instagram or YouTube shorts. And how do you interact with those in a way that both from a brand standpoint, it provide some upper funnel benefit, but frankly is really also driving that lower funnel sales transaction. And so that you're monetizing it on the payback you want. And so I would say what we believe is that there are certain channels, which we do a very good job in, we're getting kind of our share, we're learning how to kind of keep increasing that cost effectively through increased targeting, better creative, et cetera. And then there's channels where we don't yet have the recipe craft. But we think they're important places to be. And so I mentioned creators. But then similarly, if you look at YouTube full length or whether you look at AppLovin, there's a number where we care a lot about being a leader in that channel and getting our share, but then making sure we measure the interaction effects, that we're only, we're setting the payback tight enough, so that we're getting the benefit both in the channel, but overall because of the interaction effect. And I would say that one of the things we're focused on doing is catching up with the channels we're not yet at the scale in. But we don't want that sort of experimentation cost to be a big source of deleverage. So, you know, the way we think about it is, hey, you know, there's some upfront cost when you're in channels that you are at payback end, but you're not maximizing that. Hey, you want to spend up to that payback. And then you get revenue that quarter, and the next quarter, the quarter after. And you know your money good there. So we're doing that. But then the second thing we're doing, which really gets to the channel mix, is experimenting in the channels that we think are important ones, but where we don't yet have the share and we don't yet have the recipe correct. And there what we're doing is we basically have, you know, I think in the fourth quarter we sort of did a lot of both of what I mentioned, but what we've done is we've really fixed that budget to where we're going to be able to continue to expand the channels we care about, but in a way that our overall ad cost is going to be very effective and efficient. So that's kind of the way I would talk about the channel mix. Before I go to the second part about the direct traffic, Kate, anything you want to say on the first part?

No, I mean, I think you've covered it well. I would say some of the key points for us are that all of these channels are managed to very specific paybacks. So they are very tightly managed, and sometimes the total advertising dollars gets larger as we test and we play around with where we want to lean in more or less. But we're always tracking the payback. The other thing I would say just in terms of sort of how do you start to see some of the leverage and yours will go into loyalty and direct traffic in a minute. But there is a bit of a mismatch between when the dollars are spent and when you see the benefit from those dollars. And so that's why on the call we referenced that Q4 was a high water mark on this advertising spend, because the paybacks can be as low as sort of 60 and 90 days, but they can also extend to longer. We don't go out beyond a year of course, but you can see some of the revenue generated by marketing spend that was efficient and effective in the fourth quarter may come in multiple quarters later. And so as you think about leverage and where you see leverage, I just think that's an important concept to keep in mind a little bit of the mismatch there.

You know, on the second question about direct traffic over time. I think the way to think about it is, I talk a lot in the letter about advertising costs and about how you basically have a tension of sort of, as folks get increasingly loyal, you get a lot of ad cost leverage on that cohort of customers. But the things you're doing that drive them up to be increasingly loyal actually allow you to get a lot more newer customers into being active customers and climbing that loyalty ladder. And that sort of de-leverage you on the ad cost, and so those are puts and takes. I think your question, what I would highlight is, there's a couple other factors that will significantly help ad costs, and the way they do that is really what they're doing is they're helping people move up that loyalty ladder faster. That's really the mechanism that helps the ad cost. And what those are, the two I would highlight, one is are the app, the Wayfair app, the percentage of revenue that's coming from the Wayfair app, and those broader base of users that are using the Wayfair app has been, it's a very positive trend. That has the effect of doing that, moving people up that loyalty ladder. And then the second one is Wayfair Rewards. And Wayfair Rewards, the new loyalty program, it's early days, right? We launched it in October. But what we're seeing so far from the first cohort of members is the behavior is it's working very well. It's going as expected. Actually, the numbers are actually running ahead of expected. We have not aggressively marketed yet. We've gotten signups at a nice pace, but we've not aggressively marketed yet. So now what you're going to see is you're going to see it on the site highlighted more. You know, right now you can sign up for it in checkout, but it's not like super obvious. It's there if you're paying attention, but we don't make it like really jump out at you like most other folks do. Now that we've kind of gotten it through that initial testing and we're seeing it working well, you're going to see that ramp up. So and that would be another one that has the effect of moving people up that loyalty ladder faster. So there are multiple things outside the ad cost itself that will have a driver on it in a positive way as you were basically asking.

Thank you.

Thanks for your questions. Our next question is from the line of Chris Horvers with JPMorgan. Your line is live.

Hi, good morning. This is Jolie Wasserman on for Chris. I was hoping you could talk to the cadence in terms of what you saw that was more post-holiday lows, especially in January, versus what the impact was from wildfires and weather? And also on the weather portion, was weather a good thing for you or a bad thing? Because I know last year, Wayfair, you talked about the polar vortex being a headwind. But this year, I saw the app usage was up, which is probably more of a cold weather. People not going to brick and mortar stores is much benefit. So also speaking to weather polar vortex part 2, that reaction differed from last year?

Yes. So thanks for your question, so a couple of thoughts. So I would say the cadence, when you think about the holiday and entering the new year, the biggest thing I would say there is if you ignore the holiday period itself, which was, I think, strong, basically what you've seen is you've seen a relatively weak market. And January was weak. And I'd say February's been a little weaker than January. But that's not really very much off of the trend it had been on outside of holiday. And also when you look at holiday, I think it's important to balance November and December, because certain peak days slid from November into December. And I think the way some folks looked at it, November was down, but December was up a lot. And they're really excited about that. I think you sort of need to add the two together to get the kind of, which days fell and which month effect out. You'd still see a good holiday, but it wouldn't be quite as stark. And so our view is that the market has not dramatically changed. It's been a weak market. It's still a weak market. We're probably approaching the bottom. Impossible to say exactly where that is. No immediate catalyst that's going to like shoot it upward right away. There is pent up desire from customers to engage in the category, but no immediate catalyst to cause that to happen. So, hey, what makes sense? Well, our strategy around taking market share through our own actions we think makes perfect sense. We happen to have a set of levers to do that. We're very excited about that. And again, the tech re-platforming sort of, the position we've gotten to is a very, you know, idiosyncratic lever for us, but it's one that's actually very powerful for us. So we're sort of excited about that. Weather, as you mentioned, there's different weather spikes that happen. This year, it's been a little bit more puts and takes. I don't know that there's a specific weather pattern in the early part of this year, I would point out. But, Kate, anything you'd like to add?

Yes, I wouldn't quantify any significant impact or detraction from weather. It's been neutral.

That makes sense. Thank you. And just a follow-up on your February comment, I know Lazy Boy earlier this week said that President's Day was just not as robust as some other recent holidays and following up on your comment about February being, I think you said February being slightly weaker than January overall. So just wondering if you could speak to that and whether you observed the same trend of that holiday being weaker? And then just another quarter-to-date question would be how later Easter is affecting the 1Q outlook and what the expected shifts would be? Thank you.

Yes, sure. So, again, you know, I did try to come on President earlier. I have seen a number of people comment about President's Day being weak. I don't know, I think in general, just, you know, the market has remained weak. I think it's probably the main punchline I would put through that. And then Easter's a little later. Easter doesn't drive a huge amount of change in sales for us or we think the category. So we're not that Easter moving, we don't think is a big driver.

Thanks for your questions. Our next question is from the line of Simeon Gutman with Morgan Stanley. Your line is live.

Good morning, everyone. I wanted to ask if you can parse out the guidance for the Q1, and if I caught it, it was revenue flattened down slightly. How it breaks between the U.S. and international. I caught some of the quarter-to-date commentary in there and then how the first quarter guide dovetails with some of the bump in advertising you did in 4Q? And I know Niraj is not a perfect science in terms of timing, but I'm curious if one and the other are hand in hand?

Yes, thanks, Simeon. So I'm going to let Kate really answer the bulk of this question. But I think just to talk about advertising, you know, there's definitely a tail in future quarters and that is a factor, but I think most of the guide probably has more to do with a lot of other drivers of what's happening, but Kate can kind of parse that apart for you. What I would say is, you know, it's kind of like the main point, I guess, is what we were talking about a minute ago, which is just more that we think we're going to be able to still nicely take market share. We've been doing that since the fourth quarter of 2022. We did it for 20-years pre-COVID. And we think that we actually have some ways that we can do it this year that are quite advantaged. So despite the market remaining weak, as it has sort of the specific holiday period, and despite the -- you know, obviously the quarter, you know, we're comping, not having Germany, we're comping, you know, not having the extra day in the quarter from last year. But I think we feel quite good about our position in the taking share, but Kate, maybe you can answer the questions about guidance.

Yes, so we said quarter-to-date we're just below flat and we expect to, you know, end the quarter flat to down year-over-year and that includes about a 100 bps drag from the exit of the German business. So we don't, you know, typically guide U.S. versus international, but because of the uniqueness of comping over, you know, the German business this year versus last year, we did want to account for that. So the first quarter guide, excuse me, contemplates the German exit and as Niraj said, the lack of the day, the extra day. In terms of your question on sort of how is the ad spend driving, I think Niraj addressed some of that. What I would say is, as I referenced a few minutes ago, the marketing spend impacts on multiple quarters, right? So certainly is there some benefit from increased spending Q4 into Q1? Yes, but it could also impact on subsequent quarters throughout the 2025 year, depending on which channel, because the channels all have different payback days. And so we're really focused in an ongoing sort of challenge and down market. Obviously, you can look at the year-over-year comps, but we're quite focused on how are we driving share and are we seeing the benefits from the marketing and share game, because that tells us that we're continuing to do well in an ongoing challenge environment and so that's how we're looking at it and looking at the impact of it.

Thanks. Can I sneak in a quick follow-up? We had a little bit of a bump in industry demand in late last year. I don't know if it was post-election or not. Is there anything in your visibility, whether it's big item furniture, household items, did it feel like this was an end of a reversionary cycle? Like how did, what did you attribute, and if you're seeing what we are in terms of industry picking up a little bit into the end of last year, how do you assess that?

Yes, it's less clear to me that there's really much of an industry bump in demand that stands out. I think some folks looked at imports, but again, I think the timing of the lunar holiday in February, I think what we saw was a buildup of shipping ahead of it, and then there's generally a low, which we're now in, and then there's a buildup after it. So I think that's a factor that I think maybe folks were looking at demand. So again, I think the other thing is some folks remember some days moved from November to December calendar-wise. I saw a number of folks, you know, November was low, but then they talked about how high November and December was. But again, I think you got to add the two together. So my general view is that holiday was good, but if you zoom out, the trend overall has not really changed. It's been a weaker trend. And holiday, if you add up all of it together and look at it, it wasn't quite as good as the folks who just looked at December alone.

Thank you. Good luck.

Thanks, Simeon.

Thanks for your question. We have a final question today from the line of Steven Forbes with Guggenheim Securities. Your line is live.

Good morning, Niraj, Steve, Kate. Niraj, I wanted to focus on the CastleGate fulfillment network. Appreciate the color as others did, delivery time, return, incident rates, but curious if you could help frame up for us capacity utilization today? And how do you expect the vendors, based on your discussions, to engage with that network? But as we move throughout the 2025, anything to note right from your discussions today?

Yes, sure. So in the shareholder letter, I actually talk about what could drive gross margin. One of the things I talk about is utilization of our fulfillment network, utilization of CastleGate. As that rises, that's a big driver of gain for us in the sense that it offers real leverage. So one of the things we focused on with our suppliers are like, how do we help them do things that are good for them, good for us, and good for the customer? And obviously our goal, as we've talked a lot about, like so we're being very ROI focused. We're focused on how do we grow revenue really focused through the back of taking market share so we're not under in the market getting better, but do so while growing profit dollars so that's the frame right? So just think about that is we want to grow revenue we think we can we think that's going to be through market share growing, but while we grow the EBITDA dollars. And so one of the benefits there is where when we can grow the CastleGate fulfillment utilization in a way that's taking out costs for suppliers, allows the retail to get sharper for customers, the speed to get faster for customers, in a way where we're getting leverage through utilization of the network, that's a big benefit. And so that is something that we've kind of worked on, honing kind of the cost structure of CastleGate in a way that benefits sort of everyone involved. We've seen good reaction from that. And then we focused on some of the operations capabilities we have in our network and what are things we can do that make it easier for our suppliers to use our network in a way that's beneficial for everyone and technology that adds efficiency. And the way to think about it is for our business, as we grow, there's a lot of profit leverage in the business. So for example, revenue, when revenue grows a percent, EBITDA grows a few percent. So there's real leverage there. But then similarly on the cost side, there's certain things that are fixed costs. So one, we kind of think of a corporate overhead as a fixed cost. So obviously there's leverage there, whether that be that some costs are no longer needed and we save some money like we've done or whether revenue grows. Well, CastleGate is an example of a fixed cost where utilization of that network will drive real profit. So we can get profit as, again, revenue grows 1%. We get a few percent growth in EBITDA, but also leverage through some of these other things, as you mentioned. So we do think this is a real driver.

And maybe if I could just, a quick follow-up on that topic, because you framed the first quarter gross margin profile midpoint of the traditional range, 30% by 31%. You think about these comments around capacity utilization in CastleGate and then supplier advertising, which I also think you commented on the shareholder letter. So is there any reason for us to think about a second-half or full-year gross margin profile that's not within the upper bounds of that range that you're providing, noting you're not guiding here, but like what would be the risk factors to that sort of framework for the progression of gross margin as we move through the year?

Hey Steve, I'm glad you answered the question for me noting that we're not guiding. But I'll try to give a little context on it as well. So as you think about where we've been on gross margin over ‘24, we've obviously stayed within that 30% to 31% range. And that's really been balancing, how do we think about investing in the customer experience? So particularly around price investments. How do we think about what's valuable there for the consumer? Well, also making sure that we're generating gross profit dollars on this multi-quarter basis, ultimately driving adjusted EBITDA dollars on this multi-quarter basis. And that's the trade-off that we make in gross margin. So I would think about decisions around price investment and how do you reinvest things like benefits that we get from retail media as really a lever for us in the same way that we talk some about the marketing spend and then we can flex in and flex out of that. If you think about sort of the Q1 guide, obviously there's a little bit of seasonality. You know, this gross margin has a number of clicks and takes to it, the retail media spend, it has the leverage or de-leverage in the logistics network, it has merchandising mix. So there's a few things that can move that around quarter-on-quarter. I wouldn't overly anchor on, you know, the Q1 guide relative to the rest of the year.

Thank you.

Thank you for your questions. And that will conclude our Q&A session for today. And I would like to turn it back over to the Wayfair team for any closing comments.

Great. Thank you. I think obviously want to thank you guys as always for your interest and you know just kind of two quick things I'd say as we look at 2025 it's definitely a year we're very excited about what's in our control and what we can do. Obviously, we are looking to see on the back of market share, to see revenue growth while we grow EBITDA dollars. And I think if you have a few minutes, I just want to put one more plug in and just have you take a quick look at the shareholder letter, because I think we tried to capture some of it there. But thank you again for your interest, and I'll talk to you next quarter.