Wayfair Inc. Q1 FY2022 Earnings Call

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Jane Gelfand, Head of Investor Relations, Treasury and Corporate Development. You may begin your conference.

Good morning, and thank you for joining us. Today, we will review our first quarter 2022 results. With me are Niraj Shah, co-Founder, Chief Executive Officer and co-Chairman; Steve Conine, co-Founder and co-Chairman; Fiona Tan, Chief Technology Officer; and Michael Fleisher, Chief Financial Officer. We will all be available for Q&A following today’s prepared remarks. I would like to remind you that we will make forward-looking statements during this call, regarding future events and financial performance, including guidance for the second quarter of 2022. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we’ve been reasonable in our expectations and assumptions. Our 10-K for 2021, our 10-Q for this quarter, and our subsequent SEC filings identify certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures, as we review the company’s performance including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our Investor Relations website. I would now like to turn the call over to Niraj.

Thank you, Jane, and good morning, everyone. We're glad to reconnect with you today to share the details of Wayfair's first quarter results. More than two years ago, we made the swift transition to a remote working environment in the early days of the pandemic. Over the past several months, we welcomed back thousands of Wayfair employees to our corporate headquarters in Boston. The energy and excitement have been palpable as colleagues and friends reunited, and many new faces transitioned from computer screens to real-world interactions. Being together in person a few times a week is a strong enabler of one of the most important drivers behind Wayfair's success: a collaborative culture. Our talented, hard-working, and low-ego team is singularly focused on building the world's best destination for the home. Despite the rapid changes over the last two years, this goal has remained steadfast, and the response we continue to see from our customers speaks to the value Wayfair brings to their lives. Even in this admittedly softer period, our active customer count was 25 million in Q1, and we delivered 10 million orders, generating nearly $3 billion in revenue. When we spoke in February, I noted we were seeing early signs of normalization in consumer behavior as the pendulum, which swung heavily toward e-commerce in 2020 and back to physical retail in 2021, began to even out. This is still the case, but in just the two months since, a lot has transpired. With rising prices across the retail universe and amidst troubling geopolitical events, our mass customers in the US and internationally appear understandably more focused on where they are spending their next dollar, pound, or euro. Consumer spending is still climbing for retail overall; however, even with the relatively healthy individual balance sheet, shoppers are nonetheless allocating a larger share of their wallets to nondiscretionary categories and reprioritizing experiences like travel. Reflecting these trends within our business, we are seeing stronger performance from luxury and professional customers compared to mass shoppers, and stronger overall performance in the US relative to our international geography. Michael will get into the specifics, but for now, I'll just say that while the typical seasonal pattern of gradually building demand that we expected for the year is indeed playing out, it is occurring in a more muted fashion than our normal seasonal curve. Factors like a slower start to spring weather make the exact curve hard to read, but we are seeing positive traction. Last week, we had our most successful Way Day ever, a clear sign that customers remain very interested in the category. Notably, our Way Day event represented two of the four largest days in Wayfair's entire history. For context, the other two were during the pandemic. We also expect year-over-year revenue growth to progressively accelerate over the course of 2022, aided by improving product availability, speed of delivery, and customer value, as well as normalizing year-ago comparisons. Given the volatility of the macro environment, this only reinforces the value of having a long-term focus while also moving with agility and speed—features truly inherent to how Wayfair operates. Wayfair's core competencies have always included our ability to leverage data to have a real-time view of our customer and our strong partnership model with our suppliers. These enable us to identify actionable insights and to be nimble in our approach regardless of the environment. Our P&L has natural variability, which adjusts in stronger and softer periods, and our platform empowers suppliers to fine-tune their offerings quickly to meet changing customer expectations. Suppliers know they can lean on Wayfair to access a loyal and robust customer base. Internally, we are used to moving and pivoting quickly given the rate of change at Wayfair. These elements combined position us well in any environment to attain the best long-term outcomes for our customers, suppliers, and for Wayfair. While rising energy prices are a headwind to shipping and fulfillment costs, some of the biggest pain points from last year are dissipating. Encouragingly, we are seeing a steady recovery in logistics globally since the low point of 2021, as areas of congestion continue to ease. Product availability on the platform has improved by around 10 percentage points since the trough, while delivery times have improved by more than 10% for small parcels and more than 20% for large parcels compared to where they were this time last year. While we have not yet returned to a fully normal supply chain environment, we are generally seeing the pace of improvement accelerate. Suppliers are thinking more strategically about inventory management than they have over the last two years, as the gap between supply and demand begins to close. We believe this will accrue to Wayfair's benefit. It is important to note that our business model excels when supply meets or exceeds demand, as it does most of the time. However, 2021 represented the opposite. This resulted in poor availability, a significant degradation of delivery speed, and cost pressures. Seeing these factors reverse is responsible for the share gains that have started earlier in 2022, with a long runway ahead. We are seeing strong interest in selling on Wayfair, due in large part to the value that suppliers can derive from CastleGate, all the way from Asia consolidation and ocean freight forwarding to storage and fulfillment, to last-mile logistics. We've nearly doubled the number of suppliers selling on the platform since 2019. Many of our newer suppliers are only now discovering the true value that CastleGate can add to their business, and we expect increased uptake across all of our logistics services as the year goes on. To facilitate this, we are driving more education, simplifying the supplier onboarding process, and bundling services to make it easier than ever for them to take advantage of CastleGate. Over time, this should unlock a wide range of benefits, including better delivery speed, higher conversion, improved cost efficiency, and more reliable ocean and last-mile capacity—leading to a win for customers, suppliers, and Wayfair. Over the past several months, we've met with thousands of our partners across a series of industry events, where we heard a consistent set of feedback. Suppliers are just as focused as we are on the state of the consumer, and they're looking to double down on platforms where they know their interests are best aligned. They're excited to lean into Wayfair because of the partnership model we offer, which provides them dedicated and live support augmented by an increasingly sophisticated set of technology tools—all geared toward helping them grow their business. Suppliers have multiple ways to stand out on Wayfair, including deeper CastleGate integration, participation in-house brands in our B2B business, leaning into key promotional events, and enhancing their presence through Wayfair media and merchandising solutions. Wayfair stands out as the best place to sell online because of our ability to integrate services across the full spectrum of supplier needs. We are seeing growing interest across each of these dimensions. Suppliers are excited about all the ways we can drive value for their business in the near term while we simultaneously invest to bring new shoppers into the ecosystem over the long run. One example of this is what we're doing with physical retail. In just a few weeks, we will open our first all-modern store. We're excited to begin showcasing our specialty retail brands in an entirely new set of formats. Our teams have put a lot of thought and creativity into optimizing the in-store shopping experience for customers. This is the next stage of Wayfair's omnichannel journey. Our first joint store will launch later this year, and we are especially excited to open the first store under the Wayfair banner next year. Our physical retail locations will be a gateway into the broader Wayfair ecosystem, building on and complementing the richness of the online shopping experience with our world-class logistics infrastructure underlying both, representing yet another example of us taking a decade-long view of the business. Even with the uncertainty we are seeing in the environment, we have conviction that Wayfair is uniquely positioned to command considerable share in the future because of the loyalty of our shoppers today, the runway of customers yet to capture, and our differentiated set of capabilities. We've always run this business with a focus on what is best for our customers and suppliers. That remains our focus today, as we maintain the delicate balance between being nimble and responsive to the environment while continuously managing the business for the long haul. Switching gears, as you may have seen this morning, we are also sharing that Michael Fleisher will be retiring next January and that Kate Gulliver is being named the incoming Chief Financial Officer and Chief Administrative Officer. Many of you have followed Wayfair since the IPO in 2014 and therefore know Michael well. He's been a trusted partner to me and Steve for the past eight years, having joined the company when we had less than $1 billion in revenue and overseen its growth to the industry leader that it is today. Under Michael's watch, Wayfair's capabilities have grown exponentially more sophisticated, and our employee population has expanded from less than 2,000 to approximately 18,000 today. Together, we have weathered a variety of dynamic environments, which have only made the company stronger. Perhaps less visible from the outside is the top-tier talent Michael has nurtured across all parts of the organization. At the top of that list is Kate Gulliver, who has worked alongside Michael for nearly his entire tenure. Kate has been part of Michael's thoughtful succession planning and will transition into the CFO and CAO role in November as he looks forward to retirement early next year. She will lead all the areas that Michael currently oversees, which includes finance, legal, talent, real estate, and corporate affairs. Some of you know Kate as Wayfair's first Investor Relations leader, after which she built out our talent organization as Chief People Officer. Prior to Wayfair, Kate worked at Bain Capital and McKinsey. While Michael will be very much missed, Steve and I, along with the broader leadership team, already view Kate as an invaluable partner and have tremendous confidence in her ability to elevate Wayfair even further in her capacity in the years to come. Even as Michael remains fully engaged over the coming quarters, we are excited for you to spend more time with Kate as we get into the summer. Turning now to our next speaker, I'm very happy to introduce Fiona Tan, who recently became Chief Technology Officer after 1.5 years of working in tandem with her predecessor, Jim Miller. She's joining us today to discuss our tech organization and what we're building to take Wayfair to the next level of scale.

Thank you, Niraj, and good morning, everyone. I'm excited to join you today to discuss our technology organization and how we are building the future of Wayfair. To give you a brief background on myself, I studied at MIT and Stanford and worked at Oracle, TIBCO Software, Ariba, and most recently, Walmart, where I was the Head of Technology for the US division. I joined Wayfair in the fall of 2020 as the Global Head of Customer and Supply Technology under our prior CTO, Jim Miller, and spent the last 1.5 years working hand-in-hand with Jim as we began setting Wayfair up to grow from a $10 billion to $100 billion platform. I want to start by giving you an overview of the organization and how it has evolved in recent years, and then talk specifically about some of the most important areas where we see tech as a driving competitive advantage for Wayfair. Wayfair’s technology team consists of more than 3,000 software engineers, product managers, data scientists, user experience and user interface designers, and a host of other roles to develop, sustain, and support the full-stack technology and products that help run every function of Wayfair globally. At the highest level, our mission is to create world-class experiences for all Wayfair shoppers, suppliers, and employees. To do this, we build the underlying technology that enables us to deliver those experiences in a manner that is durable, scalable, resilient, and consistent. You can broadly think about our organization across each of these major stakeholders, with teams in each functional area dedicated to solving for the unique needs of each group. In addition to the people we have working on all our internal enterprise technology, such as our proprietary marketing tech stack, we have a diverse set of teams working on building a better customer experience. These span what we call 'still front', such as customer service and more. At the same time, we have groups dedicated to making Wayfair the best possible platform for our supplier partners and focus on elements like merchandising, supply chain, and self-service tools. As we thought about readying Wayfair to grow into a $100 billion business, we set out to evolve our organization in several specific ways to facilitate that growth. I'm pleased to report that we are nearly finished with our move to the cloud. We also continue to work on replatforming from our legacy technology stack to cloud-native microservices. These adjustments will give us a clear path for scalability while preserving the agility we need to build out the platform in the future. On the other side of our technology stack's progression, we have also been taking our team to the next level. One of our big focus areas has been growing the seniority of the team and bringing on talent with domain expertise in building products at scale. We’ve brought in senior leaders from some of the most respected technology companies in the world, which has deepened our expertise in critical functions and acts as a magnet for other talent. As we started this evolution two years ago, 60% of our team members had less than two years of professional experience. We have now flipped that ratio, and that figure sits at less than 30% today. A driving force and ability to attract and retain top talent has been the opening of four new development centers. New office locations in some of the top technology talent markets across North America. Since we announced these new centers, we have hired more than 400 team members to work across the San Francisco Bay Area, Austin, Seattle, and Toronto. I'd like to turn now to the underlying technology itself and how it influences the experiences that our customers and suppliers have as they buy and sell on Wayfair. In particular, we are deeply focused on the benefits of machine learning and automation as we think about driving scale in the business. Let me walk you through a few examples of how these are applied across marketing, catalog, and logistics. One of the biggest areas we leverage technology is in our marketing organization, which itself is made up of more than 200 quantitative marketers, engineers, and data scientists. Our team drives billions of customer interactions every week with a strong focus on automation. As an example, we leveraged machine learning in creating over 36 million search keywords across three languages as we drive search engine optimization. Beyond marketing, we use machine learning to curate tens of millions of items across our catalog as well as to augment, enrich, and ensure accurate and complete product information. This enables us to respond to customer needs through filters in search, ensuring customers can shop with enhanced confidence and find products in the styles and price points that are right for them. One last area to highlight is how we apply machine learning into our logistics network. We are dynamically curating customer searches to show products that not only fit the parameters of their search but are also located in fulfillment centers closer to them. Doing so can significantly reduce the distance products travel, lower costs and prices, reduce damage, and drive higher conversion. We also have strong teams thinking about what it will mean to shop for the home in the years to come. For instance, Wayfair and Nexus, our R&D team, are specifically focused on exploring the future of the Internet and e-commerce. We have been experimenting in this space for a while and early on saw an opportunity to scale the creation of lifestyle imagery by digitizing photography through 3D modeling. We believe this 3D content will become a backbone for novel applications in the VR and AR space. And we’ve already taken early steps in integrating these models into proprietary and third-party experiential features. The future of the home is in the cloud, and it won't be long before many customers have a digital rendition of their home that they can decorate in virtual space as a complement to how they decorate their home in the real world. Wayfair has long led the industry in innovation around how customers shop for their homes. We are positioned to continue to do so and are very excited about what the future holds. Thank you. And now let me turn it over to Michael for a review of the financials.

Thank you, Fiona, and good morning, everyone. Before I dive in, I just want to thank Niraj for the kind words. Working with Niraj and Steve to build this tremendous company over the last eight-plus years has been the privilege of a lifetime. While I'm not going anywhere over the coming quarters, I do want to say that this decision is purely the fulfillment of a personal commitment I made to myself and my family several years back. I couldn't be more bullish on Wayfair's prospects and the talented team behind it, nor in Kate's future as CFO and CAO. Kate has been a constant sounding board and partner to me over the last several years and is a proven, capable, and inspirational leader inside Wayfair. I am so excited to work with Kate to facilitate a very smooth transition over the coming quarters and to reintroduce her to all of you in the process. Now let's take a look at the financial details for the first quarter before I move on to the outlook. As you saw in our press release this morning, Q1 total net revenue was $3 billion, representing a 14% decline year-over-year. Q1 revenue landed somewhat below our quarter-to-date revenue commentary back in February. We saw some encouraging trends as the quarter began, suggesting a return to more typical shopping behavior with a strong President's Day event. While we knew that March would present a more difficult comparison with the added stimulus from last year, we also saw new macroeconomic headwinds develop, exacerbated by geopolitical events, which served to further depress customer sentiment, particularly in Europe. On a segment basis, US net revenue declined 10% from Q1 last year, while international net revenue declined 31% year-over-year. We once again saw Wayfair.com in the US outperform the consolidated business for the full quarter, down in the high single digits year-over-year. The International segment faced challenging comparisons, as we navigated over 80% year-over-year growth in Q1 of 2021. We also saw European customer sentiment drop towards the back of the quarter as the war between Ukraine and Russia unfolded. Q1 KPIs broadly reflected the macro trends that Niraj outlined earlier. For the trailing 12 months, we had more than 25 million active customers, which was 23% lower year-over-year. Order frequency over the last 12 months was 1.87, a decline year-over-year but aligned with levels seen just before the onset of the pandemic. LTM net revenue per active customer grew about 13% year-over-year to $520, driven by higher AOVs. I'll now move further down the P&L. As I do, please note that I'll be referencing the remaining financials on a non-GAAP basis, which includes depreciation and amortization but excludes stock-based compensation-related taxes and other adjustments. I will use the same non-GAAP basis when discussing our outlook as well. Q1 gross margin was 26.9%, with guidance set at 27% to 28%. As we mentioned in February, inflation is weighing on our cost of sales, particularly on shipping and fulfillment as well as labor expenses. We saw higher energy costs take hold, particularly in the back part of the quarter, which is something we will have to address and offset over the coming periods. Customer service and merchant fees were 4.8% of net revenue in the first quarter, slightly higher quarter-over-quarter due to increased compensation costs and a lower revenue base year-over-year. Advertising as a percent of net revenue was 11.2%. We are seeing smart opportunities with good ROI on top-of-funnel and brand-based advertising. In taking advantage of these, we're utilizing Wayfair's household brand status and driving higher awareness across the wide array of classes of home that we sell in order to penetrate wallet share. Our selling, operations, technology, and G&A or OpEx expenses totaled $525 million. The increase quarter-over-quarter is a combination of compensation adjustments for existing employees and net headcount growth. I want to provide some context for the magnitude of the total headcount jump this quarter, now approximately 18,000 by the end of Q1. The lion's share of this came from additions to our supply chain and customer service teams, which gets accounted for in the cost of goods and customer service and merchant fees lines. While our OpEx employee count is also growing to support the business, our intent is to increase these ranks at a more measured pace as we have previously described. Putting this all together, Q1 adjusted EBITDA was a negative $113 million or negative 3.8% of net revenue. In the US, adjusted EBITDA was a negative $30 million or a negative 1.2% margin, while the International segment booked adjusted EBITDA of negative $83 million, resulting in a negative 18.4% margin. Moving on to the balance sheet and cash flow, we ended the quarter with $2 billion of cash and highly liquid investments. In Q1, net cash from operating activities was negative $226 million, and free cash flow was negative $331 million after factoring in $105 million of capital expenditures. As a reminder, the net working capital swing in our business is typically at its most negative from Q4 to Q1 and tends to turn positive as revenue builds quarter-over-quarter as the year progresses. Let's now turn to the outlook. As Niraj mentioned earlier, there are a lot of moving parts influencing consumer behavior and sentiment these days. War and widespread inflation should weigh on consumer spending, but we still see the consumer in a relatively healthy place today. As pandemic restrictions ease, there is a shift between e-commerce and brick-and-mortar, between experiences and things. We believe the pendulum will progressively move toward equilibrium over the course of 2022. In simple terms, we still expect revenue growth year-over-year to accelerate as the year goes on, and we are monitoring this very carefully. It is also encouraging that we are capturing market share in the US thus far in 2022 and expect that to continue. That said, it is very challenging to pinpoint when exactly things will truly normalize. We monitor the business very closely and in a data-driven manner, and will remain nimble in adjusting to changing conditions as necessary. We have appropriate plans in place to balance our long-term focus on the massive market opportunity and the shorter-term realities of the environment in which we operate. As we have over the last few quarters, we will not provide formal top-line guidance and will opt instead for transparency on what we are seeing thus far in Q2. Currently, our gross revenue is down in the mid-to-high teens year-over-year. Once again, the US, and particularly Wayfair.com, is trending more strongly than our international segment. Comparisons begin to normalize from here, and we are also seeing improving supply chain conditions and product availability. The gross margin, as we have for the last five quarters, remains targeted in the 27% to 28% range for Q2. Similar to last quarter, we believe the low end of our range is most likely given the current state of cost inflation in transportation, energy, and labor. We remain focused on passing through these higher costs where appropriate, while managing the remainder within our own cost structure. For now, please model customer service and merchant fees as a percentage of net revenue in a 4.5% to 5% range. This is an example of a line item where we are choosing not to overreact to short-term top-line volatility and maintain a high bar on customer experience. Advertising as a percentage of net revenue should again land in a 10% to 11% range. We remain disciplined in our ROI-based approach. Where we end up in this range will depend on the opportunities we see in the period and the resulting channel mix. SOTG&A or OpEx dollars, excluding stock-based compensation and related taxes, should equal approximately $555 million to $565 million in the second quarter. As with the last quarter, the main driver here will continue to be compensation for our existing team and new employees joining Wayfair. We remain extremely mindful of the delicate balance between hiring too quickly and resourcing our long-term opportunities, and continue to actively manage this closely. Q2 adjusted EBITDA will ultimately depend on how the top line progresses. However, I will note that assuming the current top line trends continue, this would suggest that Q2 adjusted EBITDA margin is similar to Q1 levels. Let me now touch on a few housekeeping items. Please assume the following for Q2: equity-based compensation and related tax expense of approximately $136 million to $140 million; depreciation and amortization of approximately $85 million to $90 million; interest expense of approximately $9 million; and weighted average shares outstanding equal to approximately 105 million shares. Finally, we forecast CapEx in a $130 million to $140 million range for Q2. We remain focused on both our long-term opportunity and running our business profitably. However, the macro environment is so murky right now that it is challenging to know how 2022 will unfold with the consumer and our top line. Therefore, we cannot commit to the business being adjusted EBITDA profitable for the full year; however, we will be responsive based on what we are seeing as we remain very focused on returning the business to adjusted EBITDA profitability. How our top line plays out over the balance of the year and how we choose to manage our expenses in response will drive the exact timing. We fully intend to manage Wayfair to strike the right balance between growth, profitability, and smart long-term investment, and we have the balance sheet to allow us to achieve this in a thoughtful way. Zooming out, we also have complete confidence in the structural profit economics of our business and the key drivers that should propel them higher, recognizing that the investments we've made over multiple years are already largely in place to achieve this. I now want to conclude by revisiting where I began. I have no doubt that Wayfair's best years lie ahead, as I have witnessed firsthand what our talented team is capable of and the scale of untapped potential in our market. The past two years have been among the most challenging and rewarding, not just in my nearly decade-long tenure here at Wayfair but for my entire career. They have reinforced the importance of approaching each day with a balanced perspective, bringing creativity and resourcefulness to solve today's consumer and supplier challenges, while always keeping sight of what will serve them best in the long run. This is how Niraj and Steve have long run this business, and how Wayfair will continue to operate, both under my stewardship and Kate’s. Thank you all very much. Now Niraj, Fiona, Steve, and I will be happy to take your questions.

Your first question comes from Peter Keith from Piper Sandler. You may go ahead.

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

Hi. Sure, Peter. Well, thanks for your questions. So first, let me clarify: it's not that our model excels when supply exceeds demand. It actually excels when supply is roughly equal to demand or supply exceeds demand. Our model is disadvantaged when supply is scarce relative to demand. To be honest, in a capitalist environment, supply is almost never scarce, but it was last year and it was during World War II. So there are times where it is, but it's rare. Why does it get hurt then? We're the only major retailer that doesn't write checks for inventory. When supply is scarce, as you can imagine, if you're a producer, you can't produce anywhere near enough relative to demand, so you're going to sell all of it to people who are writing checks. Our model gets hurt a lot. It's not just that we don't have the best items, but a sub-function of that is that we take that inventory before it is positioned, which then contributes to delivery speed. This results in lower costs, which then drives the retail price. It's a knock-on effect. So what's different now than the back half of last year is we lost share due to supply issues. Right now, as you mentioned, inventory is recovering, and it's starting to recover aggressively, as demand has fallen somewhat from a macro perspective. We were already benefiting from improved availability. Now that availability is accelerating at a fast rate. Our speed of delivery has also improved significantly. Those factors result in sharper retail prices, which we see customers respond to. As you mentioned, some suppliers have excessive inventories relative to what they want. Our competitive retailers have already bought inventory for the next few months and locked in those prices, meaning they have to start discounting to avoid being stuck in a bad cost position. On our platform, the supplier sets the price every day, which drives the retail price. If suppliers have extra inventory, they want to turn it to cash, and they will be less concerned about exact profit margins. This is why we have seen strong promotional events, including President’s Day and our Way Day, and we expect this trend to continue leading up to Memorial Day. This pattern is true in other countries as well, with suppliers leaning in aggressively. This creates compelling value for the customer, encouraging them to engage with us. This is why we had our best Way Day ever—two of our best four days. If you look at Wayfair.com, we recorded our two best days ever. In the near term, we expect our speed of delivery to continue improving. Our availability is also projected to improve significantly. We have forward insight into that, partly due to our ocean forwarding business we started four years ago. We have doubled capacity since last ocean year. This strategic advantage lowers costs for our suppliers. A promotional environment is beneficial for us; a normal environment is also very favorable. Suppliers are competing against each other, leading to compelling value for customers. This is why we've performed well during both the financial crisis and the housing recession. Given these dynamics, we're confidently taking significant share as indicated by credit card data and third-party sources.

Okay. That's helpful. Just sticking with the competitive environment, there is a broader view out there that the COVID backdrop last year has forced some of the large mass retailers to improve their e-commerce capabilities, especially in the home furnishings category. What are you seeing in the evolution of that competitive landscape? Do you agree that your mass competitors have become more sophisticated?

There is no question that the largest retailers recognize the importance of e-commerce. Here, I'm not just referring to Amazon, who is obviously an e-commerce specialist, but also to Walmart, Target, and Home Depot, Lowe’s, etc. Each country has a comparable set. That said, they all focus on their core business. When you think about Home Depot or Lowe's, they emphasize flatbed trucks and delivery networks, with a lot of focus on building materials. Walmart and Target focus on grocery and home grocery delivery. They are trying to defend their share from Amazon. Home is no different from every other category in that general merchandisers want to expand their presence. However, they face challenges; selling a variety of products differs in presentation and merchandising. Our specialization in home furnishings is evident in our selection and merchandising strategies. We don't operate at just the opening price point, where many of these retailers do their business. We have a logistics network tailored for our unique delivery practices. This prevents damage, conserves retail pricing while enhancing delivery speed that others can't achieve for bulky items. Our suppliers appreciate this. The technology and innovative services we provide to optimize inventory management and merchandising are highly valuable. I believe we will continue taking share disproportionately in the home category, while mass retailers will remain concentrated in the lower-end market segments. We will see the same dynamic that existed before COVID. Smaller independent retailers or specialized big boxes may struggle with e-commerce because this is a sector that rewards scale, especially in logistics and customer acquisition, costs that can't be as effectively amortized over a small sales base.

Okay. Great. Thanks so much for the insights. I appreciate it, and good luck.

Thanks, Peter, and thank you for the kind comments.

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

Great. Thanks for the question. And Michael, congrats on your excellent work over the years and also congrats to Kate on the new role. It will definitely be nice to work with her again. So I have two questions on supply chain. Niraj, in your prepared remarks, you seem to suggest that supply chain issues are abating somewhat. Is that right? And just given conditions and recent COVID shutdowns in China, are they potential new headwinds to the supply chain? Secondly, regarding gross margin, it was right around the low end of the range. How should we think about the outlook for gross margin in Q2 and the rest of the year? Thank you.

Sure. Thanks, John. Our supply chain challenges—keep in mind that supply chain for us is a combination of availability, which is not only production-dependent but also a function of us gaining access to production and transport flow. I would say those challenges are indeed abating as demand has slightly decreased, as our ocean freight capacity has expanded and we're getting deeper into planning cycles with our suppliers. The shutdowns in China will create new challenges but we expect to manage them. Much of what I am describing is relative to how it was before and to our competition. We feel like we are well-positioned on both fronts, which is why we continue to gain share. It's not as if the supply chain is fully resolved—rather, it remains complicated. However, we've built a proprietary network encompassing everything from ocean freight to last-mile delivery that gives us considerable advantage. Regarding gross margin, I would recommend you stick with the range we've mentioned: the 27% to 28% target for gross margin. Gross margin has fluctuated within this range. The reason it has varied is that we take the cost structure of an item—wholesale, transportation, and other costs—and apply the margin. Therefore, our cost structure drives retail pricing. If there are changes in wholesale prices or transportation costs, we might adjust retail prices, but we strive to avoid overreacting and causing more price fluctuations than necessary. We are seeing a lot of movement in both directions due to changes in wholesale pricing and promotional activities. It's essential to zoom out and realize you're not going to see a significant permanent change.

The only thing I'd add, John, is that I believe we're in a period of increased volatility around all those costs. Product margin has remained very consistent, but there's significant movement occurring on delivery costs. This is why we're guiding to the lower end of the margin range, as managing volatility will be challenging. We're focused on balancing our business needs and customer experience.

Thank you.

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

Hey, thanks. Good morning, and also congrats, Michael, on your retirement. You called out success with Way Day last week. Can you share any additional insights, perhaps in category performance and how that may impact your top line performance in the next few quarters? Secondly, you mentioned a return to positive EBITDA territory. Which building blocks within the P&L do you expect will inflect sooner rather than later?

Thanks, Chuck. Regarding Way Day, what stood out was broad-based activity across categories, not concentrated in any particular sector. For outdoor items, which had a slow start this year due to weather, consumer responses aligned more with pre-COVID seasonal patterns. Excitingly, outdoor did perform well. This broad-based performance, which aligns with patterns from 2017-2019, contrasts with 2021's stronger pull forward. On your second question about EBITDA profitability, we feel optimistic. We wanted to emphasize this in our prepared remarks for a few reasons. First, we are maintaining gross margins, with our unit economics intact. As revenue grows, the flow-through becomes substantial—this is critical for reaching EBITDA profitability. In Europe, I recently attended major furniture trade shows and visited various suppliers, many of whom reported significant slowdowns in sales. By contrast, we are seeing sustained demand in our business. Currently, we continue to see sequential growth in revenue, despite it being more muted relative to where we normally would expect it to be. We are also seeing encouraging share gains. How do we see profitability? We believe we can continue to capture market share, resulting in revenue growth. Although we are adding operational expenses, adding at a measured pace balances our growth plans and keeps our OpEx as a percentage of revenue manageable. While we acknowledge the uncertain macro environment, we have measures to drive EBITDA in place.

I agree with Niraj. The structural opportunities for increased gross margins stemming from our supply chain investments and supplier services remain in place. As the business normalizes, we expect those opportunities to take effect over time and significantly enhance our profitability.

Great. Thank you.

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

Good morning and also congrats, Michael, on the planned retirement. Niraj, I'd like to hear your thoughts on OpEx labor productivity, particularly why the recent ramp in SOTG&A expenses doesn't affect the longer-term margin expectations for that item.

Sure. I think the most noteworthy aspect is that non-OpEx headcount, such as that in customer service and fulfillment, directly correlates with order volumes today, while also impacting revenue flow. Conversely, the OpEx headcount isn't tied to today's order flow. When considering the technology we are developing—like visualization for storefront technology or the work we are doing in developing our ocean freight capabilities—they require time for effective rolls out. Some of our initiatives, like physical retail, require considerable investment and time to be impactful long-term. We position OpEx productivity in relation to future revenue rather than immediate operational revenue. Due to the complexity of training and experience, we strategically manage headcount growth. New employees require time to acclimate to our culture and processes, which is why we minimize hiring too aggressively. We implement moderate approaches to ramping OpEx, ensuring that hiring supports long-term potential.

I wouldn’t want to segment the expenses specifically. It’s noteworthy that there's a significant portion of expenses tied to future growth initiatives. That's always going to carry more flexibility. At the same time, we have to be thoughtful about weighing both short-term demands against long-term growth opportunities. The strength of our balance sheet allows us to navigate challenging times and respond expeditiously when necessary.

Thank you, and best of luck.

Thanks, Steven.

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

Thank you for joining our conference call. We appreciate your continued interest.

We look forward to speaking with you next quarter.

Thank you.

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