Wayfair Inc. Q3 FY2024 Earnings Call

Good day, and welcome to the Wayfair Third Quarter 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. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome James Lamb, Head of Investor Relations to begin the conference. James, over to you.

Good morning and thank you for joining us. Today, we will review our third 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 fourth 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, 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 any 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. I'm excited to share our third quarter results with you today. Q3 marked another proof-point of resilience for Wayfair with further market share capture in the face of sustained challenges in the category. Once again, we navigated a dynamic consumer environment while driving further discipline on costs to achieve a mid-single digit adjusted EBITDA margin for the second quarter in a row, but that's just one piece of the picture. As I've mentioned many times before, our North Star is driving adjusted EBITDA in excess of equity-based compensation and CapEx, and we're pleased to be making noteworthy improvements across each one of these, totaling almost $100 million year-over-year in Q3. The third quarter exhibited a continuation of choppy macro trends we've seen across 2024. Consumers remain trepidatious in their spending patterns and are demonstrating more price elasticity than we saw in the early months of the year. While we were pleased with the response we saw over Way Day at the start of the quarter, which we ran as an extended event for the first time this fall, it has become clear even as we exited September that we were seeing a broader pullback by shoppers in the lead-up to the election. Attention is focused away from the home right now and when customers are in the market is increasingly for lower investment, lower consideration purchases versus larger ticket items that represent our traditional area of strength. We remain optimistic that pieces are coming together to support a category recovery in the quarters to come. While it will take some time to play out, this improvement is poised to provide some relief in what has become a historic slowdown in the housing market. Redfin published an analysis at the end of Q3, noting that just 25 of every 1,000 U.S. homes changed hands in the first eight months of the year, the lowest level they saw in their study running back to 2012 and more than 30% below the turnover levels back in 2019. Now as we've said for many quarters, we are not running the business with the expectation of a recovery in any specific time frame. For more than two years, we've done two things simultaneously: driving cost efficiency and spending discipline to run the business profitably in a recessionary environment and setting ourselves up to be a considerable beneficiary when the category does return to growth. You've seen the former quite clearly with what is now nine sequential quarters of compression in our fixed costs and the third quarter result that is the lowest SOT G&A we've had since 2021. The latter you've seen us demonstrate across several vectors. For much of 2023, our mantra focused on the core recipe, bringing the best combination of competitive pricing, fast delivery and broad availability together into an offering that wins customer orders day in and day out. Across 2024, we went a step further by concentrating on strategies to drive mind share and frequency, including the three major initiatives we've spoken to several times. Even if customers aren't shopping for their homes at the moment, when that time does come, we want to make sure Wayfair is their first destination. These efforts include many things such as our brand refresh back in March and the launch of our first large format Wayfair branded store over Memorial Day weekend. Our new initiative is our loyalty offering, which just began rolling out last week. For $29 per year, Wayfair Rewards customers will unlock exceptional value and experiences with benefits including 5% back on purchases, free shipping on all orders, access to exclusive shopping events, special offers and a dedicated members-only support line. We know how much investors love math, so let me walk you through the business model of Wayfair Rewards at a high level. Our average customer typically shops on Wayfair about twice a year, spending around $300 per order. Priced at $29 per year, the 5% back benefit would be roughly breakeven for our average shopper. Our goal is to push customers out of that two orders per year bucket into the three orders per year bucket or even higher. While we have more than 20 million active customers who have placed at least a single order over the past 12 months, about a tenth of those are shoppers that have made four or more orders in the same timeframe. We see an important opportunity to grow that figure given shoppers typically purchase in the category 6 to 8 times per year. There's a flywheel we see from customers that grow their shopping occasions on Wayfair, as they increasingly spend more time on the site, browse a broader selection of the catalog and are more likely to shop through our app. These behaviors are self-reinforcing, and we see that the path for a shopper to move from three to four orders per year is even quicker than the path from two to three. Customers who shop four or more times on Wayfair in any 12-month period not only spend more but also are nearly a third more likely to come to us via free traffic. So growing that cohort is highly beneficial to margins. With the benefits of Wayfair Rewards, if that average customer now makes an incremental third order on Wayfair versus a competitor, we've grown our share of wallet by 50%. Those three orders at $300 a piece are worth $900 of total revenue, $45 of which goes back to the customer thanks to the program. Accounting for the annual fee, we've now nicely grown revenue per customer per year profitably; that doesn't even include the efficiency on advertising as Wayfair Rewards customers are much more likely to return on a direct basis. There's tremendous potential here to drive more frequency amongst our existing as well as new shoppers. We're excited about all the different ways customers will be able to interact with the new program from deal hunting in our member-exclusive sales to saving up rewards over time for big aspirational upgrades. One of the areas we're excited to stimulate is in the frequency portion of our catalog, like kitchenware, tabletop, decor and bedding, where the benefit value really stands out. We plan to lean into the 'treat yourself' angle of the program and encourage customers to use their rewards for all those upgrades and finishing touches that they have been dreaming of but may not have had the budget for. We're also eager to bring the program to new movers and project shoppers like renovators or remodelers. These are customers with high category needs who can draw a lot of value from the program. We've been focusing on these audiences for some time across our marketing and sales organizations, and we're excited to incorporate the value proposition of Wayfair Rewards in those outreaches to better attract their full business. You've likely seen some of this marketing outreach since the launch of our brand refresh. As we discussed right after the debut in the spring, this was years in the making, and we've been extremely pleased with the results we've seen in the months since. Much of our work has been focused higher in the customer acquisition funnel as we've increased our investment in television, social media and streaming audio and video. Since Q1, we've seen nice improvements in qualified recall rates, which measures how well customers recall seeing any advertising from Wayfair across any channel. This is an important high-level view of how our advertising is resonating with consumers and to what degree they recall key details, like our product message and identity. In fact, we are now ranked in the top 10 among major retailers. When we launched the Wayborhood, we talked about driving creative content that could exist across our portfolio of advertising channels and serve as a foundation for many years of marketing campaigns to come. In fact, in the past few weeks, we've rolled out our first major update to the Wayborhood with our holiday chapter and are in active development on more content for 2025. We've seen very healthy ROI on the first iteration of the campaign, with strong results when it comes to brand linkage and awareness as customers are quickly coming to recognize the Wayborhood as a symbol of Wayfair. This has translated to positive movement in our core metrics, direct traffic and, even more importantly, revenue per direct visits. Back in the spring, I noted how the launch of the campaign came alongside a refreshed view of our channel mix as we stepped more holistically into parts of the advertising funnel where we had been lagging behind. It should come as no surprise that influencer marketing has grown to be an incredibly important way that customers are exposed to the category. Shoppers are now routinely looking towards creators across YouTube, Instagram Reels, TikTok and more for inspiration on their next home purchases. Our reach and influencer marketing today is quite small relative to potential, and we're excited to scale it. Based on feedback from the creator community, we've made significant investments in improving the terms and technology supporting our program. Creators are eager to work with Wayfair because we treat them with the same mindset we treat our suppliers. We succeed when they succeed. This plan is working. We have dramatically increased our monthly piece of content produced by the nearly 4,000 and growing creators we've partnered with. Over the summer, we've amplified our influencer content and are seeing promising returns on ad spend for the dollars we've tested. In fact, we've seen payback windows that are on par with what we find on lower funnel social ads, all while attracting what we expect to be higher lifetime value customers. We have a dense product roadmap that will allow us to scale breadth and depth of activities with influencers in partnership with our suppliers across the major platforms. This will open the door to working with an even wider field of creative talent as we get into 2025. The ROI here is clear to us, but we want to make it clear to you. We're still operating within our rigorous payback thresholds that extend up to one year but are often much quicker. As I mentioned at the outset, we remain laser-focused on driving healthy profitability while setting ourselves up for success as the category rebounds. That has been the core goal across all three of our major initiatives in 2024 to foster customer loyalty and spur repeat business while driving economic value. By leaning into marketing strategies that build brand affinity and introducing programs like Wayfair Rewards to enhance the customer experience, we're not just aiming for short-term gains, rather building long-lasting relationships with our customers that will be accretive on both the top and bottom lines. Thank you. We hope you all have a festive holiday season. And now, let me pass it to Kate to go through our financials.

Thanks, Niraj, and good morning, everyone. Let's dive into our third quarter results, beginning with the top line. Net revenue was down 2% year-over-year in Q3 or down about 7.5% on a sequential basis, closely in line with the sequential pattern we saw in 2023. This is driven by orders down 6.1% versus the year-ago period, modestly offset by AOV, which was up 4.4% year-on-year and down 1% sequentially, again, in line with what we would typically expect to see in the seasonal cadence moving from the second to the third quarter of the 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 for the quarter was 30.3% of net revenue. Back in August, we talked at length about the changing dynamics we have seen in customer price sensitivity and the opportunity we identify to lean on take rates to drive incremental order capture. We heard many questions from investors around how this differs from funding promotions. So let me take a moment to address that because the answer fundamentally comes down to magnitude. For years now, we've seen robust interest by suppliers to participate in promotional events, where you'll see headline items at prices that are 20%, 30% off or more. These discounts are aligned in partnership with our suppliers and are funded through a reduction in their wholesale price, which we then reflect by lowering retail, while our gross margin remains resilient throughout. That's part of the reason why we've been happy to ramp up the number of promotional events and grow existing events like we did with Way Day last month. Promotion remains a critical marketing tool to drive customer engagement at a moment in time when the focus is just not centered on the home and supplier demand to participate in promotions remains quite high. Now when we talk about making our own investment into lower take rates, the scale is very different from the discounting you'll see from suppliers and promotion. The magnitude of the investment here is in the tens of basis points at the consolidated level, hence targeting gross margin in the lower half of our 30% to 31% range. Across our nearly 10 million orders per quarter, we're able to collect a tremendous amount of data on price elasticity and can with a highly tuned degree of precision determine exactly which classes and geographies would see an order lift from a very modest reduction in the take rate. As we've said for some time, it's considerably more valuable to multi-quarter gross profit and adjusted EBITDA dollars to have an incremental order come in at a gross margin in the low end of that range than to miss out on that order because we were keeping our gross margins at the top end. We're pleased with the results we're seeing so far as we've made this price investment, and you should expect that this will continue as we exit this year and enter 2025. Of course, the other question we hear from investors is, why make this investment if you still are seeing orders and revenue contract year-over-year? Our response to that is to once more point to the share picture. As Niraj said earlier, our ability to outpace growth of the category while still driving a strong margin profile for the business allows us to capture share now and sets us up for significant strength when customers begin to shop for the home in a more robust fashion once more. Now moving further down the P&L. Customer service and merchant fees were 3.7% of net revenue, while advertising was 12.3%, that was slightly higher than where our advertising margin had been in recent quarters as a result of the renewed investment opportunities Niraj outlined. We're excited for the major unlocks we are seeing across the advertising funnel but are keeping a steady hand on the wheel as we ensure that each dollar is spent with strict adherence to our payback windows. Our selling, operations, technology, general and administrative expenses totaled $388 million in the third quarter, a more than $70 million improvement versus the third quarter last year and $274 million improvement on a trailing 12-month basis. As I talked about investing in gross margin and advertising earlier, those of you who have followed Wayfair for years may have had flashbacks to our history of the investment cycle at the expense of profitability. What we've made clear over the past two years is that Wayfair is now fundamentally a different company than we were in the past. We are at a level of scale and maturity where we can both invest for growth and drive profitability at the same time. So when I talk about compressing take rates or leaning into advertising due to their quick payback, you can see that we are funding these investments through further discipline as we manage our fixed cost base, a paradigm we will continue to uphold. Ultimately, we are focused on growing adjusted EBITDA, less CapEx and equity-based compensation measured in dollars. Our plans that are underway are progressing well, and this is part of why we are comfortable committing to 2025 adjusted EBITDA dollars being higher than 2024. Altogether, we generated $119 million of adjusted EBITDA in the third quarter for a margin of 4.1% of net revenue. As Niraj mentioned earlier, this was our second consecutive quarter of mid-single digit adjusted EBITDA margin, and we have now proven that we can operate at this level despite year-over-year revenue contraction. We ended the quarter with $1.3 billion of cash and equivalents and $1.9 billion of total liquidity when factoring in our undrawn revolving credit facility. This was, of course, before we bolstered our cash balance further with the close of our inaugural high-yield debt offering in early October. We saw investor demand many times larger than the $800 million that we raised, which was a testament to the tremendous work we've done on driving profitability across the business. With the rapid improvement in our financial profile and movement across rates and credit spreads, we saw this as an opportune time to derisk the balance sheet by effectively prefunding our upcoming convertible maturities in 2025. As I've said from the beginning of the year, we are laser-focused on deleveraging the business over the years to come, and we will use these proceeds in combination with our own free cash flow generation to handle our coming obligations. Now rounding out the cash flow statement. Cash from operations was $49 million in the third quarter, offset by capital expenditures of $58 million. This CapEx was a bit lower than our guided range due to a combination of timing and further expense rigidity on our part. So while there will be some catch-up in Q4, the net will still be lower than the run rate or Q3 guide implied. The end result was free cash flow of negative $9 million in the third quarter. Let's now turn to the fourth quarter guidance as we round out the year. Beginning with the top line, quarter-to-date, we are flat to down slightly year-over-year and expect to end the full quarter down in the low-single digit range. This contemplates sequential seasonality in line with what we saw last year. While we're pleased with the strength we saw on Way Day and are excited for the holiday season ahead, we're also cognizant that the weakness in the category on top of all the distractions facing consumers right now creates a challenging operating environment. Turning to gross margin, we would guide you to the lower end of the 30% to 31% range once again, as we continue to lean in on take rates in the strategic areas where we see valuable payoffs in order capture. Customer service and merchant fees should be just below 4% again as well. Advertising should end up in a range of 12% to 13% of net revenue and likely towards the upper end of this range. This is higher than in the past few quarters as we see clear demonstrable evidence of high-value opportunities to lean in here to drive further share capture as we get into 2025. It's important to bear in mind that many of the dollars spent today are driving order capture in the next few quarters. Finally, SOTG&A should fall in the $400 million to $410 million range. We saw some spending that had been planned for the third quarter shift to Q4. So there's a slight normalization here as you think about the sequential trend. Following this guidance down the P&L would lead to a fourth quarter adjusted EBITDA margin in the 2% to 4% range. Even with a challenging top line environment, this puts us right in line with the commitment we made to drive at least 50% growth in 2024 adjusted EBITDA dollars, which is a testament to our steadfast focus on cost efficiency. 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 and amortization of approximately $90 million to $95 million, net interest expense of approximately $14 million, weighted average shares outstanding of approximately $125 million and CapEx in a $60 million to $70 million range. Layering this on top of the expectations for adjusted EBITDA and the working capital benefit with revenue up sequentially in the fourth quarter, we would expect healthy free cash flow generation to round out the year. I want to make sure investors appreciate just how unique 2024 has been in the context of Wayfair's long history. We spent many years post our IPO focused primarily on growth and then over the past several years, appropriately pivoted to prioritize profitability. 2024 has marked a return to the pre-IPO form of this business, balancing the dual mandate of driving progress on both the top and bottom line, and there is more to come in 2025. As we close out the year, I want to draw back to Niraj and Steve's remarks from their shareholder letter from February. Our mission is to make Wayfair the best place to shop for the home over not just the next quarter or a year, but the next decade and beyond. We believe the best is yet to come and have never been more excited to execute against the tremendous opportunity in front of us. Thank you. And now, Niraj, Steve and I will take your questions.

Thank you. We are now open for questions. Our first question comes from Ygal Arounian from Citi. Please go ahead.

Good morning. Could you provide more details on the share gain you're experiencing? Can you clarify whether this is primarily driven by pricing or other factors? How do we expect this to evolve as the market improves and you're positioned for that? Also, regarding your commentary on 2025 EBITDA, can you share more about your confidence in achieving mid-teens incremental EBITDA margins? How should we interpret this in a category that may not see improvement as we enter the beginning of next year? Thank you.

Yeah. Ygal, thanks for the questions. Let me run through them and then Kate, if there's anything you want to add, you can jump in. So on the first one around the share gain we're seeing. So I would say since the end of 2022, since the fourth quarter of 2022, we've kind of consistently seen ourselves gaining market share every quarter, hitting all-time highs in the credit card panels that we get on market share. And in terms of how we're doing it, you mentioned pricing, and I'd say, optimizing our pricing to maximize our profit dollars is certainly one thing. Again, we didn't really change pricing that much. I just want to quantify that, right? That was low tens of basis points. But that's just the kind of ongoing optimization we do on the demand elasticity to maximize our position there. But that's just one of many things. So we talked about pricing, but for example, we can talk about improvements we've made in our logistics network. Like, for example, on our prior calls, we talked about consolidated delivery, which is right now live in Houston, Las Vegas, we're rolling that out nationally or we've done a whole series of logistics features and functionality that increases speed, increases customer service levels, that grows the business. So the way we can kind of take market share is actually through a long list of things we can do to improve the customer experience, drive up conversion, gain customer reach, optimize the outcomes we're getting. And so when we look to 2025, we see a lot of ways to continue to grow market share regardless of whether the macro economy in this category is something that's getting better or not. So we're not counting on that. We know it's a cyclical category. We know that consumer discretionary durables are under a lot of pressure now, and that is where we play. Despite that, we see a pretty good outlook for how we're going to grow on the back of taking market share. And then for the 2025 EBITDA, the way to think about the 2025 EBITDA is what we said is, we see 2025 EBITDA dollars being higher than 2024 EBITDA dollars because of the ongoing roadmap we have around what we can do around market share as I just described and kind of scale our business that way, while we also continue to have a good cost roadmap. And as you've seen on that SOTG&A line, for example, it's been eight or nine quarters in a row that you've seen that come down in dollars. And that's just us being very smart about how we're spending money and continuing to find ways to optimize that. But Kate, let me just turn it over to you.

Yeah. I just want to jump in to clarify. Obviously, we haven’t given any 2025 guidance and we don’t typically give annual guidance. But all we have said to 2025 is exactly as Niraj said, which is we are focused on growing adjusted EBITDA dollars. And that continues to be our focus and commitment, and we can do that through the combination of the cost discipline that you’ve seen us execute on over the last few years and the investments that we’re making now to grow revenue. That revenue growth, which we see come in on this multi-quarter basis, on a positive front from adjusted EBITDA dollars will help us grow adjusted EBITDA dollars in combination with that cost discipline, as Niraj referenced how that’s showing up on that SOTG&A line.

All right. Appreciate it. Thank you.

Your next question comes from the line of Christopher Horvers of JPMorgan. Your line is open.

Thanks. Good morning. My first question is about the fourth quarter revenue guidance. You are anticipating a modest slowdown in revenue growth for the remainder of the quarter, with quarter-to-date performance expected to be flat to low-single digits compared to a decrease in low-single digits. You also mentioned pre-election deferrals. Can you clarify that for us? Why wouldn't trends improve if consumers are slowing down ahead of the election and delaying holiday sales later into the quarter?

Yeah, Chris. So I think on that, you've got the election coming up, that's something that may or may not really be determined in one day, that could take a little bit of time. We've got a calendar or the number of days that you're talking about kind of in the holiday season is a little shorter and you have what's been a challenging macro. So you have a bunch of uncertainty. So we feel very good about how we can continue to take share. But you're kind of looking forward to the quarter and you still have a lot of the revenue yet to come and you have some of these uncertainties, you're trying to figure out where you think you're going to be.

How significant has the slowdown ahead of the election been compared to the timing shift associated with having a longer Way Day?

I think we were quite satisfied with how we executed Way Day. We intended it to be a three-day event and incorporated some flexibility into our planning. Notably, we observed that several major retailers were scheduling two-day sales events immediately following Way Day. We chose to leverage the online shopping surge expected during that period, which certainly contributed to our success. However, I don’t believe this will dramatically influence demand in the coming weeks. It seems that the broader economic climate makes predictions more challenging. This is an important consideration as we look ahead to the upcoming holiday season, where there are various potential outcomes that all appear reasonable.

Got it. That makes sense. And then on the operating margin forecast for the fourth quarter, Kate, you talked about we're hitting our goal of mid-single digits. You did 4.1% in the third quarter, but at the same time, the midpoint of the fourth quarter guide is not mid-single digits. So I guess to what extent does that sort of undermine the view of hitting that goal that you've sort of said you would get to and have said that you've achieved that? And then, is any of that just seasonality from a mix perspective versus timing of spending?

Yeah, Chris. Thanks for the question. I guess the way I'd look at it is, obviously, over the last two quarters, we've proven we can operate at that mid-single digits, right? And we've shown, I think, very nice discipline to get to that point. What you heard with the fourth quarter guide is a little bit of incremental investment on that marketing spend. And as a result, we stepped up that range a little bit. And then the net of that is that we think that that is going to drive incremental revenue and incremental adjusted EBITDA dollars over the next few quarters. So I want to be clear that bottom of the final marketing spend is a place that we are quite disciplined. We have very good visibility, and we feel confident in the ability of that to drive both the revenue and the adjusted EBITDA dollars, and that is really where we're driving for.

Thanks very much.

Thanks, Chris.

Your next question comes from the line of Peter Keith with Piper Sandler. Please go ahead.

Thanks. Good morning, everyone. So just sticking on some of the advertising and election dynamics. So you're highlighting the elevated ad spend from the stepped-up influencer marketing. But we're also hearing that ad rates are very high right now around the election season. So how do you think about the ad spend going forward? Do you think the overall costs are going to come down as we get in further into November, December and going forward?

Thanks, Peter. To clarify, certain segments of the advertising market will see higher rates leading up to the election, particularly in local television and other upper funnel channels suitable for various messaging. We take a very analytical approach to our spending, meaning we won't pursue costs that aren't justifiable. If the costs are not feasible, we allow others to take those media opportunities. However, if it becomes economically viable for us, we would consider investing in those channels again. Additionally, when looking at influencers or other lower funnel channels aimed at quick returns, these are very specific to different advertising strategies and aren't typically associated with political advertising. The key takeaway is that our approach to ad spend is strictly data-driven, and we avoid participation in anything that isn't economically sensible. While channels like local television tend to decrease in cost after the election, we don't heavily engage in local television advertising, for instance.

Okay. Helpful. And then, Niraj, a separate question for you is just on Wayfair Rewards. So exciting to have a loyalty program out there. I am recalling it was six or seven years ago, you did have a loyalty program called MyWay, which was ultimately disbanded. So maybe just talk about the learnings from MyWay and what's different this time that ultimately might make this new loyalty program stay?

Yeah. So I think our biggest learning from MyWay was that the kind of customer value proposition that we had associated with the program just wasn't that strong. Now in contrast, if you think about what we're offering on Wayfair Rewards. What I talked about on the call already, if you think about that average customer $600 a year, they're getting 5% back, that tranche of customers would be basically breakeven on the program right off the bat off their annual spend. They pick up those other benefits, the members only customer service line, early access to the sale events. But obviously, the way it works is, if you're getting rewards dollars every time you make a purchase, you have a balance you could use against your next purchase. And that customer is already spending a few thousand dollars in home today spread across many retailers. So you think about that next $2,000, $3,000 that they're not spending with Wayfair, well, if they spend some of that with us, the programs have some cost for them, and they're going to get rewards on that incremental spend. And so it has some of the basic engineering you want in a program that makes it very obvious and easy for the customer to change kind of where they choose to drive their spend. And then there's a bunch of other benefits tied to the program that you say are not economic but they could be exciting to consumers. So I think we've got a very good setup. And I don't think, in hindsight, MyWay did not have as good a set up, and for that reason, we didn't see the traction we wanted with that. Wayfair Rewards, it's new, right? It's only been out there for a couple of weeks. But we're happy with the start of the launch.

Yeah. I would just add, you heard Niraj speak to on the call, the value of loyal customers. And so we have a very good understanding of when someone is increasingly loyal to us, the overall ROI that that drives the customer lifetime value there. And so this program is really designed at driving incrementality from folks who were getting a portion of their spend, but we know we can be getting that third and that fourth order. And we tested the concept with customers we had good reaction. So we're really excited about both how the customer perceives this value prop and what it can do for us.

Very good. Thank you so much.

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

Hi. Good morning. I have a couple of questions. Regarding the home furnishing category, if housing turnover increases, I believe the category will recover. If not, I'm curious about your thoughts on pent-up demand—will that stimulate activity in the category? Where do you think we currently stand in this situation?

I think you've phrased it well. If housing demand and existing home sales improve, it would certainly boost the category. We're noticing indications of pent-up demand, but it's uncertain how long it will take for that to become a significant factor on its own. This perspective aligns with our strategy over the past two years, during which the market has declined by about 25%, yet we've managed to gain substantial market share. Our approach isn't reliant on a recovery in the category; instead, we recognize that while the category was around $400 billion in North America, it's now just over $300 billion, meaning there's still a significant amount of spending happening. We believe there's a strong case for us to capture market share with the initiatives we're implementing. The market is long-tail and fragmented, and we're seeing many players struggle to stand out, leading to loss of market share or even going out of business, which we have witnessed with some major players. Changes are certainly occurring, and this represents a real opportunity for us. Additionally, when the category does improve, there will be substantial growth. However, predicting the timing of that recovery is challenging and doesn't align with our current strategy.

And then a follow-up on just the construct for '25, which I know once you give a construct, we're going to ask all sorts of questions. There's obviously a lot of room when you say EBITDA dollars north of 2024. The question is, you could, let's say, that's up a couple of hundred million dollars or are you going to lean in to market share to the point where you'll just drive a modest outcome? And I'm not looking at dollars and how much it will be up year-over-year, but more on your posture of how much you want to lean in to take market share to just achieve that goal of growing them or actually taking market share in a more meaningful way, if that's the essence of the question?

Yeah. The only thing I'll say, and I'm going to turn it over to Kate too, is that those are interrelated meaning that the things you do to take market share, some of those do not have costs associated with it. That's not really something, but for example, I have a storefront experience. That's a team of people we have on payroll. They're doing hard work every day, rolling out a lot of features that will have an outcome that will drive market share. There's no incremental cost. The ongoing payroll is the cost there. There's other things you would do, like if you talk about advertising, you have a cost associated with revenue. But what we're seeing is, we're going to do the costs associated with profit dollars that it generates. So those who have a very direct relationship. They're not unrelated. But let me turn it over to Kate for any clarification.

Hey, Simeon. I want to emphasize that we are highly focused on improving both our revenue and profits, and we are confident we can achieve these goals simultaneously. What we mean is that we have targeted areas where we are investing, which we mentioned regarding our gross margin last quarter. You saw the impact of that this quarter. We also discussed our marketing expenditures, which we believe will lead to increased order growth and higher revenue capture. In turn, this contributes to the growth of our adjusted EBITDA. We're able to do this while maintaining a disciplined approach to costs, as evidenced over the past few years. Niraj noted that our SOTG&A expenses have been reduced for nine consecutive quarters, totaling more than $250 million on a last twelve months basis. This reduction comes in addition to the cost-cutting measures implemented at the end of 2022 and throughout 2023. So, we are effectively managing our fixed costs while strategically investing in areas that we believe will enhance revenue, gross profit, and ultimately our adjusted EBITDA over multiple quarters.

Okay. Thank you. Good luck.

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Hi, good morning. I have a couple of questions. My first question is about market share. I know this has been a significant topic, and you've consistently highlighted that the numbers indicate Wayfair is gaining market share in a challenging environment. As you analyze the data more closely, is there any evidence that some of the more value-oriented retailers or sites that are doing well right now are having a harder time taking market share from Wayfair, or are they possibly regaining market share from you?

I guess just to clarify what I would say, so it's a large and fragmented market. There's quite a few people losing share. But just to clarify, we're not the only one winning share. And so two other folks have highlighted, who I think have done a very good job also over the last few years. One is Amazon. Now they played at the kind of opening price point commodity items is really where they specialize, but they've done a good job. Another one is HomeGoods, who’s purely brick-and-mortar, and they really play in sort of the decorative accents, the core textile space, lower ticket items, but they've both been taking market share. So there's a handful of folks who are doing well. Much longer list of folks who are not doing well, and that's kind of the landscape. And so I wouldn't say that we expect to be the only winner. But I think there's actually kind of, only a handful of winners and quite a few folks who are on the other side.

That's helpful, Niraj. And then my second question, Kate, it's probably more for you, but again, you've done a great job taking your cost infrastructure down, controlling costs a bit this top line weakness. But as we look into 2025, and still the top line there is still somewhat of a wildcard. But I guess the question is, as you look at your cost infrastructure, how much incremental opportunity is to take costs down further? And then philosophically, if sales were to stay weaker, are you looking to take more cost down or at that point, start to prepare for the eventual recovery in sales and kind of keep the cost of structure in place?

Yeah. Great question. So first, let me just start with how we look at the cost efficiency and the cost opportunity. You've seen us focus sort of up and down the P&L on cost. Obviously, the place where you see that continuing to show up is on that OpEx expense that SOTG&A, although we've also seen nice discipline, for example, on the CapEx expense. And as we're driving towards our sort of ultimate goal of growing adjusted EBITDA dollars less the CapEx, less the equity-based compensation, where you've also seen nice gains from a cost control perspective. You're seeing that sort of combination of those three continuing to improve. So as we look at it, we do see ongoing opportunity for efficiency. You've seen us do in the restructuring in the past and then you've seen ongoing tightening on a quarterly basis on that SOTG&A line. And as a reminder, that line is not just labor, right? That's labor, but it's also P&E, it's R&O, it's some overhead, it's some software expense. You're seeing us be really disciplined in all of these pockets as well as CapEx, equity-based compensation, etc. So when we look at it, yes, we see ongoing places for tightening and places to be quite thoughtful. And as we think about '25, again, what I will say and reiterate is, we are very focused on growing those adjusted EBITDA dollars. So we intend to balance things appropriately to continue to drive that. And that in combination with CapEx equity-based compensation so that adjusted EBITDA less CapEx less equity-based compensation continues to improve.

That’s very helpful. I appreciate it. Thank you.

Your next question is from the line of Curtis Nagle, Bank of America. Your line is open.

Great. Thanks very much for taking the question. I guess the first one just on the AOV came in above expectations but pointed to high price elasticity and press for small versus large ticket items. So just curious what drove the better expected and higher AOV in 3Q?

I think when considering the Average Order Value (AOV), it’s important to recognize that it is an output metric. In our business, we're focusing on selling lower-priced items. For instance, we have initiatives in housewares and decorative accents, and one advantage of our Wayfair Rewards program is that it offers free shipping on every order, which can reduce AOV. However, we also have a luxury platform, Perigold, that is growing significantly, which boosts AOV. Our main aim is to increase the dollars spent per customer each year, and we view market share as attracting more customers and encouraging them to spend more with us. Consequently, revenue results from the number of orders multiplied by AOV. It's crucial to note that our focus isn't solely on low or high-ticket orders; AOV reflects the outcomes of our various strategies. Currently, discussions around AOV relate to inflation or deflation of similar items, such as pricing shifts in beds, but that isn’t the main context at the moment. The impacts we experienced with COVID and ocean freight costs have settled down, making AOV more reflective of business seasonality and our overall performance across multiple areas.

Okay. Got it. Then just would love to ask a question on tariffs. Yeah. I mean, effectively just kind of how we should think about the framework, if we were to go to 50% or 60%. I think last you spoke and it was a while ago, China exposure about 50%. So in terms of just kind of the implications on revenue and margins, how the industry reacts, right? I mean pricing is probably harder to push and capacity that moves right out of China might be lower. So just kind of piecing all that together and maybe an update on what your exposure is at the moment would be incredibly helpful.

Great, Niraj. Let me give some thoughts on this, and then I'll hand it over to you. This is Steve. So yeah, tariffs are something we've certainly seen over the history of this business and seen anti-dumping and we've seen tariffs. And they certainly can have an impact. I would say, on the one side, we're running a marketplace. And so, we really have selection across the broad spectrum of suppliers, and that allows our customers to see a lot of options for products they have and swap in different things. And so, we're able to sort of move demand around in that regard. We certainly had some practice now navigating tariffs. And so, I think when we look out in the future and certainly, it's uncertain exactly how that might play out. We feel much better about the playbook, we will run and the approach we will take to help consumers buffer whatever price increases they may see selectively and certainly imported products. The other side of it is, our suppliers are obviously more directly impacted deeper than we are. And so, they've been working over the last year or two here to just to modify their businesses so they don't have single-source problems as quite as much as they have in the past. And so, I think the combination of all those, we think will buffer this as best as we can and should be very navigable.

Yeah. The only thing I would mention, though too, so in the five years, there's some anti-dumping thing that happened in like wood, some specific categories of wood goods, certain factories from China, which happened years and years ago. But then really the notable things were in the tariffs during the first Trump administration where we got the 10% and then 25%. Well, ever since then, what you've really seen happen is there's been a lot of suppliers who built manufacturing capabilities in Cambodia and Vietnam and Malaysia, Indonesia, and other places, so that they actually have more control over their future should the tariff landscape change, etc. So I would say that the industry now is much more cognizant of that risk than they were five years ago. And so, I think we have kind of a couple of benefits going for us. One is that the industry is definitely in a different position than it was five years ago. The second is, as Steve mentioned, we have 20,000 plus suppliers and we have domestic suppliers. We have import suppliers, our suppliers make goods in Brazil. We have suppliers who make goods in Eastern Europe. So we have suppliers that are quite different from one another. And so we have the benefit of how they compete on our platform for the customer. So yeah, I think you never know quite what's going to happen, but I would say that, that's certainly a topic that folks have been thinking about and doing things about.

Okay. Got it. Thank you.

Your next question comes from the line of Colin Sebastian from Baird. Your line is open.

Thanks, guys. Good morning. So I know there's a lot of focus here on the category challenges and efforts in pricing and advertising. But Niraj, if we sort of zoom out on broader e-commerce platform and technology trends, I mean, there's a lot of change happening around shopping tools and digital assistants and personalization within apps. And so, I wonder how important those initiatives are for Wayfair? And are you seeing any positive impacts perhaps in metrics like just time spent or discovery and browsing even if those aren't converting yet to sales in this environment?

Thank you for the question. This is Steve again. We have been making significant internal efforts. Just this morning, I shared a short pre-earnings video that I created entirely using AI. We are currently navigating the learning curve of effectively utilizing these new tools. It's essential for us to adopt best practices in the business to avoid potential challenges. We must encourage our teams to embrace these tools, experiment, and explore innovative approaches so that we can lead rather than risk falling behind as the market evolves. We have several internal initiatives, some of which are tactical with immediate efficiency benefits, where teams are enhancing their existing processes. Others are more experimental, aiming for potential future disruptions that could greatly benefit our customers or significantly improve efficiency in various areas of our business.

We have been strong adopters of machine learning and data science for a significant period, which helps us with pricing our catalog, managing orders, and personalizing experiences. Recently, with the rise of Generative AI, we have also embraced it vigorously, identifying numerous use cases that yield quick returns. For instance, we manage a vast catalog with millions of items, and we are utilizing AI to rectify dimensional inaccuracies and automate the tagging of merchandising attributes, which are already generating substantial value at a minimal cost. Additionally, we are enhancing the capabilities of our customer service agents to better serve customers, as well as providing tools for our software development teams to boost coding productivity. On the customer front, we are exploring how AI can transform shopping experiences, and we have initiated pilot programs that have demonstrated impressive customer engagement, although it is still early to draw conclusions. We are cautious with our investments, ensuring we don't overcommit while still recognizing the importance of this technology. We are pleased with the progress so far. Our products aren't commodity goods, which poses a different challenge compared to businesses that sell such items. For commodity sellers, agents can easily determine where to reorder items at the best price. However, for exclusive items, the decision-making process is more complex, and agents play a different role that can greatly enhance customer experiences. The real challenge lies with those offering commodity products.

Okay. Thanks, Niraj and thanks, Steve.

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

Thanks, guys. Kate, I think you mentioned you're looking forward to a healthy free cash flow generation in the fourth quarter. Maybe can you confirm the free cash flow that you guys expect free cash flow to be positive this year? And then maybe the capital allocation into next year. Maybe talk a little bit about how you want to invest and what is driving CapEx next year?

Yeah. So a few thoughts. So just first, relative to the fourth quarter, we do typically see positive free cash flow in the fourth quarter. As a reminder, part of that is the working capital dynamic, right? So seasonally, the fourth quarter is typically a bigger revenue quarter than the third quarter. And that in combination with our ongoing discipline around adjusted EBITDA growth and CapEx should drive nice free cash flow in the fourth quarter. Obviously, we haven't given any 2025 guidance. But as we think about CapEx, I'd sort of look at what we've done over the past year. And so what you've seen is ongoing discipline on that line as well. There are really two sorts of components to CapEx that we break out here. One is the CapTech labor piece. And you've seen that continue to come in quite nicely as we've been very thoughtful and disciplined on our team and our structuring. And then, the other is that PP&E line. Within that PP&E line is the investment in our logistics network and the investment in physical retail. And what we've spoken about there is in the logistics network, we're very pleased with where the network is today. So we're not in a growth mode on that network. There's some maintenance CapEx there, but it's really not about expansion. We had ample capacity for the growth that we intend to have. And then on the physical retail side, what we've also said there is we're excited about that opportunity. We're obviously quite pleased with the results from that first large format store that opened in the spring, but we intend to be very disciplined about the rollout there. And so you should, overall, you've seen us throughout this year, bringing CapEx nicely from last year as we maintain that expense discipline and rigor up and down the P&L.

Got it. Thanks. And then maybe on international, it looks like that had a nice improvement in EBITDA versus the first half of the year. On your comment about next year's EBITDA dollars to be positive versus 2024, how much of that is international improvement?

I want to make a brief comment before handing it over to Kate for more details. Over the past two years, we have worked hard to streamline our cost structure and focus on the critical elements for each business line that are essential for driving progress. As time goes on, we are pleased with the advancements we are making in the key areas of each business line. While I'm unable to provide specific guidance, I will now turn it over to Kate.

I am also not going to give you guidance. But I reiterate what you said, which is as we thought about the cost discipline and the selective areas where we invest across the business, right, that's not just specific to the U.S. And what we said was, we started some of the cost restructuring is that, that would be sort of global in nature and how we look at that. And as we think about what we're driving for the business, we're really focused on the business overall and what that looks like across Wayfair Inc.

And in the interest of time, we will conclude our Q&A session here. I would like to hand back over to the Wayfair team for closing remarks.

Thank you, everyone, for joining us today. We are really excited about the current state of the business, the initiatives we have rolling out, and the future prospects ahead. We appreciate your interest in Wayfair, and I wish you all a wonderful holiday season.

Thank you all.

Thanks.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.