Wayfair Inc. Q2 FY2024 Earnings Call

Thank you for standing by. My name is Rochelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Q2 2024 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. Thank you. I would now like to turn the call over to James Lamb, Head of Investor Relations and Treasury. Please go ahead.

Good morning and thank you for joining us. Today, we will review our second quarter 2024 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that our call today will consist of forward-looking statements, including but not limited to, those regarding our future prospects, business strategies, industry trends, and our financial performance, including guidance for the third quarter of 2024. 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 2023, 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 and adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, James and good morning, everyone. We're excited to discuss our second quarter results with you today. Q2 was a dynamic quarter that resulted in another period of share gain and we continue to see efforts around cost optimization pay off with our best quarter of adjusted EBITDA and free cash flow in 3 years. This was all the more impactful because it was a quarter of continued macro headwinds that are pressuring the way customers shop the category. Way Day was a tremendous success, with performance up in the double digits versus our event last spring. We saw notable engagement throughout all three days with broad-based strength across the catalog. The Way Day results are consistent with the pattern we've observed now for over a year, where promotions continue to drive customer engagement but correspondingly, we see shoppers pulling back in the non-promo periods. The performance spread between promo and non-promo remains wide and our post Way Day results came in below expectations. This was in part due to the increasing price elasticity we've been seeing in our customers as well as a decision to intentionally pare back on marketing spend following Way Day to remain disciplined on efficiency in periods where customer engagement is lighter. We continue to take share in the second quarter as we proactively adjusted to the trends we were observing. A more moderate capture rate in May picked up as we got through June and entered July on the back of pricing actions in response to that changing elasticity, coupled with a normalization in marketing spend. Our market relative price index, an internal measure of how Wayfair prices against competition, returned to showing healthy year-over-year improvement following those actions, and correspondingly, we've seen our market share set further highs. Q2 was a continuation of the macro trends we've been seeing for the last few years. Customers remain cautious in their spending on the home and our credit card data suggests that the category was down by nearly 25% from the peak we saw in the fourth quarter of 2021. This mirrors the magnitude of the peak to trough correction that the home furnishing space experienced during the Great Financial Crisis, according to U.S. Census Bureau data. Importantly, this calculation is on nominal dollars. Adjusting for inflation suggests we're now in the midst of a correction in excess of 35% and an unprecedented level of pullback in our sector. We see three clear factors behind this correction: one, the malaise in the housing market; two, overspending in 2020 and 2021 that has warped the historic replacement cycle; and three, a slowing U.S. economy. You're likely very aware of the evidence on the first factor. Over the first five months of 2024, new home sales are down by nearly 20% compared to the first five months of 2021, while existing home sales are down by more than 30%. While you've seen many of our peers that are impacted by housing decline to an even greater degree than Wayfair, at the end of the day, with housing turnover levels that haven't been as depressed since the Great Financial Crisis, the market fatigue weighs on everyone in the category, ourselves included. On the second factor, like many of you, we spent time trying to tease apart the magnitude of the demand pull forward in 2020 and 2021 in an effort to gauge how far along we might be in this period of rationalization. Controlling for inflation, we measured actual spending from 2020 through the first half of 2024 against a hypothetical environment where the pandemic never happened. Using data from the Census Bureau, the analysis shows actual spend volume coming in below that hypothetical no pandemic world. I want to take a moment to let the magnitude of that sink in. Customers have more than compensated for the overspending during the pandemic and have now underspent in the category compared to historic patterns. This is in spite of the fact that the structural need for products in this category has not changed. As we've said many times in the past, people still need mattresses and tables and chairs. They still need desks and bathroom fixtures and kitchen equipment. And at some point, we expect a reversion to the mean. While we've yet to see the housing recovery, replacement for pandemic spending, and broader economic upturn, we anticipate these drivers around the horizon. Given how deep we are into the cycle, it's fair to expect the turnaround to come soon and Wayfair is well positioned to benefit as it does. That brings us back to our own performance and how we are positioning Wayfair to drive both continued market share growth and profitability flow-through as the top line begins to inflect. Back in February, I outlined three initiatives that we are working towards in 2024 to further build out our position in the market. Our brand refresh in March, the opening of our first large format Wayfair store in May, and the coming launch of our loyalty program later this year. On our first quarter call, we spent some time unpacking the brand refresh and how excited we are about our new ways to speak to shoppers. Today, I want to dig deeper into the second initiative on the list: our physical stores. Despite the massive shifts in the aftermath of the pandemic, we still see home as quite underpenetrated online at roughly 1/4 of spending in the category. Even in a more mature state that approaches something closer to a 50-50 split, that still leaves hundreds of billions of dollars in addressable market opportunity on the physical side of the equation. We don't want to leave this opportunity untapped. As we look at our own core competencies, we already have many of the pieces in place to address this segment of the market. We have a household brand across North America and parts of Europe with incredibly strong brand recognition and affinity. We have a nationwide industry-leading fulfillment network and delivery capability. We have deep relationships with our more than 20,000 suppliers offering a broad range of product style and price points for our customers. And we have a customer file of more than 90 million shoppers. The one piece of the puzzle we didn't have were the physical stores themselves. And so we launched our first mall-based pop-ups in 2018 and followed up with a store in the Natick Mall just outside of Boston back in 2019. This was a very small format experiment, and we quickly realized that we needed something larger to showcase the Wayfair brand in its true depth. 2022 marked the next stage in our fiscal retail journey with the launch of our specialty retail stores under the All Modern and Johnson Main banners. We launched three stores over the course of the year and then followed up with two more in 2023. These stores average between 10,000 and 15,000 square feet in high-traffic retail centers, typically close to other specialty furniture retailers. Every element of the customer experience was thoughtfully designed with three key goals in mind: one, capturing incremental share of wallet as we broaden customer awareness to the true depth of our catalog; two, reaching a new segment of customers that have been reticent to shop for the category online; and three, building brand awareness and driving customer affinity, especially across our specialty brands. Our physical retail operating model mirrors the approach we take online. Inventories owned by our suppliers and our take rate on top of the supplier's wholesale price drives our gross margins. We've been pleased with the results across our specialty stores, which with the addition of several Birch Lane locations earlier this year, now sits at a total of nine. Our stores have been averaging thousands of shoppers per month with healthy growth in sales per square foot in tandem with considerable margin expansion as we fine-tune the operating model and selection. A core part of our strategy is building a bridge to help shoppers make the leap from the physical store experience to our online platform. This has been a major point of success and we're seeing that nearly one-third of in-store sales are for products that are actually on display. That comes in tandem with a healthy halo effect where we are seeing substantial lift in online sales within the surrounding area of our stores. Our specialty stores were years in the making before we opened their doors and we spent even longer preparing for the launch of our Wayfair branded store this past spring in Wilmette, Illinois. If you haven't had the chance to visit the store, I'd encourage you to do so the next time you find yourself in the Chicago area. We've been thrilled with the very strong initial response from the hundreds of thousands of customers who have visited the store and love how we are showcasing the Wayfair brand in its full breadth. Part of what differentiates Wayfair is the scale and sophistication of our offering. We have unparalleled breadth of assortment across styles, price points, categories, and brands, satisfying customer demand across a wide spectrum of budgets and purchase occasions. Our technology and category expertise enable us to personalize the customer journey, combining customer insights and merchant intuition to curate and recommend the perfect looks for each shopper. We complement this with services that solve some of the biggest problems that could otherwise deter home purchases, such as design, financing, assembly, and installation, and we have a supply chain that excels at carefully and quickly moving big and bulky items with reliably high service levels. We've deployed all of this in our new store, creating a shopping experience that's quintessentially Wayfair. The store spans roughly 150,000 square feet with 17 departments and 2 dedicated spaces for design services. We have more than 10,000 items on display from hundreds of suppliers, many of which are available for customers to purchase and take home right from the store. Large parts of the store are designed to be experiential, such as our functional shower studio and kitchen faucets or the office chair test lab. We've handcrafted the shopping journey in each segment of the store, such as our Find Your Fit mattress section that helps shoppers evaluate all the important attributes of their next bed, such as size, firmness, and materials. Customers are loving the thought and care we've put into every corner of the store. While it's only been a handful of months since opening, the early read on the store has been very encouraging. The majority of shoppers coming through are entirely new to Wayfair. We're seeing diversity in basket composition as well with shoppers leaning heavily into cash and carry items that we feature in the mix. As I mentioned a moment ago, that's been one of our core goals of physical retail: broadening customer awareness to the true scope of our catalog and earning more of their shopping occasions for higher frequency items. What we've been most excited to see are the early impacts on the surrounding area. Our preliminary data on the Wayfair store shows a halo effect uplift that is multiples larger than we've seen in our specialty locations. We're already working on opening our next Wayfair store to help test the model and gain a perspective across different geographies. Based on the performance of these stores and as they hit certain internal thresholds, we are excited about the full potential of physical retail over the next decade. We're also planning to bring another store concept to life with our first physical location for Perigold next year. Just as we did with our specialty stores and the Wayfair store, the Perigold shopping experience will be uniquely curated to pay homage to all the reasons shoppers love our luxury brand and we can't wait for you to see what that looks like. As we described at our Investor Day just a year ago, we see physical stores as one of the core growth drivers for Wayfair over the next decade and beyond. Our approach here will be measured and the intention is to have the stores justify their construction entirely on their own four-wall economics. You can rest assured that we have no plans to go through an investment cycle where we spend deeply at the expense of profitability to expand the store footprint rapidly. Our approach here is very similar to how we scaled up the business in our early years, with strategic growth in our store portfolio on the back of the successes we've built up to that point. That back-to-basics mentality isn't just a description of our physical retail efforts but has been a core tenet of our entire operating philosophy these past few years. A reaction we've taken every goal we prioritized and every dollar we've spent has been considered under the intense scrutiny of our high expectations for return on investment. Even with the challenging macro, this was our best quarter of adjusted EBITDA and free cash flow generation in 3 years, clear evidence of our strict operating discipline. We are running the business with the goal of demonstrating substantial growth and profitability this year, even as the top line remains challenging and that will be our mindset every year going forward as well. Thank you. And with that, let me pass it over to Kate for a breakdown of our financials.

Thanks, Niraj and good morning, everyone. Let's dive into our second quarter financials before turning to our outlook for Q3. Top line results for the period came in slightly below our expectations, down 1.7% compared to the second quarter of last year. The decline was driven by a few factors. First, as Niraj shared, we observed a weakening overall macro in the back half of the quarter, consistent with the trends that many other consumer companies are experiencing. Second, our Way Day results were quite strong but we saw less momentum in June when we were not running promotional events and subsequently pulled back on advertising and this weighed on our revenue performance. Consumers have remained cautious in the category for years and we've continued to see a pronounced spread in performance between promotional and non-promo days. There's an important caveat to add here, one that we've said before. Outperformance on promo days does not mean that sales strength is driven exclusively by discounted items. Less than one-third of our sales during promotional events come from featured items and that has been quite consistent over the past year. What this means is that consumers are willing to spend in the category once they are engaged in shopping. Promotions have been for some time and are now even more so the most potent tool to drive that engagement. One of Wayfair's core competitive advantages is the rich data-driven insight we have on customer behavior and our ability to regularly run pricing experiments, toggling prices up and down by small percentages on a portion of the catalog in order to develop a real-time view of customer spending behavior. Our data science team spends a tremendous amount of time studying the resulting demand curves, and their work has painted a picture of a customer environment where we can both take further share as well as maximize profit dollars by leaning in on pricing. The results from our price testing in combination with the bifurcation we see in promo versus non-promo periods present a clear opportunity to optimize gross profit dollars by investing in price over a multi-quarter period. This follows the construct we laid out several quarters ago. Based on what we see today, we believe targeting a gross margin closer to 30% gives us the ability to drive higher order capture than a similar investment would have yielded a year ago. Through this strategy, we are maximizing gross profit dollars and driving order capture even if at a slightly lower gross margin. Absolute revenue growth will still be somewhat a function of the category at large. But our ability to take share dollars is very powerful right now, and that's something we aim to capitalize on. We are comfortable leaning into this construct as we pair this margin investment with the considerable success we've had driving fixed cost efficiency in the business which we intend to sustain going forward. With the shifting consumer backdrop over the past several months, we actually began to lean into the price investment as we exited the second quarter and believe it makes sense to continue to do so in the back half of this year. Let me now continue to walk down the P&L. As I do, please note that the remaining financials include depreciation and amortization but exclude equity-based compensation, related taxes, and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin was 30.3% in the quarter. It's important to note that there are several moving pieces within this, including supplier advertising which has continued to be a real highlight. We've seen advertising penetration climb above the 1% of net revenue mark we had a year ago with Q2 showing a healthy sequential step-up. This is offset by the renewed price investments I detailed a moment ago, as well as the natural deleverage from our logistics network during this period where volumes remain under pressure for the category and for Wayfair. Customer service and merchant fees were 3.7% of net revenue, showing ongoing progress from our cost efforts, while advertising was 11.7%, a further reflection of our own efforts to drive efficiency across our paid channel mix, particularly during the softer demand environment we saw in June. Our selling, operations, technology, general, and administrative expense came in at $399 million in the period. This was the eighth consecutive quarter of sequential SOTG&A compression and our sweeping effort to rebase the cost structure across our organization and the ongoing efficiency opportunities here continue to be a strong lever for us. Altogether, we reported the strongest quarter of adjusted EBITDA dollars in 3 years at $163 million or 5.2% of net revenue. We've now set the second box on the path to profitability that we laid out early last year, getting to a mid-single-digit adjusted EBITDA margin, a stepping stone on the way to our next goal of 10% plus. We ended the second quarter with $1.3 billion of cash and equivalents and $1.9 billion of total liquidity when including our undrawn revolving credit facility. Net cash from operations was $245 million, while capital expenditures were $62 million, lower than we had originally anticipated due to further efficiency on site and software development costs as well as some timing of physical retail costs. The net of these was also the best free cash flow generation in 3 years at $183 million, even in the quarter with greater top line pressure than anticipated. While not directly impacting free cash flow or adjusted EBITDA, it's also worth highlighting the progress we made on stock-based compensation and related taxes which came in at $98 million in the quarter. This was down by more than 40% year-over-year and the lowest level we've seen stock comp expense since 2021 as the accounting treatment catches up to the benefit of the cost actions we've taken over the past two years. Now, let's turn to third quarter guidance. Our quarter-to-date performance is marked by the new Black Friday in July event that just wrapped up earlier this week. So I'll move to the full quarter revenue outlook, which we expect to be down in the low single digits year-over-year. This contemplates seasonality consistent with what we saw in the same period last year. Moving on to gross margin. As I discussed earlier, we are continuing to operate in the range of 30% to 31% of net revenue but we'll be targeting the lower half of that range in Q3 and Q4. We see a valuable opportunity to drive order capture by leaning in with competitive take rates to augment the promotional activity we're seeing in the space. Customer service and merchant fees should be just below 4% of net revenue and advertising should be between 11.5% and 12.5% once again. Finally, SOTG&A should fall within a range of $400 million to $410 million for the quarter. We're once again seeing us bring down this range as we continue to execute on cost efficiency initiatives throughout the business. Following this guidance down to adjusted EBITDA, suggests a margin in the mid-single-digit range, a bit below our results from the second quarter due to the typical seasonal sequential revenue compression. While 2024 has not been a year of strong macro and top line recovery as many had hoped, we're extremely proud of the work we've done across our cost structure to drive considerable profitability growth regardless of the headwinds. That work has put us in a place to drive more than 50% year-over-year growth in adjusted EBITDA dollars, all while taking considerable share amid a record-setting category correction. We would hazard to say there are a few examples in history of companies that have undertaken such considerable change while simultaneously protecting their major growth initiatives and the potential for massive profitability flow-through when top line growth does return. Now, let me touch on a few housekeeping items. You should expect equity-based compensation and related taxes of roughly $90 million to $110 million; depreciation amortization of approximately $95 million to $100 million; net interest expense of approximately $6 million; a weighted average of shares outstanding of approximately 124 million; and CapEx in the $70 million to $80 million range. As mentioned, the third and fourth quarters will likely see slightly higher CapEx than the first and second. However, we should still see quite impressive leverage on this line for the full year of 2024. As I wrap up, I want to underscore our steadfast commitment to driving profitability improvement regardless of the top line circumstances. This quarter is clear evidence of our ability to deliver results even as the macro backdrop of consumer behavior remains challenging. We have now demonstrated market share gains for seven consecutive quarters and have complete confidence that there are more ahead as customers choose Wayfair each and every day. The broad macro headwinds layered on top of home category weakness require nimble execution in the near term but it's important not to lose sight of the bigger picture. Our consistent ability to outperform the competition through our core recipe and the fundamental overhaul of our cost structure positions Wayfair to benefit considerably when the category normalizes. We have strong conviction in our strategy to successfully navigate the current environment while remaining laser-focused on the incredibly exciting longer-term opportunity. Thank you. And now Niraj, Steve, and I will be happy to take your questions.

So my first question is going back to the comments on the consumer. So it's basically that the troughs are getting deeper and the consumer is becoming that much more sensitive to the promotional aspect of it. I guess from your perspective, you have the toggling of further price investment that you're putting into the gross margin but you're also dialing back the advertising. So can you talk a little bit more about how are you going to navigate against this, what seems like a much tougher environment?

Yes. Thanks, Chris. Thanks for the question. Yes. So I think here's the way to think about it. So it's been a challenging environment for HomeGoods for two years. The first piece of it was sort of kind of the COVID pattern of binge on HomeGoods, bust on HomeGoods, which was because of the binge switched to travel, entertainment, leisure spend. And then what that's been rolled into is now in the last six months more of like what you think is a traditional recession economy, right? The economy is slowing, consumers pulling back you hear those comments from people like McDonald's, Starbucks, Pepsi now talking about how the consumers pull back. So in that environment and we've seen this before in a great financial crisis, consumers sort of because the category is not top of mind, it's out of favor, the everyday volume, the everyday business is slower but promotions are still a marketing message that piques curiosity, causes traffic to come in and customers then see something appealing and they buy it. So if you think about, we're still spending money on advertising but we're sort of managing when we're spending to put more of the money towards the promo periods and a little less of the money towards non-promo just to maximize our return based on what customers engage with. So it's more like a marketing message that works with promo. So then that we're putting that more of the marketing spend there. And so that balance is a little bit of what we're talking about. And also in this quarter, the way that played out with June is, June was more non-promo. We pulled back on advertising a little more. That made June a little softer. As we went get into July, we're seeing our market share hitting all-time highs. We're seeing us continuing to succeed and take market share. So we're not really worried about how we can perform in this environment. We think that we can keep delivering the profitability and we think we can keep taking market share. It obviously in terms of really seeing the kind of growth we all want to see, that's not really going to be the kind of number you post when the market is negative 10%. But then as the market kind of firms up and grows, I think you're going to see the fact that we're continuing to invest in mid- and long-term initiatives will really pay off in the kind of growth numbers you'll see.

It seems that July was a challenging month for consumers, especially in the latter half. Based on your observations, with the quarter showing a low single-digit decline and considering some timing shifts, this may suggest it was your most difficult quarter so far. How much of this decline can be attributed to the promotional shift compared to a deeper consumer retreat, given the events like the assassination attempt, the election, the Olympics, and overall consumer behavior?

Yes. If you compare June to July, we actually experienced better momentum in July than in June. I would say that our execution in July has improved momentum. It will be a challenging time while the economy is as it is, but there's always a lot happening. The election and the Olympics are examples, but I believe that despite these factors, we will continue executing and gaining market share. This is a significant category that is down around 10% year-over-year, but the situation is not uniform. I believe we can outperform our competitors, which we have been doing for seven quarters now, and I think we can maintain this even with ongoing events. The key to the category's recovery and momentum will come as housing improves, driven by pent-up demand and lower interest rates. This trend is anticipated—interest rates are expected to decrease, and housing will pick up—but it won't change overnight; it will take time. Meanwhile, you will see us continue to gain market share and improve profitability, and that momentum will grow as the market improves.

Yes. Chris, regarding Q3 specifically, you mentioned that the guidance for Q3 reflects the same seasonality we experienced last year from Q2 to Q3. So I wouldn't interpret anything there as being overly significant since it is consistent with our previous operations.

So I guess just one quick follow-up. So from a market perspective, based on what you observed, do you think your performance sounds better June to July but do you think the market stepped down from June to July?

We receive credit card data similar to others and also gather a lot of feedback from suppliers. It's unclear if I can say the market really stepped down or just stayed weak. It's challenging to provide specific details on that. I can say that no one is witnessing a market recovery at this time. I can't confirm that it stepped down because the week-to-week credit card data can be somewhat erratic, but if you look at the longer trends, it's clear we're reaching all-time highs while the market remains weak. That's how I would summarize it.

Could you clarify your thoughts on market share? It seems like your market share may have slightly decreased in Q2 compared to Q1, but you also mentioned that you're back to your usual rate of market share capture. Can you elaborate on that? Additionally, what strategic changes have you made to enhance this trend?

Thank you, Peter. What we're discussing is the pace at which our market share is growing. Over the past seven quarters, our market share has been consistently increasing at a steady rate. However, when looking at shorter time frames like weeks or months, the data can be noisy, whereas quarters tend to show more stability. We analyze data from nearly 100 competitors and often see fluctuations in their numbers as well, so it's important not to focus too much on short-term figures. Instead, we should look at our ongoing efforts to capture market share. We're committed to investing in initiatives that will pay off in the mid to long term. We're ensuring we have a wide selection, competitive pricing, good availability, and improving the quality of our merchandise. Additionally, our advertising strategies are designed to be effective in driving traffic to our site, helping us to monetize that traffic effectively. Our approach involves maintaining focus on our long-term goals while executing our daily operations effectively, and this strategy is proving successful.

Okay, that's helpful. And then Niraj, we didn't run into each other in Las Vegas this week. So I know you were there. When you talk to any supplier at the Vegas conference, there's concern around factory direct product that's coming in from China and being sold on Wayfair. So the message I'm getting is that U.S. suppliers are pulling back on CastleGate and I'm wondering just how are you guys handling this evolution in your supplier base? And is there a risk of CastleGate revenue may be moderating a bit?

We have a substantial number of suppliers, and this number has increased over the past few years. There was a significant rise in suppliers around 2021, after which we chose to scale back a bit to ensure we maintain quality. Many of our top-quality suppliers are U.S.-based importers, along with some U.S. manufacturers, and we also collaborate with excellent manufacturers and importers based in Asia. Our focus remains on high-quality suppliers, as we prioritize the quality of products, pricing, and operational standards to ensure customer satisfaction. Our teams, which are located globally, support these suppliers. From a supplier perspective, whether in Las Vegas or Asia, the feedback is that it’s challenging out there. Suppliers prefer to minimize competition and would rather see demand directed their way. Some U.S. importers are facing competitive challenges from factories building cross-border programs. However, U.S.-based importers that excel in design and efficient operations are doing well. After meeting with numerous suppliers in Las Vegas, they reported that Wayfair is currently their best channel, recognizing the competitive market. They are concentrating on maximizing business performance in the short and long term. We encourage the use of CastleGate for their best-selling products, as it enhances delivery speed and optimizes positioning, ultimately helping to reduce retail prices by minimizing outbound shipping costs. Many suppliers expressed a desire to utilize CastleGate effectively. There is growing interest in CastleGate, but suppliers are cautious about inventory levels due to the prevailing macroeconomic challenges. They want to maintain a lean inventory while managing various pressures.

Okay. And I would agree that everyone is seeing Wayfair as their best channel. So thanks for that feedback.

So two questions. One, just on the pricing actions. Maybe you don't have this straight but it sounds like at the moment, you are I don't know a little out of line where you wanted to be, from what I recall in past few calls, I think the commentary was you were in a good spot. So I guess if that's correct, kind of what changed or vendors sharing any of the burden? And I guess, is this in response to any of the share gains narrowing a bit, if that's the case?

We use a sophisticated data science model to measure elasticity and determine the margin rates for each part of our catalog to maximize profit dollars. Our approach focuses on profit over a reasonable timeline rather than just immediate gains. We aim to optimize our pricing strategy, which currently involves adjustments in the low tens of basis points, rather than significant price reductions that might involve cuts of 5%, 10%, or 20%. This optimization is designed to enhance profitability. Notably, this quarter, our EBITDA reached 5.2%, amounting to $163 million, with free cash flow of $183 million, marking our best performance since 2021. This indicates that we are successfully gaining market share while maintaining profitability in a challenging economic climate.

Yes, Curt, you asked specifically our suppliers sharing any of the burden and we continue to see suppliers leaning in with us quite nicely. That's how we're able to offer these incredible promo events and actually still maintain gross margin nicely north of 30%, right? So, I think what we're talking about here in rotate nicely is a nuance on making sure they're at the right and optimal point of the pricing curve based on where we see the consumer today. And frankly, we're excited that we can lean into that and deliver that for the customer. We're able to do that because of the significant cost efficiency that we've driven over the past few years.

Got it. Okay. Turning to the store, it’s great to hear about the positive start and potential. Niraj, could you provide more insights on the potential growth? It’s also reassuring that we’re not entering an investment cycle, but what could the footprint look like? What kind of productivity per box are you seeing in terms of margins? It sounds promising, so any additional details would be appreciated.

Yes, great. So what I would say is, obviously, the store has only been open for a little over 2 months. So this is kind of the way we think about it: like we're going to be really prudent and pragmatic in how we grow the store. So we've got Wilmette open. It's off to a great start. We've got a long list of things that we think can even improve its performance but it started off incredibly strong and so we're pretty excited about that. We're working on opening a second store targeting later next year for that second store. So the idea is we're going to keep moving forward but in a very methodical, pragmatic way so that we can make sure that we're optimizing performance and taking all those learnings and using them in what we do next and that we do this in a way so that a long time from now when we look back we've really built this out in a very successful way. And so that's kind of the way we think about it. So it's probably a little too early to share super detailed financial metrics given that's only been open a couple of months. But I would say we're pretty thrilled with how it's performing.

I wanted to follow up in the prepared remarks you talked about the elasticity getting a little better to when you maximize gross profit dollars in the latter part of the quarter. Can you talk about any magnitude or quantification? And then, if you're going to manage gross margin to the lower end of that 30% to 31% range, is the back half or even the third quarter run rate of sales reflective of that pickup? Or is it not reflected in that negative low single digit, I guess, quarter guide?

Yes. I'll address a couple of these points and then pass it over to Kate to clarify the guidance. Our momentum has improved from June into July, and we are pleased with this positive trend. We're observing growth in market share and performance. It's important to note that the differences between promotional and non-promotional periods can complicate comparisons during specific timeframes. Nonetheless, we are seeing that our strategies are effective.

Yes. I think, Simeon, what you're asking is, does the guide take into account the gross margin investment? Yes, it does. And what we're really doing there is in an ongoing very challenging top line, the sort of double-digit macro decline, that's how we're able to stay negative low single digits and continue to gain share. We spoke in the prepared remarks on the call that what we see as a result of investments like this is improved order capture. Right now, that's in a down market, right? So we're seeing that improve order capture in a down market. That leads to those all-time share highs and that is contemplated in what we've shared. And frankly, we're able to do that because of our ongoing success on the fixed cost base.

First, could you maybe talk about your motivation for conducting the Black Friday sale in July. Was it mostly an opportunistic decision, also to reflect the more promotional environment? And then, sort of on the effectiveness of this event on the heel or your Way Day in Q2? And then quickly, sort of stronger July trends that you mentioned, is that taken into account sort of Black Friday?

Thank you, Maria. The Black Friday in July sale was a success. During recession-like periods, we tend to increase the frequency of our promotions. In more typical times, the frequency is lower. Currently, we are following our marketing strategy for tougher economic conditions, which encourages customer engagement. I believe this promotion effectively cuts through the noise in the current environment, and we are pleased with the results. In previous years, we have tested different types of events during this period, such as an anniversary sale and a financing event. The Black Friday in July sale performed better than those other formats. This success may be due to our creative approach, the way we positioned and marketed the event, as well as the prevailing macro environment. Kate, do you have anything to add?

Yes, I think that's reasonable. I just want to remind everyone that we don’t usually provide monthly guidance, so I would refer you to the overall guidance we provided for Q3.

Got it. That makes sense. And then secondly, just following up on margins. maybe a little bit of a follow-up on the prior question and sort of you being able to deliver on our despite softer top line. So, I guess now that you have sort of reengineered your cost structure, can you maybe talk about your ability to flex your expenses outside of marketing, flex your expenses up or down sort of in the short term to reflect volatile top line trends?

Yes, I believe you are referring to the SOTG&A line, where we have observed a consistent reduction for eight consecutive quarters. This line primarily consists of labor costs, although it also includes various other expenses such as software costs. We have been very focused on lowering costs across this area. As we've mentioned in recent quarters, labor expense remains a significant factor, and we saw some impact from that this quarter. We believe that our continuous diligence in managing expenses enables us to invest in the right areas for our customers right now. This is how we balance these costs and continue to invest in areas like pricing while reducing costs in others.

The one thing I would add is to consider the impact of our ongoing efforts to optimize profitability. I mentioned that we had the best quarter for EBITDA and free cash flow in 2021. Additionally, I want to point out that we reached breakeven on owner’s earnings, which is calculated as EBITDA minus CapEx and stock-based compensation. If you examine the stock-based compensation line, you’ll see it has improved significantly. While this improvement doesn’t directly affect EBITDA, it is reflected in owner’s earnings, and I wanted to highlight that as well.

Niraj, the comment you made about sort of the performance of the business between promotional and non-promotional days. I was hoping maybe we could revisit that and maybe just contextualize like how you would summarize the health of your consumer today? Like how big is that spread? I don't know if you can quantify it for us and/or just compare it to sort of historic spreads that you've seen maybe in the pre-COVID errors. And then what does that tell you sort of about just the state of the industry and how you're sort of thinking about how long this malaise can last for, right, or in essence, the path back to growth, right, how long it could take to get there?

I don't want to be overly dramatic because while the spread is widening, it's not as if it's a sudden change. It's more about the increasingly promotional versus non-promotional periods. This shift is influenced by our marketing message that encourages shopping, as opposed to simply having the category on consumers' minds and prompting regular shopping. To understand when the category might return to growth, consider existing home sales; they've significantly dropped over time. Multiple sentiment indexes suggest there’s a lot of pent-up enthusiasm and a desire to move, but the market is currently somewhat stagnant. With the 30-year mortgage rate above 7%, studies indicate that a one percentage point increase in interest rates can reduce demand by about 16% to 18%. This makes intuitive sense, leading to the expectation that if rates start to decrease, it could ease some economic pressure. If the 30-year mortgage rate declines at a significant pace, it could prompt an increase in existing home sales. When people move, they typically spend significantly more than in a regular year, which could stimulate the broader market. Customers might not be moving themselves, but they see others making changes, which can inspire them to invest in their own homes. We're getting close to that positive change, but we're not quite there yet.

Yes. Steve, just on the promo point, another thought I'd add there is we are cognizant of ensuring that we're not overly training the customer to shop exclusively on discounts. And so we're mindful of what promotions we offer, the types of those promotions and the cadence of those as well as we think about sort of long-term customer growth. Thank you for bringing up the free cash flow for this quarter. We are very pleased with achieving our highest free cash flow since 2021. This reflects the underlying strength of our cost reductions and efficiencies, as well as our management of areas like capital expenditures. Regarding our capital structure, we have been focused on creating options, and this quarter demonstrates that strategy. This optionality is evident in our improved financial profile and free cash flow, allowing us to consider paying down debt. Additionally, this opens up alternative financing avenues beyond the convertible market, such as traditional debt, supported by improved business maturity and adjusted EBITDA. We are encouraged by our strongest adjusted EBITDA since 2021. We feel confident in the ongoing options available for managing our capital structure and will remain prudent and thoughtful about what makes sense in the market and based on our internal outlook.

Niraj, I noticed that the number of direct active customers has increased slightly, the average orders per active customer have also risen, and repeat customers are up too. Could you clarify where the revenue weakness is originating from? Is it primarily due to new customers or other segments? That would be helpful.

Yes, Oliver, if we look at the KPIs, what we saw this quarter, remember that active customer number that's an LTM number that continued to be up a little bit. And obviously, that's been going in the right direction over the last few quarters. Disaggregating sort of orders in AOV though, you saw orders down while AOV was slightly up. And the combo of those two things will lead you to that revenue softness of negative 2%; so negative 1.7%. So that's really what you're seeing playing out there. It's just a little bit of order softness offset by some AOV. Again, it's the AOV isn't anything unusual and you spoke to that earlier on. We're back to a point of seeing normal movements in AOV. And obviously, what we're focused on is continuing to drive customer acquisition, order capture and pairing that with wherever the AOV is to help drive revenue overall.

What I would emphasize is that we have more detailed metrics that we use to run the business, and I'm not as familiar with these higher-level figures. However, what we observe is strong customer engagement reflected in the metrics we track. The engagement must be understood in the context of the market environment. This is where we can see ourselves gaining market share, even though the market is experiencing a downturn. Our decline of 1.7% occurs within a market that has contracted by approximately 10%, indicating that we are capturing some share. However, it is important to note that the overall market size has decreased. This is the key takeaway.

I will now turn the conference back over to the Wayfair team for the closing remarks.

Well, I just want to thank everybody for joining the call and we appreciate your time. We're excited about the position we're in and the things that we're doing and the way it will play out. So thanks for your interest in Wayfair.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.