Wayfair Inc. Q3 FY2022 Earnings Call

Good day, and welcome to the Wayfair Third Quarter 2022 Earnings Release Conference Call. Please note that today's conference is being recorded. All lines have been muted to eliminate background noise. After the speakers' remarks, there will be a question and answer session. At this time, I will turn the conference over to James Lamb, Head of Investor Relations. Mr. Lamb, you may begin your conference.

Good morning, and thank you for joining us. Today, we will review our third quarter 2022 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer, and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the fourth quarter of 2022. 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 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 IR website. I would now like to turn the call over to Niraj.

Thank you, James, and good morning, everyone. We're glad to reconnect with you today to share the details of Wayfair's third quarter results. This last August marked our 20th anniversary. It was in the summer of 2002 that Steve and I first started this business out of a nursery and Steve's home. We were still nearly a decade away from adopting the Wayfair name at that point, but since the beginning, we've had a vision of creating a premier online shopping destination for the home. We've been big and bold every step along the way, and for nearly a decade, we were able to self-fund our growth as we reinvested operating profits back into the business. In 2011, we rebranded as Wayfair and for the first time, raised outside capital as we looked to scale up our growth. In the decade since, we've grown the business by nearly twentyfold and made meaningful investments in building out our catalog, customer file, geographic presence, logistics platform, and more. With the size and scale we've achieved, we are now in a position where we can operate the business for both profitability and growth and are well on our way to returning to a state of self-funding once more. Last quarter, we talked about controlling the controllables and orienting Wayfair in this environment around three key principles: driving cost efficiency, nailing the basics, and earning customer and supplier loyalty every day. Kate and I will talk through what we're doing on each of these fronts, and I want to begin at the top. When we spoke in August, we framed what our path to profitability would look like and told you that there would be more detail to come in the not-too-distant future. You saw the first evidence a couple of weeks later as we made the decision to eliminate nearly 900 corporate roles across the organization. Our goal here was to reduce redundancies and remove excess management layers as part of an organization-wide effort to streamline our operations. At the same time, we talked about additional reductions coming from our spending on third-party labor. These two components represent just one set of actions in the cost efficiency that we are executing. Simultaneously, we kicked off a separate set that involves operational initiatives such as returns monetization, scam reduction, incident prevention, logistics optimization, and more. Let me provide just one example by further illustrating returns monetization. When we process a return today, there are complexities involved with the cost to send the product back and how we can merchandise and resell it after the return. We see an opportunity to improve the accuracy of our grading to increase open box sales through platform and pricing improvements and decrease shipping expenses by changing how we manage logistics. This initiative alone should result in tens of millions of dollars of savings and is one of numerous operational improvements we are working on. Altogether, we expect the actions we've taken so far to drive over $500 million of savings in our P&L. And as you will hear from Kate shortly, there is more coming. Our goal across the board remains the same as it has been for most of the year: returning to adjusted EBITDA breakeven quickly in 2023 before targeting positive free cash flow shortly thereafter. From there, we will drive towards a mid-single-digit adjusted EBITDA margin that we will philosophically treat as a lower bound of profitability for the business. As we discussed last quarter, this threshold will allow us to cover other costs, such as stock-based compensation as well as CapEx associated with logistics investments and capitalized software. As we look to the future, this foundation will enable us to not only drive continued investment into the big and bold ideas that we have planned for Wayfair's next 20 years but also deliver profitability in a consistent manner. I want to turn now to the notion of nailing the basics, which means showcasing products that interest the customer, providing a great experience on the site, and delivering perfect orders that arrive quickly. Key elements of these commitments are aspects such as assortment, availability, and speed of delivery, all of which have improved significantly from where we were a year ago. In particular, several speed metrics reached records in Q3, including days to deliver and speed batch penetration. Another part of nailing the basics is ensuring we have a clear and relevant promotional calendar to engage our shoppers, which is especially important now given what we are seeing in the consumer environment. Inflation persists quite broadly and with spending pressure across the spectrum of discretionary goods, we continue to see shoppers being very discerning about where their next dollars are going. For much of the summer months, that discretionary spend shifted from goods to services, with pressure felt across a wide array of retail sectors, including ours. While interest in the broad home category remains, we are seeing shoppers being more deliberate with their spending patterns as they seek out great value and wait for promotions. As a result, promotional activity across the industry remains high, and customers are responding very positively. To support our suppliers, we have put together a very strong fall calendar of events. Last week, we ran a successful second Way Day, which came right on the back of our five days of deals event. And in just a few weeks from now, we'll get to the traditional Cyber 5 tentpole events. Each of these promotions is an opportunity to provide value to our customers and our suppliers. Importantly, without compromising our gross margins, given our inventory-light model. In today's environment, it is more important than ever for us to remain focused on our next key principle: driving customer and supplier loyalty. So let me give you a few examples of how we're doing this. One of the biggest factors in driving customer loyalty is having a great experience through all stages of the shopping journey, even after the order has been delivered. To do this, we have made an effort to equip our service professionals with a wider toolkit of solutions to make things right for our shoppers if, as occasionally happens, an issue arises. These enhancements are generating a very strong response. In fact, over the last handful of months, we've seen repeat rates among customers who report an issue actually match repeat rates of customers who do not. Our relentless focus on creating the best possible shopping experience is a key enabler of earning customer loyalty, and we're pleased to see these efforts validated by internal data, as well as external accolades. We're honored to share that our customer service team has been recognized by Newsweek in their Best In Customer Service 2023 rankings. We also know our customers care about the environment as do we. And we are continuing to innovate with programs to address sustainability. On October 20, we launched our Shop Sustainably program, Wayfair's third-party-certified sustainable product offering. We now host the largest number of third-party sustainability certifications in the home industry as well as a refreshed set of options to filter for attributes like water efficiency, fair trade, and more. We're very proud of Shop Sustainably because doing the right thing for our communities and our customers isn't a function of whether the economy is good or bad, but it's something we think of as our responsibility. On the other side of the loyalty equation, we have our suppliers. Since earlier this year, we've been encouraging suppliers to lean into CastleGate, and we've seen continued strong momentum. CastleGate drives multiple advantages for suppliers: faster conversion through quick delivery, lower retail prices due to shipping cost savings, better visibility on site, reduced damage rates, and more. After the supply chain shortages of last year, suppliers are reengaging, and CastleGate penetration is now back to 25% of volume in the U.S. and climbing. The benefits that CastleGate provides to suppliers result in tangible value to customers as well as creating a positive flywheel that will further drive loyalty from both groups into the future. I want to wrap up by returning to where we left off on the first of our key principles, cost efficiency. We are, as a management team, and as an organization, universally focused on taking the steps needed to reach adjusted EBITDA and cash flow neutrality in short order. We have taken a hard look at our cost structure holistically to identify areas of improvement and take action aggressively. Our execution against these initiatives is thoughtful and deliberate to ensure that we can make progress towards our profitability targets without compromising the potential in front of us. I will reiterate it once more, to be clear. We intend to reach adjusted EBITDA breakeven independent of what the macro brings our way. And from there, to move forward to our mid-single-digit margin target, which will allow us to cover our expense base while at the same time funding our future growth. Over our 20-year history, we've seen several economic cycles. One thing that Steve and I have learned is that moments like this present an opportunity to set ourselves up for continued success as a category leader. One irony is that this is when we're at our best. We built this business with no outside capital and very well-funded competitors. We know how to win by being both lean and focused. Thank you. And now I'm excited to turn it over to Kate for a review of our financials.

Thanks, Niraj, and good morning, everyone. Before I dive into third quarter results, I want to take a moment to emphasize the point that you've just made. The key principles of cost efficiency, nailing the basics, and earning customer and supplier loyalty have become driving tenets across our organization. In particular, cost efficiency is a mandate to scrutinize each dollar of spend closely. We started by examining our operating expenses related to headcount across two dimensions: employees and third-party labor like contractors and consultants, with savings that accrue primarily within the SOT G&A line. These programs are already delivering meaningful savings beginning in Q4. Concurrently, we've also been implementing a myriad of operational cost savings that will primarily benefit the cost of goods sold line. Several of these initiatives represent areas of cost discipline that were forced to the back burner given the frenzy of the COVID-impacted period. Now is the right time to reengage across a series of best practices with savings that will build over 2023. Combined, we are taking action on a set of initiatives that represent annualized cost savings of approximately $500 million, of which roughly 60% is related to headcount and third-party labor costs, and 40% from operational initiatives. This magnitude is greater than our anticipated adjusted EBITDA losses this year, but we are not finished. In tandem, we are currently actioning additional savings of several hundred million dollars that we will provide details on during our next call. Turning now to our third quarter results. As you saw in the press release, Q3 total net revenue was $2.8 billion, a 9% year-over-year decline and a 14% sequential decline from the second quarter. This is largely in line with the quarter-to-date performance that we had previewed in early August. And as we noted at that time, a weakening macro environment contributed to a break from the typical seasonal pattern in which we would expect revenue to be sequentially flat from the second to the third quarter. As it has for some time now, net revenue in the U.S. business outperformed the aggregate at a negative 6% year-over-year decline, while our international markets, especially in Europe, continue to be disproportionately impacted by macro headwinds and geopolitical uncertainty. While the operating environment incrementally worsened over the course of Q3, we continue to see customers respond to promotional events in a positive way and are optimistic about what the holiday season will hold this year. 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. The benefits of CastleGate adoption are most visible on our gross margin line, which climbed nicely again in Q3 to 29.1%. The combination of faster CastleGate penetration and further relief on transportation costs, some of which we have previously absorbed rather than passed on to customers, all helped us to exceed our guided range of 27% to 28%. Niraj mentioned it briefly earlier, but we're often asked by investors how promotional intensity impacts our margin structure, and the simple answer is: not by much. As suppliers on the site choose to lean in with shopper wholesale, we pass those savings on to the end customer. Our margins stay resilient while also ensuring that our retail prices stay competitive across the landscape. Advertising as a percentage of net revenue came in at 12.4% for the third quarter, above our guided range. There continue to be various mix effects impacting ACNR. We went into great detail about these last quarter, and much of what we saw in Q3 reflected similar trends to Q2 where, once again, higher paid versus free traffic is a temporary headwind to this metric. We continue to monitor our paid marketing spend very closely to ensure that we remain within our ROI and payback parameters across each channel. Customer service and merchant fees were 5.2% of net revenue, just above our guided range. We saw some inflation in headcount across this line item earlier in the quarter. And while we made adjustments to that base subsequently, it still had an impact on the dollar cost for Q3. We expect to see this return closer to historical levels in the fourth quarter. Finally, our selling, operations, technology, and G&A expenses totaled $543 million, just under our guided range. With the reduction towards the end of August, a small portion of the savings began to accrue over the remainder of the quarter. And as we'll discuss shortly, you should expect to see a more fully realized set of savings in Q4. All combined, our Q3 adjusted EBITDA came in at a negative $124 million or a negative 4% of net revenue, in line with our guided range. We ended the quarter with $1.3 billion of cash and highly liquid investments. Net cash from operations was a negative $431 million, and capital expenditures totaled $107 million below our guidance as our cost-cutting initiatives started to play out, leading to free cash flow of negative $538 million for Q3. As many of you know, we typically enjoy a net working capital benefit when revenue grows sequentially due to the favorable timing differences between receivables and payables inherent in our business model. However, this dynamic inverts in periods of sequentially declining revenue like we saw in Q3, resulting in a cash outflow. In fact, more than half of the loss in cash flow from operations this quarter was due to a drag from net working capital. With Q4 historically representing a sequential uptick in revenue, we would expect our net working capital to once again positively contribute to cash flow. As many of you saw, in September, we issued $690 million of convertible notes as part of the liquidity management transaction. We saw an opportunity to use the proceeds to repurchase over $600 million of outstanding convertible notes for a considerable discount, meaningfully reducing our 2024 maturity from $575 million to approximately $200 million, as well as beginning to chip away at our notes due in 2025 and give ourselves even more flexibility as we think about navigating the next few years. With that, let's turn to the outlook. Quarter-to-date gross revenue has been trending down in the low single digits year-over-year. Excluding the impact of Way Day 2, gross revenue was down approximately 10% year-over-year. Given the uncertainty around consumer behavior this holiday season, we would suggest you model year-over-year revenue growth down in the high single-digit range. Shifting to gross margins, we now believe it is appropriate to move our guidance range up to 28% to 29% for the fourth quarter. Many of the drivers of gross margin outperformance in Q3 are expected to continue. But the typical holiday mix shift will weigh a bit on gross margins in Q4, so we expect to see some pressure sequentially. As I previewed earlier, we would expect customer service and merchant fees around 5% of net revenue and advertising to be 12% to 13% during Q4 as we continue to see the same set of macro pressures impacting the mix of traffic across our channels. We forecast SOT G&A or OpEx excluding stock-based compensation and related taxes to come in between $495 million and $505 million for the fourth quarter. The full impact from the reduction in force, as well as the third-party labor cuts, are now flowing through. If you follow through the guidance I outlined, that would translate to adjusted EBITDA margins in the negative low single-digit range for the quarter. Now let me quickly touch on a few housekeeping items for Q4. Please assume the following: equity-based compensation related taxes of $153 million to $160 million; depreciation and amortization of approximately $93 million to $98 million; net interest expense of approximately $9 million to $10 million; weighted average shares outstanding equal to approximately 108 million shares; and CapEx in the $100 million to $110 million range. In closing, I would like to reemphasize how unified and focused we are on the three key pillars we've touched on throughout this call: cost efficiency, nailing the basics, and earning customer and supplier loyalty. We have a tight plan to continue to drive cost out of the system in a meaningful and proactive way while also allowing for flexibility into the future, a future we see as bright for Wayfair. We're excited for the next 20 years with a laser focus on what needs to be done in 2023 as the first step on that path. Now Niraj, Steve, and I will be happy to take your questions.

Your first question comes from Brian Nagel with Oppenheimer.

My first question is for Kate. You discussed the advertising expenses and the high numbers we observed in Q3, which seem to continue into Q4. When do you expect those numbers to normalize? What factors will contribute to that normalization? Also, can you clarify if there was a 20 percent target at some point in '23? For my follow-up, this is for Niraj. We talked about CastleGate and its current penetration of around 25%. Where should that number realistically be, and what is the intended design for that infrastructure? From a customer or partner perspective, if they are not currently using CastleGate, what are the reasons for that? It appears to be a strong offering.

It's Niraj. Let me actually jump in and start off on the ad cost question, and then Kate can certainly chime in on that, and then we'll go to your CastleGate question in a second. I think the main thing to understand about that ad cost to ACNR percentage number is there's a set of things that move that number around. A lot of them have to do with mix. One of the things that's happening right now is that if you think about the composition of that number, you have a significant amount of traffic that effectively has zero land cost. And that's where we have a household brand, we have tens of millions of customers. We have people who downloaded the app. Depending on how top-of-mind the home category is, they come and shop Wayfair. Then we also have what we do in the paid channels. This is where we manage each channel to a targeted payback. We've kept all the channels at payback. So we've not extended any. All those channels are coming in at the payback numbers we want. And there, we are going out and targeting and running ads in a way to draw people in. Now what happens in times when the category is super top-of-mind like Q2 of 2020, for example, you're just getting tons of that direct free traffic, and that's going to average this number down. But in times where, frankly, the category is not top of mind, which, to be honest, this category, particularly online is not top of mind right now, things like travel and leisure and entertainment are taking share of the discretionary dollar, what happens is just that free traffic is a little less. Those numbers don’t need to move very much for the ACNR percentage to move up or down, even though every channel is at a payback. So what I described is the single biggest factor that's moving that percentage around right now. We don't particularly view that as problematic. The reason we don't see that as problematic is that we've seen the cycle before, and we know where it will refer to as the environment normalizes. That said, there’s a component of the spend that is in buckets that are either very hard to measure or are high ACNR or in the experimental phase where they're not at the percentage we want to get them to before, we will scale them, and we're running different experiments and tests to figure out how to get it there. And so that bucket is something that, frankly, we have been looking at, and we're getting tighter with. And so that will allow us to basically reduce ad cost without really reducing as much revenue because we're taking off the most expensive things or the least proven things. And so that is kind of the way to think about it and why the ad cost number maybe is where it is, but also how we can manage it. But Kate, anything you want to add on that?

Yes. I think that covers it. I think as Niraj mentioned, obviously, as the mix shifts continue to happen, we may see some of that 12% to 13% as we guided to. But over time, we're obviously managing very closely some of that longer-term payback and bringing that in as necessary.

Let me address your second question regarding CastleGate penetration. As you pointed out, it's currently at 25%, indicating a strong recovery from last year's low point when inventory was extremely limited. We believe it is on track to reach and exceed previous records. It's a valuable offering, and we have a significant number of suppliers participating. You might wonder why some suppliers are not involved; they may still be in the testing phase or engaging at a very minimal level compared to their potential. Some suppliers may not be participating yet due to our focus on discussions with our category management team and the suppliers we actively collaborate with. We also have long-tail suppliers who interact with us through Partner Home or our extranet, and many of the self-service features of CastleGate are relatively new. We are continually enhancing that functionality. As it becomes easier for suppliers to onboard in a self-service manner, we anticipate a greater number will do so. Depending on where suppliers are located, we've optimized certain lanes through our ocean freight and consolidation strategies. However, we lack inbound flow setups in certain locations, which complicates the use of CastleGate for those suppliers as they need to manage inbound logistics independently. The past year and a half has been challenging, with fluctuations from excessive demand to insufficient inventory, which negatively impacted CastleGate penetration since supplies weren't flowing adequately for the existing orders. Recently, we have excess inventory, with suppliers either increasing their involvement in CastleGate to drive sales or new suppliers exploring how to expand their business under current conditions. We are seeing a phase of increasing CastleGate adoption and heavier usage by suppliers. We are also integrating more optimization into the system while enhancing the technology for inbound flows. This suggests that CastleGate will continue to grow. We haven't specified a precise percentage for future growth, but we've established a strong logistics framework. The phase of simply opening new facilities is over; however, we do have some new buildings planned to fill capacity gaps. As demand normalizes, we expect to see increased turnover in our network, resulting in higher flows of goods through our facilities. Right now, suppliers are dealing with an inventory excess not only in their own locations but also in CastleGate, reflecting a shift in demand forecasts across the board. That’s the context for understanding this situation. I hope this information is helpful.

Your next question comes from the line of Steven Forbes with Guggenheim Securities.

I wanted to start with the outlook for overall logistics cost. So Niraj, curious if you could help frame how you see inbound and outbound. Is it just the cost environment in general as we look out to 2023? And sort of frame it around what has traditionally been about 20% of overall net sales or the combination of the two. Do you see relief right as we look out over the next 12 to 24 months?

I would say, if you think of the 20%, we've referenced that a number of times in the past. What that was saying is, hey, if you took every aspect of the end-to-end logistics, it was around about $0.20 of every revenue dollar; that was sort of before what happened last year when the costs really mushroomed. So it would have risen significantly from that level. Now if you look at what's happening, things like ocean freight have come back down fairly significantly. So it's back down to a level that would sort of put you back in that 20%. Some aspects like over-the-road trucking are coming down. They're still somewhat elevated, but those aspects have come down more than other aspects. Broadly, you should think about supply chain costs re-entering that normal historical range, that $0.20. That wasn't true last year. It is a deflationary force. Supply/demand right now is in excess supply relative to demand. That will normalize back out. All the things we're doing to really add efficiency and elegance around having products travel fewer miles, by forward positioning them in the right place to begin with, offer the customer a speed bag of delivery and also provide the customer a lower retail price because the shipping costs are factored into the retail, so they see a better price. We also see less damage, and that is taking share. That's a customer value proposition that we are optimizing for that also averages down that shipping cost over time, which is the reason we've been building up the logistics.

Steve, I'd probably just add that as we spoke to on the call, in addition to some of the logistics costs coming in line, we've also taken a series of actions around our operational costs, and that combined is helping us see improvement on that gross margin line, 29% this quarter. We have confidence that that will continue to grow throughout 2023 due to that combination of actions.

Maybe just a quick follow-up staying on that same topic. I guess if we think about the impact of lower overall logistic cost and the pass-through to the consumer, can you just help us sort of frame the 2023 outlook for average order value directional-wise? Is it probably fair to say that we should expect average order value to be down, or is it too early to tell given mix changes potentially, etc.?

Yes, I think average order value (AOV) does drop some. The question is how much. That’s the tricky part to quantify. But there’s definitely some inflation that’s already reversed, and we’re seeing suppliers being proactive around that. My cost to bring this item in in the future is lower, I have too much right now, so why not price it closer to what the future cost can be to move through it faster. There’s relief in the form of reflecting these costs coming down, absolutely. If AOV falls, actually conversion rate and orders pick up. You don’t net lose all of the AOV in a flow through to revenue. Depending on what you’re thinking, there’s an offset that plays out.

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

Just on the $500 million of savings coming out of the business, thanks for the examples you shared regarding returns monetization and other things. How should we think about the impact of those costs coming out to customer experience and potentially customer demand? That's my first question.

So just to clarify, we did refer to the $500 million of savings. If you remember back to the last earnings call in August, we talked about a set of things that we'd already decided to do. That's what the $500 million was. We said we'd provide you detail and quantify it a little later. We're now quantifying that. But since that expanded the plan, we've added several hundred million dollars on top of the $500. From a cost standpoint, we decided to be very aggressive around making sure that we’re not carrying any excess costs that force us to either drive up retails or not have the profit profile we want to have. If you think back to our history for a decade, we operated out of cash flow. We grew the business by $500 million in sales with no outside capital by being very lean. When we looked at our cost structure with a fresh set of eyes, we saw a lot of things there that while busy managing that dramatic growth from $9 billion to over $50 billion because of COVID, there was an extended period where not everything was equally focused on as it should be. The return of monetization is just one example. There’s a number of those areas. The way to think about what these things do is the impact to customers is either neutral or positive. Either we're taking out costs that are not providing customer benefits, which is neutral, or it's positive if you think about the fact that some cases lower retails or some of the cost optimization we're doing in transportation actually increases the speed of delivery. We’re doing things that are making retails better, making speed better, taking out costs where we think they’re not adding value. We’re not looking at the costs coming at the back of customers. In fact, we are looking at the proposition increasing. We’re streamlining and cleaning up some things that perhaps should have been done earlier. Kate, anything you want to add on the cost?

Yes, I want to clarify that the $500 million Niraj mentioned relates to our gross margin line. About 40% of that amount is considered operational cost savings and improvements that will positively affect our gross margin. We expect to provide several hundred million more details in February to give you additional context.

And then my second question, just on the second Way Day, I think this is the first year you held a second event here. Is this just a reflection of the current inventory environment, or are you changing the philosophy in terms of how you're working with suppliers going forward? Should we expect to see more regular holiday periods going forward? Obviously, you clarified that it doesn't impact gross margins all that much, but just curious what we should expect in terms of promotional holidays going forward as the inventory situation changes.

I want to highlight that we have consistently maintained a solid calendar for major shopping holidays, such as President's Day, Labor Day, Memorial Day, and Cyber 5, similar to other mass retailers. Throughout the year, we also organized promotional events like Way Day and Safe Things Give Back, which we transformed into a five-day deals event this year. Our calendar is flexible and can be adjusted based on the market conditions. Currently, we have excess inventory, and while customers have sufficient funds, they are hesitant to spend, reflecting their sentiment. In such environments, we increase our promotional activities, but we won’t keep that elevated level indefinitely. As the conditions stabilize, we will revert to our standard promotional calendar, which includes a reasonable amount of promotional events. During times like this, the duration of our promotional boosts will be relatively brief, as exemplified by Way Day 2; this is not a typical situation.

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

Can you just talk about your fulfillment capacity in the U.S. at this point and where you are from a utilization standpoint? Do you see the possible need to optimize your footprint in a scenario that revenue continues to be soft in the near term as you focus on cost optimization initiatives, especially as Kate highlighted some of the next layers of additional savings?

I think the way to think about our footprint is that we have a good footprint. It's fairly heavily utilized right now, but it's not necessarily at the turns level that we and our suppliers would target. This is just a function of the inventory cycle you're hearing about from everybody everywhere, where you're already hearing inventory flowing against a slowing demand profile. They have too much inventory or an imbalance on what inventory they have, and they're working through that. These buildings, it's two factors. One, of course, is it full or not, and what rate does it move. The amount of stuff in the building is quite good, but the rate at which it's moving in and out is lower than we would like. That's why we have Way Day 2 and suppliers leaning in on price. They want to rightsize their inventory and clear up excess inventory. They know that providing customers value right now is the only thing that will change share dramatically. The buildings actually reduce our cost versus increase our cost. Without buildings, you can't do what I just said. When I talk about logistics optimization and taking costs out, the easiest way is excess miles. If you bring something into the port of L.A. when 70% of customers are on the East Coast, items are sitting in California. They have to move distances on that final mile leg, your most expensive leg to the customer. If we forward-position goods in Dallas, Jacksonville, New Jersey, and Chicago, all of a sudden, the customers see a faster speed, but our shipping cost also goes down dramatically. Obviously, without a building in that place to put the goods, you can't do what I just articulated. Our suppliers typically have one warehouse, and a small percentage have two, a negligible percentage have more than that. This makes it complicated for suppliers. We’ve also built up this logistics optimization to take costs out.

Yes, I'll just add, Maria, you mentioned how do we think about the buildout of the fulfillment centers in relation to our cost savings initiatives and that core goal for '23. As far as the capital expenditure is related to the fulfillment centers, we're very focused on building when we need it, not in advance of when we need it. We intend to be very moderated and thoughtful about any incremental capital expenditure there.

And then secondly, is there anything you're seeing in customer behavior, maybe more recently, that would give you some clues that customer count should return to growth in the near term?

Yes, I believe we are observing positive customer behavior in response to our actions related to the macro environment. Even with low customer sentiment and an excess of goods, we have a clear strategy to address this situation, including events like Way Day 2. Our suppliers are actively participating, and we have effective marketing strategies that encourage customer engagement and purchases. This approach has proven successful, as demonstrated by stable gross margins. Rather than discounting, we are investing in our strategy, and our suppliers are skilled at utilizing it, leading to favorable customer responses. This strategy is well-suited to the current environment, which we expect to persist for some time. The excess inventory will require a considerable period to deplete, suggesting that this situation may continue for several quarters rather than just weeks or months.

Yes, but long term, our view of the potential, the total TAM, our position in that, where e-comm penetration should land, that has not changed. So while there may be volatility in the near term, our long-term outlook has not changed.

Your next question comes from the line of Greg Melich with Evercore ISI.

The question has been withdrawn.

Your next question comes from the line of Alexandra Staiger with Goldman Sachs.

I wanted to follow up on the active customer growth question here. Given the scale and reach you achieved during the pandemic, how do you think about the potential of customer reactivation to support forward growth? And how large do you see reactivation as an opportunity relative to new customer growth going forward?

I think reactivation of customers is a big opportunity, frankly. We have built a large following amongst customers, a number of which have an app, are on our e-mail list, and many of which visit regularly. Right now, you have a macro phenomenon where customers are not keeping the category top of mind. These swings that happen will revert to the mean over time. We are doing a lot to position ourselves as the go-to home retailer, the largest specialist in home, and we are getting those customers back to us as the category becomes more top of mind. There are specific things on the marketing side we’re doing to drive that as well. We have the benefit of a lot of what has happened on the ad landscape, which makes it very hard for new entrants without an existing customer file to market effectively at a reasonable cost. What we've got because of the first-party data in the direct regions, we can reach directly to these customers. This is a very major benefit. Only the largest companies have that advantage due to what’s changed in the privacy landscape and technology. Reactivating customers that haven’t purchased in the recent past is a huge opportunity, and we have a lot of things in progress along those lines.

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

Two questions from us. You mentioned that the environment got worse as the third quarter progressed, but consumers obviously continue to respond. I'm not sure if I missed this, but what was the monthly cadence during the third quarter? And then secondly, could you talk a bit more about international which continues to be a pretty meaningful drag on the business; obviously, macro is difficult. Do you think getting closer to breakeven is realistic for '23 in the international bucket? What are some of the expense opportunities in the business that you could implement to get there?

Yes, great. I’ll start answering your questions, and Kate can jump in too. On the environment getting worse in Q3, I’m not sure exactly what our comment was referring to. We don’t typically disclose monthly trends. What we would reiterate is that we see customers coming in during promotional activities and those tend to be highlights for us at this moment. The broader macro context is a little uncertain right now.

I'll just add that I would say we continue to see engagements on promotional activities positively. We’re seeing strong demand signals at those times, and we know promotions like Way Day and others drive that activity for us.

I would say, I don’t think the environment is worsening. I think it’s more steady; it’s not improving. It’s steady. In terms of international, out of the four countries, we operate in five countries today technically, but we have four major ones in terms of the U.K., Germany, Canada, and the United States. The United States economically is holding up the best among those four. You see that from macro data, then of course, we see it in our data. Every country is facing a different set of issues they're working through. We believe online sales of home goods are below the normal trend, but the timing of how exactly that curve plays out is very hard to estimate. What are we doing? There’s a big focus on micro tailwinds where we know we can drive share up, and we’re executing on those strongly. We also talked about the $500 million and the additional $700 million. We’re taking out a tremendous amount of costs, and this positions us incredibly well. The netting of those factors is quite a positive story. So we think that will play out quite positively. In terms of how to think about international success, every country is working through a different set of things. The countries were smaller in. The opportunity for tailwinds to be faster is higher when we have a smaller share. The macro conditions in these countries differ greatly, and some are quite challenged right now.

As we said, we intend to reach EBITDA profitability regardless of the top line, in aggregate. We're very focused on that goal. We’ve seen no structural reason why the international sector over time can’t perform as well as the U.S. sector. The $500 million in cost savings and the additional several hundred million will apply across our entire business, not focused on one geography.

We will take one more question. Your final question comes from the line of John Blackledge with Cowen.

Two questions. First on competitive positioning, I think Wayfair's U.S. revenue is down kind of like high single digits through the third quarter. How do you think Wayfair is doing relative to the U.S. home market through the third quarter? Do you think Wayfair's competitive positioning has changed at all versus pre-pandemic? And then just second question, in the past, you said returning customers typically cost 4% to 7% added expense as a percent of revenue. Does that still hold? Or just given the macro environment, is it more expensive to get a returning customer?

On competitive positioning in the U.S., our revenue was down around 6%. What we’re seeing in the U.S. is that our competitive positioning, at a super high level, is the same as it’s been. Our competitors remain the same set. There’s a long tail of competitors. We have a few large competitors and then a long tail in the category. When we talk about the micro tailwinds, I think there are some things that, through the cycle of COVID, kind of hurt us. Product availability got pretty bad for a period of time, and the speed positioning of forward positioning of the goods got quite poor. Pricing also dropped significantly due to inflation. That eroded our offering. Where are we now? Speed has reached all-time highs and continues to climb at a fast rate. Availability has recovered quite nicely and has headroom ahead of it, while retail prices have been falling. You can look at our holiday offerings, and you can compare those to others. It feels quite good overall. We feel very good about our position both as a home retailer and the bespoke things we’re doing, especially where we are relative to last year due to external forces. Regarding economics of returning customers, returning customers showcase a lot of leverage. The cost to go from one order to two orders is where I believe we said, we’ve found that repeat is typically around 7%. That’s from one to two orders. Then that percentage drops when you go from second to third orders and so on. What complicates the ad cost right now is the free channel and paid channel mix shift, which is affected by the macro environment. Just like you've seen it go one way, you'll see it reverse back.

Thank you.

Okay, great. Well, with that, I think we're wrapping up the call, so thanks everybody for joining us this morning, and I hope you all have a great holiday season.

Thank you all.

This concludes today's conference. You may disconnect at this time.