Wayfair Inc. Q3 FY2023 Earnings Call

Hello, and welcome to the Wayfair Q3 2023 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the conference over to Mr. James Lamb, Head of Investor Relations and Treasury. Please go ahead.

Good morning, and thank you for joining us. Today, we will review our third quarter 2023 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that our call today will consist of forward-looking statements, including, but not limited to, those regarding our future prospects, business strategies, industry trends and our financial performance, including guidance for the fourth quarter of 2023. All forward-looking statements made on today's call are based on information available to us as of today's date. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2022, our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures, as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, James, and good morning, everyone. We are excited to reconnect with you today to cover our third quarter results. While we still have a couple of months left to go, I’m confident the overarching theme of 2023 will be execution. Our team came into this year with a plan, a plan to see our core recipe return to form, to return our business to profitability, and to continue pushing our major growth initiatives forward. Wayfair is now in a place where we can both drive profitability while simultaneously investing for growth. Q3 is one more proof point of exactly that. Today we are reporting positive adjusted EBITDA of $100 million, a second consecutive quarter of positive free cash flow and nearly 4% year-over-year revenue growth driven by strength in orders. We saw order momentum persist from the spring through the summer of 14% in the third quarter versus 2022. You're seeing this lead to steady improvement in our active customer metric, which saw sequential growth strengthened to 2% and is well on its way to getting back to positive year-over-year growth. 2023 has been an eventful year for Wayfair, as the plans we set in motion during 2022 have come to fruition. A remarkable progress against the three core priorities we set back in the summer of last year, nailing the basics, driving customer supplier loyalty, and cost efficiency put us in a position to beat our own timetable to profitability. One of the analysts reports summing up our second quarter results was titled 'They did what they said they would do.' And we can think of no better compliment. We executed further in the third quarter to produce consistent profitability while still driving demonstrable market share growth, as evidenced by our gains on customers and orders. One of our long running focus areas is controlling the controllables. And you're seeing that we have and will continue to keep a tight grip on the reins, even with a volatile macro environment around us. Our improving order trend has led us to a place where net revenue returned to positive growth this quarter, even as average order values continue to normalize versus last year. With the considerable inflationary pressures across ocean freight and raw materials coming out of the system, it has been no surprise to see pricing levels continue to come back down to a more normal range for the category. We've heard a lot of debate around AOV over the summer as investors tried to piece together where levels will stabilize. Our conversations with suppliers suggest that prices should continue to rationalize in Q4, which we anticipate will represent the year-over-year trough. Lower AOVs in tandem with strengthening our core recipe are contributing to our order growth and share capture. This is particularly encouraging when we think about the strong repeat behavior of our customers, with nearly 80% of orders in 2023 so far coming from returning shoppers. Growing market share is a key focus area as our category demonstrates persistent weakness. We've seen the sector slow from the last time we spoke in August. A few weeks ago, I was in High Point and heard repeatedly from our suppliers that the market is getting tougher. In the U.S., the category is now tracking down in the mid to high teens on dollars with continued order pressure industry wide. In spite of the distressed home goods environment, our share position has held up well. Third-party data shows that our share gains across 2023 are persistent and have come from a large collection of peers rather than from any specific displaced retailer just as it has for most of our existence. Every day we see customers choosing Wayfair because of our unmatched combination of competitive pricing with the widest selection in the industry and speedy fulfillment on the items our customers love. The success has been broad-based across our catalog, not focused on any specific classes within our assortment. In fact, we still frequently hear our customers and investors express surprise at the depth of our catalog. So I wanted to take a moment to highlight a couple of categories you might not immediately associate with Wayfair, but are great examples of our strong share gains. Many shoppers think of Wayfair as a great place to buy their next bed, but we don't stop there. Our customers can also pick out their next mattress, sheet set, and bed pillows at the same time. We've seen our share in the mattress class outperform meaningfully over the past couple of quarters with positive unit growth in that low double-digit range year-over-year while market volumes have been down by a commensurate amount in the same timeframe. Mattresses are known for having a wide range of price points, and on Wayfair, you can find a broad assortment of the highest-end national brands all the way to our Wayfair Sleep essentials line. Mattresses are the perfect example of the core recipe in action. This is a class where we win by having that wide assortment in tandem with competitive pricing. As we do with our entire catalog, we take a good-better-best approach to our selection, ensuring that customers are finding the highest value at any budget level. We wrap it all together with fast delivery. Mattresses have one of the highest levels of speed badging across any of the classes we sell. We also have the value-added services customers expect in a great shopping experience, be it financing, white glove setup or taking an old mattress away. Our scale enables us to compete successfully in a class that pushes the boundary of online penetration across our category, with nearly a third of mattress sales happening online. Just like mattresses, we frequently find our customer surprised and delighted at the breadth of furniture products they can find for their dogs, cats, birds, fish, or reptiles on Wayfair. The pet furniture opportunity represents several billion dollars of our $800 billion total addressable market. And we've seen strong double-digit growth here over the past few quarters, well outpacing the peer set. Our place in the field is unique as we tap into the emotional investment of the home, multiplied by the emotional connection our shoppers have to their pets. We built a promotional calendar around the major pet-focused events to speak to customers in this space. For example, we ran an app-focused event for National Dog Day this summer, which saw considerable double-digit boosts to click-through rates, conversion, and sales, and shoppers celebrating the opportunity to make their homes a better place for their four-legged friends. Before I turn things over to Kate, I would like to spend a few minutes touching on three of the biggest questions we've heard from investors in recent weeks. The first of these is around promotion. A few of you have asked how promotions have impacted our order momentum and ability to take share. So it's important to frame up how the environment has evolved in the past year. Last fall, we saw promotional intensity spike as suppliers used discounts as a tool to clear out inventory. While our cadence mirrors the peer group, our focus is leveraging promotion as a tool for engagement. Shoppers are staying on the sidelines until they spot a good deal. But once in the door, they're proving happy to shop around. As I noted last quarter, during promotional events, less than a third of our gross revenue is driven by featured items. Moreover, our average supplier is marking down within a very reasonable range where they can achieve positive order economics for themselves, even with a discount. It’s due in part to the massive base of 22 million customers that our suppliers access by selling on Wayfair. Our customer file draws more selection on the platform, which in turn brings in more customers and ultimately spins the flywheel of share capture. As the inventory environment normalizes and promotional intensity evens out, we can continue to be a share winner, as our core recipe has proven for many years. The second question is unsurprisingly one about the housing cycle and our ability to succeed in an environment where people are staying put in their homes for longer. The answer to that question is quite straightforward. While we do have customers that will come to Wayfair for purchases geared around a move, this is far from our most common customer use case. You can see this in our own data on orders and revenue per customer. The average Wayfair shopper places about two orders per year, totaling about $540. This isn't someone who's typically refitting an entire room or house. Instead, it’s a shopper that's going through their home item by item, project by project making small updates on a much more frequent cadence. If our customers stay in their homes for longer, we're well-positioned to be their retailer of choice the next time they decide that they'd like a new lamp for the living room, or want a new set of chairs for their dining table. As I wrap up, the last question I want to address is when we heard following our Investor Day in August. For those of you who were able to tune into the event, you'll remember the slide on our growth algorithm, which detailed our pathway to returning to a double-digit growth rate. We walked through our major focus areas, our specialty and luxury brands, international efforts, physical retail investments, our Wayfair professional offering, and our supplier advertising solutions. In the week since, one of the most frequent questions we've gotten is how to think about the timing across these initiatives. The way to think about these growth drivers is on a staggered basis of maturity. While even the most mature efforts on this list are our higher-end brands and Wayfair professional, they are still in early days compared to our U.S. business. We see a strong trajectory for each. As these businesses eventually ramp up to the middle of their S curves, we expect the next initiatives will be right in line to follow a similar pattern. In totality, we believe that this will give us the legs to drive considerable share outperformance in the years to come. And as the category returns to stable footing, it will push our aggregate growth rate comfortably back into the double digits. This also means that we will be vigilant about tracking their performance against our investment thesis. As we operate the business over a multi-year period, we will concentrate our focus on growth drivers delivering well over 10% top-line growth with significant flow-through to EBITDA. We won't hesitate to shift course if a driver is not delivering as we expect. That goes back to where I began today, the concept of execution. We see this as the key theme of 2023, but not one that goes away as the calendar turns over. Even with a turbulent macro, we remain committed to being adjusted EBITDA profitable in good times and bad. We'll continue to drive peerless focus and execution into 2024 and beyond as we push every day to be the number one shopping destination for the home. Thank you. And now let me turn it over to Kate.

Thanks, Niraj, and good morning, everyone. The third quarter was an exciting continuation of our profitability journey we laid out on this call last year. So let's dive into the details. Net revenue for the third quarter came in at $2.9 billion, up 3.7% year-over-year with our U.S segment up by 5.4% in spite of the increased slowness in the category. Niraj spoke about the major moving pieces here as it pertains to our KPIs. Order momentum showed nice double-digit strength, up 14% versus 2022, while AOV came down by about 9% against the same period. All in all, we see this as important progress as our business builds momentum. Orders today are the best indicator of orders in the future, and we're encouraged by the improvement as we see shoppers increasingly returning to Wayfair for their needs across the home. I will now move further down to P&L. As I do, please note that the remaining financial figures include depreciation and amortization, but exclude equity-based compensation-related taxes and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin had another quarter of standout strength, landing at 31.2% for the period. There are a few moving pieces to unpack here starting with our efforts at pulling costs out of the system. We've talked about our cost efficiency efforts at length, so I won't repeat all the details now. But the important piece to remember is that our operative goal is to maximize multi-quarter gross profit dollars. To that end, we did carefully redeploy some of the savings dollars into the customer experience with the goal of driving results that would show up not just in Q3, but also Q4 and even into next year. This was augmented by better-than-expected performance across our merchandising efforts, including strong results from some higher-margin classes in addition to benefits from the profit-aware source that Niraj spoke about in May. Moving further down the income statement, customer service and merchant fees came in at 4.4% of net revenue. Advertising came in at 11.4% of net revenue as we drove improved efficiency across our pay channels in part supported by the learnings from the advertising holdback tests we performed in the second quarter. Rounding out the cost line, our selling, operations, technology, general and administrative costs, or SOTG&A totaled $459 million for the third quarter. As we discussed back in August, you were seeing steady improvement on this line as we push for continued spending discipline each quarter. Our goal is to drive further leverage. In total, we delivered $100 million of adjusted EBITDA for the third quarter for a 3.4% margin on net revenue. This was another strong quarter of profitability for Wayfair and a reflection of the work we've done to rebuild our cost structure across the business. To put the significant progress we've made here in perspective, this is over $220 million more of adjusted EBITDA and nearly 800 basis points higher adjusted EBITDA margin than we reported in Q3 of 2022. Our U.S segment generated $123 million of adjusted EBITDA for a 4.8% margin, and our international segment adjusted EBITDA losses continue to show improvement, a negative $23 million for Q3. We ended the third quarter with $1.3 billion of cash and equivalents and $1.8 billion of total liquidity when adding in the capacity from our undrawn revolving credit facility. Net cash from operations was $121 million, which was offset by $79 million of capital expenditures. The net of these was $42 million of free cash flow during the quarter. Now let's turn to guidance for the fourth quarter. Starting with the top line, quarter-to-date, we are seeing gross revenue trending close to flat year-over-year, and we would expect to end the quarter in the flat to positive low single-digit range. We anticipate AOV to show further compression in the fourth quarter versus 2022. Though this should likely be the trough on a year-over-year percentage basis, we expect that AOV will continue to be offset by strong performance on orders, as we expect to once again pace above the category on unit growth. Moving now to gross margins, we will guide you to a 30% to 31% range. We are continuing to move our guided range higher as a reflection of the structural improvements in our gross margin we've achieved through our operational cost savings efforts. Our customer service and merchant fees line should once again be in the range of 4% to 5% of net revenue, and advertising should be in the 11.5% to 12.5% range again as well. We forecast SOTG&A, excluding stock-based compensation and related taxes to come in between $455 million and $465 million as we continue to run the business through the lens of cost efficiency. If you follow this guidance, we would expect adjusted EBITDA margins for the fourth quarter to be somewhere in the low single-digit range, making clear and steady progress to our goal of sustainable mid-single digits before turning to the subsequent goal of 10% plus margins that we detailed at our Investor Day. Now, let me touch on a few housekeeping items. Equity-based compensation and related taxes are expected to be roughly $140 million to $160 million, depreciation and amortization approximately $103 million to $108 million, net interest expense around $4 million to $5 million, weighted average shares outstanding approximately $118 million, and CapEx in a $100 million to $110 million range based on the timing as we get closer to the launch of our flagship Wayfair store. Given our expectation for sequential revenue growth in the fourth quarter, we would also anticipate that working capital is a source of cash in the period. As such, we would expect another quarter of positive free cash flow to round out the year. Before I wrap up, earlier, Niraj walked through a few of the biggest strategic questions on investors' minds, and I want to do the same with a couple of the financial questions we've been hearing. Coming off our Investor Day in August, we heard many of you asked about the timing of our margin drivers, especially as it pertains to the pathway we described as we journey from a mid-single digits adjusted EBITDA level to one north of 10%. We broke this pathway down into five components on a slide in our presentation, and I'll start by talking about the first three, which are all contributors to gross margin. We largely think of these as independent of core revenue growth as the biggest driver here. Supplier advertising will be achieved through scaling penetration within our existing sales base. Logistics will be driven by further cost savings as we achieve new levels of efficiency in our supply chain, in tandem with increased adoption of our fulfillment solutions by our suppliers. The remaining 100 to 200 basis points of gross margin potential comes from a combination of merchandising and mix achieved in large part by expanding the mix of our sales coming from more margin accretive businesses, like our higher-end retail brands and our professional platform. Beyond gross margin drivers, we spoke to two more pieces on the path to 10% plus. We expect to drive 100 to 200 basis points of advertising leverage, coming from a combination of our own efforts to push for higher efficiency in our paid channels, as well as the normalization of the mix between free and paid traffic to our category. Some of you have asked if this is the floor on advertising as a percentage of net revenue, and to that, I would say no. We have framed this journey around a discrete set of goalposts and expect advertising to come down by 100 to 200 basis points on the pathway to 10% adjusted EBITDA margins. However, our business certainly has the potential for margins well in excess of that, and you can expect that we will give more clarity around what the pathway to higher margin looks like as we get closer to the 10% mark. That leads to SOTG&A, which is the one step of the path that is primarily driven by revenue leverage. You've heard us say it many times, but I'll repeat it once again. Going forward, you should expect us to take a very deliberate approach to the size of this line item in reflection to the growth of revenue. While we haven't given any guidance for 2024, the one anchoring item I can offer is that whatever you're modeling for revenue growth, you should be modeling SOTG&A growth less than that. Finally, the one other big question we've gotten since the event has been around our capital structure. As I mentioned during the day, we're excited that our profitability milestones opened a new set of doors for Wayfair from a financing perspective. Our upcoming maturities include the remaining $117 million due on our 2024 convertible notes, and the $754 million that is left on our October 2025 notes. The 2024 notes have a strike price of $116 per share. But we've said that even if those notes don't end up converting, we intend to pay them down with cash from our balance sheet. The 2025 notes have a strike price of $417 per share. So while we remain optimistic about the potential for our stock, we are planning around how to handle them in the absence of conversion. This will involve some combination of paying down with cash from our balance sheet as well as refinancing. With a wider suite of options available to us, we intend to be thoughtful around exploring options and the debt markets are quite cognizant of the tradeoffs between convertible and high-yield debt. As I wrap up, I want to return to the discussion of execution that Niraj touched on earlier. Over the past 12 months, our relentless focus on cost control has enabled us to deliver consistently improving adjusted EBITDA. As we look ahead to 2024, I want to be clear that our operating mindset remains the same, and we expect to deliver substantial adjusted EBITDA growth, even if the environment gets more complicated. We've demonstrated throughout 2023 that we know the right levers to pull to deliver profitability growth. As we shared at our Investor Day, ultimately, we are committed to delivering on mid-single-digit margins and then eventually 10% plus, all with the goal to maximize free cash flow generation over time. Thank you. And now, Niraj, Steve, and I will be happy to take your questions.

Your first question comes from Chris Horvers with JPMorgan. Your line is open.

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

Hey, Chris. Good morning. You have both Niraj and Kate here. Maybe I will just start on speaking to the guidance for the fourth quarter. And then as we think into sort of how some of this flows through for next year. And then, Niraj, I'll pass it off to you. On the fourth quarter, you started Chris by saying you’ve continued to achieve those cost savings, and certainly, we feel very good about the progress that we're making there. You can see some of that in the guidance. We, obviously, continued to up the gross margin guidance range. We've continued to bring down the SOTG&A guidance range, and that's reflective of those initiatives panning out. If you look at Q4, specifically, what we're reflecting there is, as we've spoken about in the past on the gross margin, we’re really trying to maximize growing gross profit dollars on a multi-quarter basis. Q4 tends to be a great quarter for us to bring new customers in. It's a highly promotional quarter; it's a great time for us to get somebody on to the platform, and then they come back and repeat and spend more dollars with us. And so we're just balancing those pieces as we think about, in particular, that gross margin for the fourth quarter. If you think about sort of 2024, obviously, we haven't guided to that, but perhaps I can provide reflecting on that thought model that we spoke about before I can maybe sort of reference and speak to how that might plan out in your sort of flat revenue example there. You're absolutely right that you should expect to continue to see ongoing improvement in EBITDA, and that's really driven by a few factors. We started the year saying we were taking out about a $1 billion in cost. If you start on that gross margin line, we said we'd achieve over $500 million taken out of that line in 2023. And you will see that by the end of this fourth quarter, where we will reinvest some of that. But let's say, for this example, you take the exit rate of the fourth quarter on gross margin and use that in 2024; that'd be a nice step up from where we were in 2023. If you look at the next line item on CS&M, we spoke about taking some of the costs out of that, and that January restructuring that you did, you've seen that moderate nicely throughout this year. Again, you could take through where that landing and assume some further improvement there in 2024 as those cost actions fully materialize, and you've got the appropriate leverage there. Then if you move down to ad spend, that's one where we said in that over a $1 billion cost takeouts, we were pulling out some of the higher advertising spend as a percent of net revenue investments. If you look at sort of the average of 2023, that place is reflective of the efficiency that we've been driving in that line. So again, in your model of flat revenue in '24, you could probably use that. And then if you go down to SOTG&A, you've seen some really big movement on that line throughout '23, obviously, starting with those January restructurings and the full impact of that run rate through less the combination of the incremental movements that we've made on that line quarter-on-quarter. Obviously, you saw that materialize again this quarter with that $459 million, and the further efficiencies have driven there. So again, if you look at full year '24, you could take the exit rate of that in Q3 of Q4 '23 and apply that into full year of '24, and you'd see really nice flow through. As I said in the prepared remarks, substantial EBITDA growth just from those cost savings fully run rating through. I think you're thinking about it in a very productive way. Obviously, you'll make your own assumptions around where revenue goes, but I believe we've demonstrated this year we're very committed to these levers and pulling the right levers to drive EBITDA growth.

I'll jump in here. It's Niraj. I want to add a few thoughts. As Kate mentioned, we are committed to achieving strong adjusted EBITDA regardless of the macro environment, and I believe we are in a good position to achieve that. We've discussed our cost-saving measures, and I want to emphasize that these operational savings are not just a one-time event. We've started planning for next year, and there are more improvements on the horizon. These gains will help drive EBITDA, which is the focus of your question. Furthermore, I encourage you to consider the current dynamics of our business. There's strong momentum, and if you look at the numbers, orders are up 14% year-over-year, and the number of active customers increased by 2% from quarter to quarter, indicating that we are close to a positive trend. We just had a successful Way Day 2, and our market share is growing across a variety of participants. So, when you add all this together, you're seeing positive customer momentum and order growth. Although order growth typically translates to revenue growth if the average order value remains consistent, we are currently experiencing a 9% decline in AOV this quarter, but that situation is almost resolved as we approach the end of this cycle. There is significant positive momentum. While you might consider revenue to be flat, I urge you to factor in this momentum and the ongoing savings from our initiatives. That's the key takeaway.

Thanks very much.

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

Good morning, and thank you for taking my question. I would like to delve deeper into your Q4 guidance. Are you observing any slowdown in consumer spending in Q4 compared to Q3? What factors are contributing to the slight deceleration in the year-over-year growth rate? Is this primarily due to lower prices, or are you noticing any trends of consumers opting for lower-priced items or any decline in large parcel purchases? Any insights on this would be appreciated.

Hi, Maria. It's Niraj. Your question seems to focus on the year-over-year revenue growth from Q3 to Q4. First, let's take a step back and consider our guidance for Q4 compared to Q3. Typically, during the holiday season, we expect Q4 to exceed Q3 by about 9% to 10% due to seasonal demand. In our guidance, we've projected a revenue increase from Q3 to Q4 of 7% to 8%. While this growth is slightly muted compared to the norm, it still falls within expected ranges. The reason for this moderation is that we are operating in a promotional environment, with most of our fourth-quarter revenue still upcoming. So far, we've only completed one promotion, Way Day 2, which exceeded our internal expectations. All indications suggest that future promotions will perform well, although we are being cautious in our guidance. Now, regarding your question about the compression in year-over-year growth despite a positive outlook, it's important to remember that we regained our competitive position at the end of summer last year, which is significant since this Q4 will be our first year-over-year comparison when we are back in a strong position. We have successfully reclaimed market share, similar to how we expanded prior to COVID. Thus, a slight compression in year-over-year growth is to be expected before we see that rate increase again. What really matters is whether we are capturing market share and our sequential customer growth. Additionally, focusing on annualized average order value gives us a clearer picture of revenue growth. Analyzing these factors will reveal that our business is gaining momentum. When considering year-over-year results, it's crucial to account for the events of the third and fourth quarters from the previous year, as those create some noise in the data. I encourage you to review both perspectives. Looking sequentially, you'll see that we are performing well and are positioned for significant growth as the market recovers, even as we continue to gain considerable market share driven by strong order performance. Moreover, we remain committed to maintaining robust adjusted EBITDA regardless of broader economic conditions. Everything is coming together positively.

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

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

Good morning, everyone. I would like to inquire about the customers, average order value, and the macroeconomic environment. As the average order value normalizes and we notice a deflationary trend, do you anticipate this influencing any growth in customer numbers and orders? Specifically, if pricing is stabilizing, does that create a more favorable environment? Additionally, many investors have raised concerns regarding international markets, particularly the ongoing challenges and headwinds we face there, which still haven't returned to normal. Could you share your perspectives on this situation and whether your outlook has shifted as we move into a potentially softer economic climate? Thank you.

Sure. Let me start, and then, Kate, if you have anything, you can just jump in and add it. So let me do the first question first and then we'll do the international one second. So first, I think you have a question around AOV normalization and does that drive order growth? I think the way to think about it is, the AOV normalization, what that is showing you is that things are getting back to normal. What does normal mean? It means that no retailer has an advantage over the other on relative price, relative availability, relative delivery capability other than what they themselves are doing, okay? During COVID, people had weird advantages depending on how they were set up, whether were they brick-and-mortar or online? Did they happen to buy inventory and carry 4 months, 3 months or 6 months normally versus that? Those odd advantages because of the scarcity of goods have really abated. Everyone is in a great position now. Everyone is in a great position on price, availability, and delivery. The question is what can they do with it? You’re seeing the results that basically show up based on everyone competing with each other and who can put forward the best offer for the customer. And it's not necessary that online beats offline because in our data, we recognize about 90 brands; we only see three that if you look back to the 2019 period through now, have taken share. You see us taking significant share, you see Amazon taking share, and you see home goods taking share. Home goods is really a brick-and-mortar retailer. In fact, they pulled out of online recently, but I think it was kind of a de minimis piece of their business, but they're the ones outcompeting in Bed Bath. And as Bed Bath went out of business, they took that share. So there are different ways to get share. As you aptly pointed out, we're in a tough recession environment. The market is down mid to high teens in dollars. There's that deflation that everyone has. Orders are not down by quite that much. If you think there's 10 points of deflation, orders might be down 5% or maybe 7%. But you see our orders up 14%. So you see us kind of gaining ground in the market. You see sequentially customers up 2%. We’re gaining great market share, therefore I believe that we are on a track where we are gaining strong momentum in that macro environment. So I hope that answers your question.

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

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

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

Good morning.

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

Let me address your questions about big-ticket versus small-ticket items, and then Kate can provide insights on the guidance. In terms of big-ticket and small-ticket performance, the overall impact of changes in average order value is influenced by the shift from inflation to deflation. We're observing consistent strength across all segments, with no significant mix effects. The dynamics of price elasticity play a role; when larger items, which tend to incur higher shipping costs, experience price increases, it adversely affects their attractiveness. However, as those costs decrease, those items become more appealing again, allowing them to gain market share. We've performed well across the board without significant mix variations. Regarding the perceived deceleration in Q4, it's important to understand that there will be a strong holiday uptick leading into this quarter. The year-over-year comparisons between Q3 and Q4 are quite distinct, as last year's Q4 marked the beginning of our market share growth, resulting in a tougher comparison. Consequently, you may see a slight compression in the year-over-year growth rate before it expands again. The 2% sequential customer count and robust order growth indicate our overall momentum. I recommend modeling the data sequentially for a clearer picture, which could provide better insights on the trends. I hope this clarifies your question, and now I'll pass it to Kate.

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

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

Thank you. Good morning, everyone. I have a question about the fourth quarter and your approach to promotion and advertising spend in relation to sales. First, regarding the fourth quarter, what do you think the likelihood is of increasing promotions? Given your focus on preserving margins over sales, it seems you might not be inclined to increase promotions, but could you share how vendors are handling this? Also, would you provide some insights on promotions in comparison to vendors? Lastly, are you considering increasing advertising if there were any decline in market share due to the promotional environment?

Yes, thank you, Simeon. We anticipate that Q4 will be promotional, which is why our guidance for the sequential increase is a bit more conservative at 7% to 8% instead of 10%. With the promotional season approaching, aside from the success of Way Day 2, the overall holiday period is still ahead of us. It's challenging to interpret the current economic headlines as indicating a thriving environment. We expect to be promotional, and our merchandising strategies along with our vendor collaborations reflect that expectation. Our website and app interfaces clearly show our commitment to this approach. We've factored this into our guidance. While it's possible that the promotional nature may exceed our expectations, we believe we have a good understanding of market dynamics. If the promotional environment intensifies, it's uncertain how it may impact us. However, we believe our current position is strong, as we've reclaimed market share over the past year and achieved an all-time high. Regarding ad spend, we don't view it merely as a tool to boost revenue for its own sake; we've carefully evaluated our spending to ensure that each dollar is effective. We will invest in advertising only if we anticipate a strong return based on our new thresholds. Our focus is not on market share as a direct outcome but rather on executing well, which naturally leads to acquiring market share. Advertising is simply one line item of expenditure that we expect to yield significant value. We have reduced our ad spend, which would have likely resulted in even greater revenue growth had we not made those cuts. We believe it was the right decision to ensure every dollar is utilized efficiently, and we will maintain that expectation going forward.

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

Thanks, guys. Good luck.

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

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

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

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

Yes, let me add a few points before continuing. The repeat percentage, which is 80% of orders, refers to all customers who have ever made a purchase. We have been in business for 20 years, and if someone has made a purchase at any time, they are counted as a repeat customer. The active customer count, however, only includes those who have made a purchase in the last 12 months. For instance, someone who bought in 2015 and makes a purchase after an 8-year gap is still considered a repeat customer, but they re-enter the active customer count after being inactive. If they do not buy within 13 months, they drop out of the active customer count. Therefore, it's important to analyze these two metrics differently. We still have many new customers to attract, and we anticipate doing so over time. The active customer number represents our engaged audience, as they need to have made a purchase in the last year. Their ongoing purchases contribute to the business's growth. Currently, there is a 2% sequential increase in the active customer number, indicating it's likely to continue growing positively. We're currently earning only $540 per customer each year, indicating a low share of wallet, which presents numerous opportunities for us.

Got it. Thank you very much and good luck.

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

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

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

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

Thank you.

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

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

Thank you.

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