Wayfair Inc. Q1 FY2025 Earnings Call

Thank you for your patience. My name is Kayla and I will be your operator for today’s conference. I would like to welcome everyone to the Wayfair First Quarter 2025 Earnings Release and Conference Call. All lines are currently muted to minimize background noise. After the speaker's remarks, we will have a question-and-answer session. I will now hand the call over to Ryan Barney, Head of Investor Relations. You may begin.

Good morning and thank you for joining us. Today we will review our first quarter 2025 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'd 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 second quarter of 2025. 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 2024, our 10-Q for this quarter, and our subsequent SEC filing identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. These non-GAAP financial measures should not be considered replacements for, and should be read together with, GAAP results. Please refer to the investor relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, Ryan, and good morning, everyone. We're pleased to be here today to discuss our first quarter results with you. Despite persistent category volatility that showed a fourth consecutive year beginning with contraction, we were able to once again outperform our peers and take healthy market share while driving meaningful improvements in profitability. Year-over-year growth, excluding the impact of Germany, came in nicely positive at 1%, driven by the U.S. business up 1.6% against the category that we estimate was down over the same time frame. Tariffs are clearly top of mind for everyone. While there is a lot of uncertainty in the broader economy, we have a clear line of sight and strong conviction on what we need to do for both our customers and our suppliers. I want to spend the bulk of our time this morning laying that out, so let's take a moment to take stock of where we stand, what we're seeing, and how we think about the goal forward. As a reminder, tariffs are not a new phenomenon in our category. Going back to the early 2000s, a number of Chinese producers were hit with anti-dumping duties on wood furniture products, some of which were over 50%, which began a migration of production out of China. In 2019, a 25% duty was implemented more broadly on home furnishings products, and that never went away. It's worth dialing the clock back to walk through how we navigated these headwinds, as many of the same forces stand to benefit us today. At the most basic, we operate a platform that connects over 20,000 suppliers to our more than 20 million customers. Our retail platform delivers for the customer by facilitating marketplace dynamics where a supplier competes with other suppliers to win each order, and they do that by offering the best value. Value can come in many dimensions in this category, breadth of assortment, quality, speed of delivery, and price being a few. Like other retail channels, our platform allows our suppliers to choose the wholesale price they want to charge us, and we layer a take rate on top of that for our retail price. Suppliers who offer a more competitive wholesale price often succeed on the storefront because that translates directly into more competitive retail prices for customers. So when an incremental cost like a tariff enters the system, suppliers have to make a decision on how much they want to pass through versus bearing themselves. This is where the marketplace-like forces on our platform work most in our favor. The category we operate in is largely unbranded and highly substitutable. On top of that, we have thousands of partners selling through Wayfair, which means that there is intense competition amongst our suppliers to win each order. Just as we're seeing now, back then there was a lot of speculation about how much tariffs would ultimately increase retail prices. It's important to remember that the tariff is applied to the value of the goods at the time of import, which is a fraction of our wholesale price. There are multiple companies that participate in the value chain, and the burden of the tariff can be shared across that group. In 2019, we saw this playing out in real time. Suppliers that found a way to keep wholesale costs low were the most successful. They could often make up the margin difference with the volume gains by taking share from their peers that chose to pass the cost burden through. This creates a very clear incentive structure for suppliers to offer their best prices at all times. That incentive has only grown more powerful in the years since as we have grown the global base of suppliers and we have provided them with increasingly powerful tools to manage their business. All of this, combined with the prolonged contraction in category demand, has only served to further elevate competition amongst suppliers for each customer order. We are frequently asked by investors what the mix of sourcing by country looks like. Our platform has considerable diversity and sourcing can shift in a very dynamic fashion based on which suppliers have the most compelling offering to consumers at any one point in time. This is an important facet not all investors appreciate. When suppliers in one region raise prices, we may see consumer demand quickly shift to suppliers in another region if they have a more competitive offering. Many of our largest suppliers have manufacturing capabilities spread across multiple countries and can pivot production lines as the cost equation shifts. Our scale gives us a durable competitive advantage here. We can drive healthy competition across our thousands of suppliers in a category that, as I mentioned a moment ago, has vast assortment and high substitutability. We have suppliers that manufacture in over 100 countries across the world, including a substantial base of production that is done domestically. Across dozens of our top classes, such as area rugs, beds, dining chairs, end tables, and more, we have thousands of items made in the U.S. These products come from the thousands of our suppliers that manufacture here in the States. Overall, our wide breadth of products and supply base from around the globe continues to offer us a healthy degree of insulation against tariff headlines. Our team has been interfacing with suppliers nonstop to make sure they have both up-to-the-minute information on the latest developments and a thoughtful partner in planning how to navigate ahead. The broad feedback we're hearing from suppliers is clear. They understand the dynamics of our platform and are not keen to raise prices as they want to continue to take share and win. I've personally spoken with a broad range of suppliers in the past month. They're pragmatic and resilient. Many of these are businesses that have operated for decades through both booms and busts. Each conversation turns to how Wayfair can help support our partners as we have for many years. The first pillar of support we can offer is data, which is how we ground these conversations. Our ability to track spending propensity in real-time gives suppliers a clear view of how they can optimize their pricing to maximize their own economics. From there, we get into how they can take advantage of some of the value-added services we offer to drive better unit economics, such as leaning deeper into CastleGate to offer faster delivery and lower fulfillment costs, which is directly reflected in lower retail pricing. Another increasingly important lever we've been helping suppliers activate is advertising. We know supplier advertising has been a key area of focus for investors for some time, and so we want to spend a few minutes today giving you an update on that arm of our business. When we last discussed supplier ads as part of our Investor Day in 2023, this business was roughly 100 basis points of revenue penetration. We saw that grow by more than 50% in 2024 to end the year north of 150 basis points. For 2023 and much of 2024, our work in growing this adoption has centered around education. This has been a key point of distinction between our supplier advertising business and that of our peers. Many of our suppliers are newer to digital advertising than large consumer brands. For multiple years, our team has been investing time and energy to bring them up to speed on all the ways that Wayfair advertising can drive profitable growth to their businesses. To augment this effort, we've developed an in-house service where suppliers can have internal experts at Wayfair run their advertising campaigns. Our team lends their expertise to define which products will benefit the most from incremental ad spend based on the supplier's competitive positioning on-site today and manage the campaigns to ensure that they'll hit the supplier's financial return target. The traction we've built on this front has been considerable. And as a result, we've seen significant interest from suppliers to participate over the past several quarters. We've ramped the number of suppliers spending at least 100 basis points of their revenue on advertising by more than 40% over the past 12 months. We're thrilled at the response and have been taking a thoughtful approach to unlocking advertising inventory in a deliberate and controlled manner to ensure that we're preserving the integrity of the shopping journey that our customers enjoy so much on Wayfair. We're constantly running tests to measure the impacts of higher ad load on conversion, ensuring that we can continue to grow our footprint while also driving incrementality. The roadmap gives us a clear line to our goal of reaching 300 to 400 basis points of revenue penetration. Our team is driving innovation at all levels of the experience. For example, one of the products we're in the process of developing is co-bidding for off-site advertising. Wayfair has been an industry leader in digital advertising for decades, and off-site advertising will open the door for us to share that directly with our suppliers. It's still very early in our journey here, and this is just one of several initiatives we have underway to drive further adoption among our supplier base. All of our work in this space comes back to a simple principle. When our suppliers delight customers, Wayfair succeeds. That alignment is especially important in today's environment. Our teams are in daily conversations with suppliers, helping them understand how services like advertising can become a critical lever to ensure they're driving enough volume to optimize production flows, or getting a new product launch from a new location off to a smooth start. In a period where margin pressure is high, whether from tariffs or other factors, advertising becomes a way for suppliers to actively manage demand levels. That's the power of Wayfair advertising. It allows our partners to target and capture incremental volume in a way that supports their broader business health. We see tremendous opportunity ahead, and we're moving quickly to deliver the strongest offering to our supplier community at a pivotal time. Before I hand it over to Kate, I want to zoom out for a moment and close with a few important steps we've taken over the past several months to further strengthen the foundation of our business. We began the year with the announcement of the closure of our German business. We determined that continuing to invest in that business was unlikely to provide us with the highest long-term financial return, and so we made the decision to reallocate those dollars towards higher ROI areas. In early March, we followed that up with the announcement of a size reduction across our technology team. As we achieved milestones in our major replatforming work, we had an opportunity to reorganize our team, which remains strong at approximately 2,500 people, while also having more resources focused on new product development, which we expect to pay meaningful growth dividends over time. The third action we took was the issuance of our second high-yield bond and simultaneous refinancing of our revolving credit facility in mid-March. Prior to this, we had roughly $1 billion of convertible maturities coming due over 2025 and 2026. While we had the capacity to handle those with our balance sheet alone, we've always taken a conservative view on maintaining a healthy cushion of cash as we run the business. Given the trading dynamics in the market, we were able to issue $700 million of high-yield bonds at a competitive rate and use the majority of the proceeds to repurchase our 2026 convertible notes at a roughly 5% discount, opportunistically putting cash to work at yields nicely in excess of treasuries and consistently showing progress on our stated goal of deleveraging. We now find ourselves in the strongest capital structure position in many years, with just under $400 million of maturities coming due in the next two years, which we can easily handle with our balance sheet. In tandem, we have a renewed $500 million revolving credit facility that extends to 2030. We've always treated our revolver as an additional safety net that we do not draw on for the day-to-day purposes of running the business, but having this now extended through the remainder of the decade gives us one less point of risk. These steps all enhance our resilience, sharpen our focus, and position us to play offense in a market where many are increasingly playing defense. As we look ahead, our strategy remains clear. Continue gaining share through disciplined execution, deepen our partnership with suppliers, and invest judiciously in high ROI growth initiatives. You've heard us discuss several of those in recent quarters, areas like Wayfair Rewards, our Verified Program, and our physical retail efforts where we recently announced our second Wayfair store launching early next year in Atlanta, and have our first two Paragold stores opening later this year in Houston and West Palm Beach. Periods of disruption have historically been moments where Wayfair pulls ahead, and today is no different. We've deliberately built a platform that thrives in dynamic conditions, flexible, resilient, and efficient. With strong momentum, a healthy balance sheet, and a sharpened operating model, we're confident in our ability to navigate what's ahead and emerge even stronger. Thank you, and now let me turn it over to Kate to walk through our financials.

Thanks, Niraj, and good morning, everyone. Let's dive into our results for the first quarter. Beginning with the top line, we saw net revenue flat year over year for the quarter. This was weighed by the exit of our German business, which led to a 10.9% decline in the international segment, but was offset by robust performance from our U.S. business, which posted a positive 1.6% growth compared to the first quarter of last year. We saw ramping customer activity as we got through March and proactively leaned in to drive our own outperformance against the category. Let me now continue to walk down the P&L. Please note that the remaining financials include depreciation and amortization, but exclude equity-based compensation, related taxes, and other adjustments. I'll use the same basis when discussing our outlook as well. Gross margin for the quarter came in at 30.7% of net revenue. There were several moving pieces in Q1, particularly in the back half of the quarter, so let's walk through what drove those. As we've discussed in prior calls, we have ongoing matters with the Canada Border Services Agency that have driven non-operational drag on the growth margin line. This quarter, one of those matters resulted in non-operational tailwinds as we were able to recognize a refund related to valuation for duty calculations during 2022, 2023, and partial year 2024. We were able to proactively reinvest some portion of this back into the customer experience, which we believe was a profitable investment. In addition to our deliberate areas of investment, we also saw some temporary impact from CastleGate. Many of our suppliers accelerated inventory imports as tariff considerations rose in the back half of the quarter. As Niraj mentioned, we've been working with our supplier partners for months to help them strategize and plan for the incremental costs from tariffs. CastleGate has been one of our best solutions. Our CastleGate network can help suppliers meaningfully bring down fulfillment costs and offer more competitive retail prices to consumers through forward positioning and other efficiencies. We saw many suppliers lean into CastleGate as we closed out the quarter, keen to bring in inventory ahead of increased duties. This accelerated adoption increased upfront costs for us, which weighed on growth margin in Q1, but it will pay dividends in the future as we both collect CastleGate fees from the shipment of the increased inventory and have more availability and more competitive pricing for our customers in the months ahead. Altogether, Q1 gross margin reflects both the benefit from CBSA and the disciplined investments we made to drive healthy growth in a category that remains under pressure. We feel great about the trade-offs we made in the quarter and remain confident in our long-term gross profit dollar trajectory. Turning now to customer service and merchant fees, these came in at 3.8% of net revenue for the quarter. Advertising was 12.6%. This was down quite a bit from Q4 as we had previously communicated. You'll recall that last quarter we talked about the incremental spending investment we made into more nascent channels. The type of spend that is needed to learn and build into our systems, but by its very nature, has a longer-term payback and a startup testing cost. With that surge of experimental spending behind us, we can scale those channels as we build them to full efficiency, which will ultimately get us back down to the advertising margin levels we were at earlier in 2024 and eventually even lower. Selling, operations, technology, general, and administrative expenses were $366 million in the first quarter. This was down by roughly $50 million compared to the first quarter of last year, a reflection of the considerable cost efficiency we've brought to bear across the organization as we have regained our focus on strong execution in tandem with profitable growth over the past several years. In total, we generated $106 million of adjusted EBITDA in the first quarter for a 3.9% margin on net revenue, including a 3.9% adjusted EBITDA margin in our U.S. segment. Our international segment had an adjusted EBITDA margin of 3.7%, bolstered by the Canada Border Services Agency tailwind, as I mentioned a moment ago. We ended the quarter with $1.4 billion of cash, cash equivalents and short-term investment, and $1.8 billion of total liquidity. Cash for operations was negative $96 million, which was a notable improvement from the year prior, despite revenue being largely unchanged year over year. Capital expenditures came in at $43 million, a bit lower than our guided range, due in part to timing as well as the reduced headcount driving lower capitalized labor. Free cash flow for Q1 was a negative $139 million, again, very typical for the first quarter of the year given the working capital seasonality, and a nice improvement of almost $60 million compared to the first quarter of 2024. Now, we're going to take a slightly different approach to guidance this quarter. Our quarter-to-date performance is warped by the timing of Easter and Way Day this year relative to 2024, making a comparison not meaningful. Additionally, there is of course a fair bit of uncertainty around the macro, making it challenging to give a traditional top-line guide for the quarter in totality. Instead, we'll walk through the P&L and highlight where you should expect each cost item to fall if revenue ends the full quarter flat year over year, which would equate to sequential growth right in line with what we saw in the second quarter of last year. Obviously, this is not our standard approach, and while we feel good about the performance to date, we think this is prudent given the uncertainty in our current operating environment. We would guide gross margin to be in the range of 30% to 31% of net revenue, likely at the lower end of the range in keeping with where gross margin was in the back half of last year. Customer service and merchant fees should be just below 4%, while advertising should be in the 12% to 13% range, likely toward the midpoint of the range. Finally, SOTG&A is expected to be $360 million to $370 million for the second quarter, again showing nice compression year-over-year from our ongoing cost takeouts. Following this guidance down, in the context of a flat assumption on net revenue, we would expect adjusted EBITDA margin to be in the 4% to 5% range. Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $70 million to $90 million, depreciation and amortization of approximately $75 million to $80 million, net interest expense of approximately $30 million, weighted average shares outstanding of approximately $128 million, and CapEx in a $60 million to $70 million range. To wrap up, I want to echo the sentiment Niraj expressed earlier. Moments of disruption, whether for macroeconomic volatility, shifting consumer behavior, or tariff-related headwinds, tend to highlight the advantages of our model. We're continuing to lean into areas where we see a clear path to gain share while simultaneously growing adjusted EBITDA dollars and free cash flow in 2025. With a streamlined cost base, a solid balance sheet position, highly competitive supplier ecosystem, and a disciplined approach to investment with numerous exciting initiatives underway, we believe we're set up not just to withstand macro volatility, but to lean in and gain ground while others are retrenching.

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

Thanks, and good morning. My first question is about the top line. Considering that the Easter shift likely provided some benefit in April, can you clarify how much Easter might have been a challenge as we looked at the first quarter? What was the exact impact of the leap day? Additionally, on the sales side, there was a significant increase in average order value. Is this due to rising prices or customers purchasing higher-priced items earlier because of tariff uncertainty?

Yeah. Sure, Chris. Thanks for your question. So let me share some thoughts on the two different questions. So first, on the top line, what I'd say is there's definitely a bunch of timing mismatches this year to last year. You mentioned Easter moving, Way Day, for example, just happened this year. But last year, it's going to happen this coming weekend, the one that's coming up next. The leap year, as you mentioned, you lose a day, right? So it's at about 1% in the quarter or something like that, that you're going to lose because our demand is kind of like fairly spread out. And so the timing is what makes it difficult. So like obviously, we didn't give a quarter-to-date number. And the reason we didn't is we could have shared it, it would be a very big number. It would be up a tremendous amount, but it's a hard number to do anything with. Because Way Day is coming up, right? And so the timing mismatches make things a little harder. But what I'd say is we're seeing demand actually stay pretty strong. There's a big divergence between what we're actually seeing in actual demand and what you're reading in the headlines about the consumer sentiment. Now the consumer sentiment stuff is talking about forward expectations. We haven't hit the forward period yet, obviously, but we're seeing demand actually demand be pretty good. On AOV, no, we have not seen suppliers raise prices. And to be honest, when we've been talking with our suppliers, because we have a large team that works with our suppliers to create joint plans, make sure the inventory in best sellers stays in stock, talks about pricing, what we're seeing on the platform. But we're actually seeing suppliers are very wary to raise prices because they know they're competing with one another. They know the way our platform works is that they need to compete with each other to impress the customer or they don't get the sales. Because it's been a prolonged downturn in this category, a multiyear downturn, they know that it's hard to get volume and they need volume to be efficient. And so what we've seen is that their interest is really the opposite, not in trying to raise price quickly, it's actually trying to not raise price or to defer it as long as possible and do the minimum that they would need to do. So there's a lot of conversations about what they think that could be. But basically, we've not seen prices go up on the platform. I don't know Kate if there is anything you want to add?

Yeah, I'll just touch on the AOV, Chris, because if you look at actually what's been happening with AOV, you can see that AOV year-over-year was starting to go up in Q3 of last year. This is pretty normal, right? So AOV has a lot of moving components to it, one that you referenced is unit price, one is items ordered, but another one is mix. So as we mix in different brands that have continued to do well, like our specialty retail brands or Perigold or high-end brand, there's obviously come in higher AOVs. I think more relevant to think about sort of what's happening with AOV is to look at the sequential and if you look at the sequential, very consistent with what they did to last year. So pretty normalized. And then just to pack it a question around Q1 and a question around quarter-to-date. I think we addressed the quarter to date. On the Q1, obviously, yes, some puts and takes there. We feel quite pleased with our revenue performance because, of course, there is the drag from the lack of the day from the leap year, and also we have roughly 100 basis points drag from the German business, right? So it would be flat and then up 1.6% in the U.S. is very good.

Is there an indication of pull-forward demand? I'm not sure how to measure that. It appears that consumers might be reflecting on the supply chain crisis and the products they had to wait for in the furnishings and electronics categories. Are you noticing or able to quantify how much of this could be pulled forward?

Yeah. Thanks, Chris. So we know what we see in our data. We know what we see in credit card data, and we know what we hear from some other companies in the space. And so we don't believe we've really seen pull forward. The only one subcategory we have where we've seen pull forward was in large appliances. So large appliances clearly had been pulled forward. It lasted a very short period of time. And because of the size of that, that category is very large overall, but we are a relatively new player in it. It's a relatively small category for us. So the amount of pull-forward we directly benefited from is actually very small. It's de minimis for us. So overall, we haven't really benefited from pull forward and we don't think the category has had much.

Thank you, Chris. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Your line is open.

Great. Good morning and thanks for taking my question. My first one was a follow-up on pricing. It sounds like not a lot of suppliers are raising price on your marketplace. Is there any indication, maybe from your conversations with vendors that they're choosing to raise prices on other platforms first, maybe as a test before doing so on Wayfair? Any thoughts there would be great.

What I can say is that, generally, suppliers seem hesitant to increase prices at all. I haven’t heard of any aggressive price hikes from them so far. What I typically hear is that they are being very careful about optimizing their business. They recognize the challenging demand environment and understand that raising prices while their competitors do not could significantly impact them. They want to ensure they stay competitive. In many cases, the dynamics for them mirror ours; we benefit as a platform compared to traditional retailers because we have numerous suppliers competing with each other, making their goods somewhat interchangeable. This situation creates a unique pricing dynamic where raising prices doesn’t solely hinge on direct negotiations with buyers. Instead, it’s essential to consider the end effects. So far, we haven’t observed a willingness to raise prices on our platform. Regarding their potential pricing strategies for traditional retailers, that could be different, but since that's not our model, we have less insight into their aggressiveness in that area. We have heard that many companies feel they cannot absorb increased costs, particularly traditional retailers engaged in direct imports, as they would have to bear those costs themselves.

Understood. And my follow-up is on CastleGate. Kate, is there a way to understand the magnitude of the 1Q gross margin headwind from the CastleGate rush and how we should think about maybe the magnitude of the tailwind from increased CastleGate fees in the quarters ahead? Thanks so much.

Yeah, great question. So sort of taking a step back and thinking through the benefit that this provides us, right? What we want to partner with our suppliers on our mentioned it as a reference is priced, but I'll say more broadly, we really want to help our suppliers understand where can they be advantaged here? And how can they be productive given the sort of uncertainty ahead. And part of that is bringing product into the country in advance in Q1. And as we talked about on the call, we were quite successful with that with our suppliers. You will see a benefit of that manifest in a few different ways in the quarters ahead. So one of those ways is price and availability for the customer, right? So that allows us to maintain really efficient prices for her that allows us to have good availability. And so that helps support the top line. On the gross margin line, obviously, products that you got a CastleGate versus somewhere else are cost advantaged. On top of that, there is a benefit, of course, when we charge the supplier for the pick pack fee when that product ships out. So that manifests in the subsequent quarters. But I think it's important to keep in mind that the benefit is twofold, right? It's both on the top line of having that product here and available and the pricing there and it's on the gross margin line over time.

Understood. Best of luck.

Good morning. Thank you for taking my questions. My first question is about tariffs. I appreciate the insights you've provided. To clarify, as you observe the tariff situation develop, it seems that most of the burden is on your suppliers from Wayfair's perspective. Is that correct? Additionally, are there any strategies that Wayfair is implementing internally to navigate this situation and improve the business?

We directly assist suppliers in two key ways. First, we provide a wealth of data regarding platform trends, which helps suppliers gauge when to adjust their prices. They want to avoid raising prices too early or by a larger margin than their competitors, so our insights into the market landscape help them remain competitive. Second, regarding our CastleGate service, we typically focus on fulfillment centers and the last mile delivery for larger items. This combination enables us to deliver high-quality service and faster deliveries. Our offerings begin with shipping goods via ocean freight, followed by positioning these goods using consolidation centers near their point of origin. After reaching our fulfillment centers—located in the U.S., Canada, and the UK—we handle everything mentioned previously. In Canada, we have facilities in Vancouver and Toronto, while in the UK, we operate a large facility at Goswell Road. This setup allows for direct goods importation, which can be more cost-effective compared to routing through the U.S., as is often necessary in Canada. The second way we assist suppliers is through tailored logistics solutions that leverage our extensive network and resources, helping them optimize costs. This not only allows them to save money but also enables them to maintain competitive retail pricing, ensuring that they are maximizing these benefits.

That's helpful, Niraj. Just a follow-up here because I know we're all having these type of conversations with a lot of different companies. But I mean so to be clear that from a Wayfair perspective, as you're looking at your business, you're not really having to determine what impact to Wayfair's margins could happen or from a sales perspective. This is all really on the part of your suppliers, correct?

What I want to convey is that we have a platform that ensures customers receive the best value by prompting suppliers to compete against each other. With a vast network of suppliers and a focus on mostly non-branded differentiated products, there is significant potential for substitution. This creates an environment where suppliers are motivated to provide excellent value to customers. However, we also consider factors like price elasticity, supply and demand, and how pricing influences consumer demand. Currently, the category we are dealing with has faced declining popularity for several years, resulting in lower demand levels. This might explain why we haven't seen as much demand reduction compared to some other discretionary categories. We do think about various scenarios and potential impacts based on different outcomes and events.

Thank you. Sorry.

No, I would echo what Niraj said. We think our model and our platform serve us quite well here. And we think that helps us be positioned to outperform in this kind of environment. That's quite sort of diligent partnership though with our suppliers and helping them understand the dynamics and the impact and the opportunity for sort of share gain in an environment like this.

Good morning, guys. Thanks for taking my question. I guess I want to ask about the range of potential outcomes and how you think about it and how you can potentially plan for it, meaning we got to pause on the 90-day reciprocals for many of the countries. And I think maybe you could help expand on this a little bit. We've seen some production shift to those countries instead of China? And kind of what happens if those come back at 90 days or we have higher tariffs and more of the input countries, how you think about that, how you can help your vendors and the ability for vendors to absorb costs in that scenario where there's less of an ability to shift production to other countries.

The current environment is quite dynamic, especially with a 10% base tariff on imports from countries outside of China, along with varying reciprocal tariffs that have been paused for 90 days. China faces a different set of challenges altogether. This makes it hard to predict how everything will ultimately unfold, especially with ongoing discussions and negotiations with countries like India, South Korea, and Vietnam, among others. Looking back to 2019, the quick imposition of tariffs prompted many companies to diversify their supply chains, which has led to suppliers developing manufacturing capabilities in multiple countries. They are adjusting their flow of goods based on capacity, skills, and cost efficiency across different manufacturing operations. Factors such as automation, optimization for specific finishes, and raw material supply chains are significant variables in this process. Overall, while suppliers may not have a precise outlook on how things will evolve, they do have a general direction that they are optimizing for. They are working to create flexible solutions that can adapt as necessary. Currently, we have products made in over 100 countries, demonstrating considerable diversification. Our suppliers have a range of possibilities in mind and are preparing accordingly. This positions our platform well for flexibility and agility, thanks to the large number of suppliers we have and the dynamics at play. Is there anything else you would like to add, Kate?

Yeah. The other piece in this environment, and frankly, if the reiteration of what we've been saying for many quarters now, given the complexity that this category has been in that we've been navigating through is, our focus is on controlling what we can control. And we think we've done that quite effectively over several years now of cost takeout. You saw us report an SOTG&A number that was our lowest since 2019. That's multiple years of work to get there. So we've kept really tight control of our cost structure, and this allows us to enable to deliver what's best for our customers by partnering with these suppliers. So we have very good cost controls, we have a wide range of suppliers across a wide range of countries. And overall, that allows us to position the best product, the best opportunity for our customer to buy what she needs. And doing that enables us to gain share, and we're quite confident in our ability to do that going forward.

Okay. That's really helpful. And maybe to follow up on the opportunity to take share and tie that into the advertising strategy in this environment. Kate, you mentioned leaning in a little bit as things were going better than expected, maybe not characterizing that perfectly. But how do you think about your advertising message? Is there an opportunity to kind of make that message to the consumer or come to Wayfair to get better value in this type of environment and stepping into that over the course of the year?

Sure, I'll share some thoughts and then pass it to Kate. Regarding our marketing spend, I want to emphasize that we measure it based on the returns it generates. We have tightened those paybacks and continue to maintain that strict approach. We don’t set a budget and spend it without considering the signals we're receiving. We ensure it delivers a return. Part of our spending goes toward brand building, which has longer paybacks, while other aspects are more transactional and yield returns more quickly. However, all our initiatives still aim for relatively short paybacks. We have identified certain channels that are large and others that are emerging, and we see an opportunity to grow profitably in those areas. Our primary goal is to increase EBITDA dollars, so we focus on finding the optimal balance between costs, whether it’s in the cost of goods sold or operating expenses, to maximize profitable growth. That’s how we are managing this, and we are observing the results. Kate, do you have anything you’d like to add?

I think Niraj said it well. Our focus is on growing adjusted EBITDA dollars. And again, we've done that for quite some time now. And we'll continue to do that. On the marketing spend, specifically, I think maybe what you're referring to is it did step up in Q4. And that was, as we explained at that time, that was we saw some opportunity where we had actually left dollars on the table, frankly, because there was an opportunity to invest further there. That will manifest on a multi-quarter basis over time. There was also some of that testing that Niraj spoke about. And you saw it come in quite a bit this quarter relative to Q4 as we had foreshadowed on the Q4 call. We are excited about what we're seeing in testing. We think that there's opportunities and unlock here that will manifest over time.

Good morning. Thank you so much for taking my question. It sounds like your message is, listen, we've got a lot of benefits from tariffs. This is many more benefits than drawbacks. The big unknown is what's going to happen to the demand environment. So with that being said, is it right for us to continue to use this incremental decremental margin of mid-to-high teens as we try and synthesize what the model looks like over the next couple of quarters? And then longer term, does Wayfair need to make any adjustments to the extent that this tariff regime stays in place such that its margins would be permanently impacted? Or is that not realistic given that the benefit of time would provide more flexibility to make any changes and adjust accordingly?

Thanks, Michael. I want to clarify that comment on benefit before passing it over to Kate. To be clear, I'm not suggesting that we gain from tariffs. Instead, in a situation with tariffs, our business model, which includes a large number of suppliers and allows them to compete with one another while focusing on substitutable categories, creates a more advantageous environment compared to a traditional retail model. In traditional retail, we buy goods from a limited number of factories and act as the importer of record. If tariffs arise, we would find ourselves in a difficult position since our plans for the next 12 to 18 months would be set. So it's more about relative advantages rather than claiming that tariffs are directly beneficial. Now, Kate, I’ll let you take over to answer the question.

Yeah. So Michael, we remain quite focused on flow-through and continuing to drive growth in adjusted EBITDA dollars as we actually just referenced a minute ago. And you saw that pan out quite nicely this quarter, right? And so there's a few different moving pieces on that. You've seen us continue to take in that SOTG&A line and get real structural efficiency there that has been enduring now for quite some time, and that's allowed us to invest in areas like the marketing spend and still grow adjusted EBITDA dollars. And in fact, that panned out quite nicely, as I said, in the first quarter of this year. And we believe we'll continue to going forward. So our focus remains on growing those adjusted EBITDA dollars, growing that concept of owner's earnings that we've talked about, and that continues to be our long-term focus.

Okay. My follow-up question is maybe your stock has been adversely impacted by this tariff situation, there's probably a lot of misunderstanding given what's been helpfully presented today. Is there enough capacity in other markets outside of China to absorb the demand for the production of home furnishings to make it a relatively seamless transition as this potential situation continues such that there wouldn't be a lot of disruptions for Wayfair as your platform shifts to wherever the demand or supply, I should say, goes?

Certainly. I agree with your observation that the stock performance has not been strong and that there may be misunderstandings regarding our strengths and progress. To address your question about capacity outside China, there is indeed a significant amount of capacity available. I've mentioned before that demand in this sector has been weak for several consecutive years, resulting in operating levels that are much lower than available capacity. Companies tend to source products based on the best value from various countries, and changes in tariffs will influence pricing dynamics across different regions globally. While disruption doesn't equate to an easy transition, our integrated logistics platform positions us advantageously because it operates in all these locations already. This gives us a leg up over competitors. We collaborate with a broad base of suppliers globally, including countries across Asia, emerging markets like Turkey, India, and Brazil, as well as various nations in Europe and Eastern Europe that are looking to expand their export capabilities. Therefore, our setup grants us a significant advantage in this situation.

Understood. Thank you so much and good luck.

Good morning, everyone. My first question, I wanted to ask. The last time we had some tariffs, we saw some price increases. And I think your margins were just fine to all the points on the take rate. There was a little sticker shock in initial couple of quarters and sales slowed a little. It doesn't sound like that's happening, but thinking about if that happens, where you see some sticker shock from pricing. How do you think about managing it given that you've made a lot of positive changes now to the P&L? What's the contingency plan? Are there offsets to be able to manage with potential deleverage?

I can address part of that question and then let Kate add more insights. Looking at the changes since 2019, there are a few key points. First, the range and quality of suppliers we have globally have significantly improved, with the number of suppliers roughly doubling since then. The geographic reach has also expanded even more. Additionally, our logistics capabilities have advanced greatly. This includes the consolidation of operations, an increase in the number of international locations, and a broader range of freight lanes we manage. Our logistics and technology integration is now much stronger, making it easier for suppliers wanting to scale up to utilize our services. Around the same time period, we also undertook a significant restructuring of our technology stack, which has taken several years to progress. We're now at a point where we can focus on developing new features, which historically has been a key growth driver for us. This means we can finally allocate tech resources towards initiatives like enhancing our loyalty program, expanding our Wayfair verified offerings, and improving customer service through our B2B sales force. These advancements create substantial opportunities for growth in our business, even in challenging market conditions, as there remains considerable market share to capture. Kate?

You asked how the cost changes might affect us differently in 2019. I believe your question already touched on this. We're in a much improved cost position, being more efficient in our P&L compared to 2019. We've demonstrated this over several years now. Our ability to identify opportunities to engage with consumers, focusing on the growth of adjusted EBITDA and free cash flow, is significantly different now due to the structural changes we've implemented. This is why we are confident in our commitment to increasing adjusted EBITDA and free cash flow by 2025, and we're optimistic about the path ahead.

My one follow-up, just thinking about the vendor community, Niraj talked a bit about this. In thinking about China-based vendors, have you seen a lot of movement already? And we think about some of the makers of product, if you're a single source origin, Wayfair should be no worse off if a certain table with some modifications appears on many different platforms of your competitors and you that price in theory goes up. But is there a situation in which some platform, a vendor moves production and a price can be lower? Like how do you think about that, like the risk that someone else moves a vendor quicker and someone else's platform has a lower price? Why shouldn't Wayfair be disadvantaged in that situation?

Yeah. So again, there's two types of competitors. So there's competitors who are also platforms. There, I would talk about the scale of our team, the size of our team that directly works with suppliers versus them solely having to work with us through the technology we offer them, and that's a real advantage we have there. And then there's kind of what we've built for logistics that's bespoke for home goods. So there's some advantages we have there. I would say, by enlarge, with the biggest platforms out there, we work with a very large breadth of suppliers and so I'm not sure that they have a substantial advantage over us when you think about the number of the other platforms. And I think we have an advantage over a number of them. So it's a balancing act. We're one of the strongest for sure on that side. Then if you talk about traditional retailers. I think there, you have them sourcing from a very specific company, and they generally have sourcing offices in one, two, three, whatever numbers of countries. They focus on certain regions and then they are directly sourcing from these factories. You could say, okay, well, they'll stop sourcing from one, we'll start sourcing from another that then becomes a question as to know what factories they want to do that from. Have they been working with them already or not? If not, that start-up period, it could take a while, but they would have the ability to directly write a purchase order to that company. But I don't think that, that's a very fast thing. So then the question is like, which model is faster, I would argue that the platform model where you're already working with folks particularly where you can provide the logistics would be generally faster.

Okay, thank you. Good luck.

And I will now turn the call back over to the Wayfair team.

All right. Thanks, everybody, for joining. And we hope you have a good spring and start of the summer.

And this concludes today's conference call. You may now disconnect.