Wayfair Inc. Q3 FY2025 Earnings Call

Hello, and thank you for waiting. My name is Tiffany, and I will be your conference operator today. I would like to welcome everyone to the Wayfair Third Quarter 2025 Earnings Release Conference Call. I will now turn the call over to Ryan Barney, Head of Investor Relations. Ryan, please go ahead.

Good morning, and thank you for joining us. Today, we will review our third quarter 2025 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Kate Gulliver, Chief Financial Officer and Chief Administrative Officer; and Fiona Tan, Chief Technology 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 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 filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and the 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 third quarter results with you. Q3 was a great success. Share gain further accelerated with revenue growing 9% year-over-year, excluding Germany. This came in tandem with more than 70% year-over-year growth in adjusted EBITDA. Our 6.7% adjusted EBITDA margin marks the highest level achieved in Wayfair's history outside of the pandemic period. As we've promised, substantial profitability flow-through is powered by a strong contribution margin and fixed cost discipline as our business has returned to growth. As we shared in Q2, we see the groundwork we've laid over multiple years directly driving share capture and profitability despite a category that remains stubbornly sluggish. Existing home sales continue to bounce along the same multi-decade lows we've seen since late 2022. Decreasing short-term interest rates certainly loosened financial conditions, but mortgages are a longer-duration product and will require more relief in long-term rates before we start to see a broader unlock in mobility. In that context, it's important to note that our plan to grow is driven by Wayfair-specific factors and is not reliant upon a recovery in the housing market. In spite of the depressed housing environment, we've been encouraged to see that the category has moved past its multiyear trend of double-digit declines. Based on the data we have, the category started down low single digits and has been inching closer and closer to flat over the course of 2025, though it remains structurally underspent against the pre-pandemic baseline. This directional improvement is all the more encouraging given the uncertainty our industry has faced around the evolving tariff landscape this year. These changes have only served to reinforce the relative strength of our model, consistently delivering the best value and experience to our customers while simultaneously enabling our suppliers to win share and grow their businesses. That strength should be very clear in the KPIs themselves. Revenue growth was driven by order momentum. We saw orders grow by over 5% year-over-year in the quarter, including new orders growing mid-single digits for 2 quarters in a row. Active customers saw sequential growth for the first time since 2023. AOV was up roughly 2% in Q3, driven almost entirely by mix shift as our higher-end brands and B2B outperformed the growth of the Wayfair business. Competition remains intense amongst our suppliers and provides a structural incentive to keep prices as low as possible to win share on our platform. To measure our momentum, we anchor on quarter-over-quarter trends as a barometer of success. Q3 this year was the best sequential growth we've seen in the third quarter since 2019, following strong trends from the second quarter. I'm sure many of you are wondering how much of this is intrinsic growth improvement versus something more transitory like pull forward due to tariffs. The only instances of pull forward we've identified came from a very short-lived increase in large appliances demand back in the early spring and a similarly short-lived increase in vanities late in the third quarter. Neither of these moves the aggregate in a meaningful fashion. We see our outperformance as structural share capture driven by our strong day-to-day execution against the core recipe, the early success of the new programs we've been able to launch, and the broad gains we have brought to bear from our technology team. Since the start of the year, we've highlighted the strong returns we're seeing from initiatives like Wayfair Rewards, Wayfair Verified, and our growing fleet of retail stores. These successes all reflect the deeper engineering resources we've been able to dedicate now that our multiyear replatforming is largely complete. At the turn of the decade, we made the decision to modernize our technology stack, including migration from data centers to the cloud. The simplest way to think about this is that by replatforming our code base, we can now be much more agile and, as a result, meaningfully ramp up the pace of innovation and what we can offer our customers and suppliers. We completed the bulk of our replatforming earlier this year, and the timing couldn't have been better as we are in the early innings of a new phase in how customers shop online. While AI has certainly become the buzzword of late, we've been on the forefront of machine learning for a long time, leveraging algorithms to drive everything from pricing decisions to marketing investments. Today, there is new ground being broken with the proliferation and sophistication of generative AI, and Wayfair is a leader in the application of AI in retail. To that end, I'm excited to have Fiona Tan, our Chief Technology Officer, here today to spend some time diving deeper into the ways we're bringing generative AI to bear across all of Wayfair. Let me now turn it over to her.

Thank you, Niraj, and good morning, everyone. I'm thrilled to join you today to share how our technology teams are shaping the next chapter of Wayfair's growth, powered by a long leadership in AI and machine learning and now by pragmatic advances in generative and agentic AI. Wayfair has always been a technology-focused, customer-obsessed company. Our promise to customers is to make it easy for them to create a home that's just right for them, and the rapid evolution of AI represents a considerable opportunity to deliver on that promise in new ways. Our long history of applying machine learning from the predictive models that power our core pricing and marketing engines to the algorithms that help us classify and organize our vast complex product catalog means we're not starting from zero, but instead scaling from a position of strength, backed by operational discipline to measure impact rigorously. Our investments in AI are pragmatic and results-oriented centered on three key strategic outcomes. First and most importantly, we are reinventing the customer journey. We are moving beyond simple personalization to create truly intuitive and inspiring shopping experiences that guide customers from their initial idea to the perfect product for their home. Second, we power this best-in-class experience by supercharging our operations and our teams. We are embedding AI into our core processes to make them faster and more efficient and have provided generative AI tools to every employee. This allows us to deliver our customers with a level of excellence that is difficult to replicate. And third, we are powering our platform and ecosystem. We are building tools that make Wayfair the best possible partner for our suppliers and are ensuring our catalog is seamlessly integrated into the next generation of AI-driven commerce. Let me walk you through each of these. Starting with the customer, we are using generative AI to make the shopping journey more intuitive and personal than ever before. We think about this as an AI-powered growth flywheel to inspire, engage, learn and personalize. It all starts with inspiration. And we're using generative AI in multiple ways to help customers discover products they love. We developed Muse, our proprietary AI-powered inspiration and discovery engine, to create shoppable photorealistic room scenes to capture the attention of low intent customers and spark discovery. Muse offers a visual browsing experience, entirely powered by generative AI. We then incorporate learnings from Muse into our new Discover tab in our app, offering an endless loop-based shopping experience that turns inspiration directly into action, delivering a measurable lift in conversion as well as visit duration for customers that engage with the tab. In parallel, we're using generative AI to understand what inspires our customers beyond just their searches and clicks. Our new interest-based carousels are driving incremental revenue uplift by matching product to every customer's lifestyle and aesthetic, with contextual signals like location and weather coming soon to enhance personalization. Once a customer is inspired, we engage them with a suite of AI-powered tools that builds confidence and removes friction from their journey. We've evolved our on-site search to be more intuitive using a sophisticated LLM to move beyond traditional keyword matching. This allows us to interpret what a customer is looking for with far greater nuance, connecting to the right products with greater precision. For shoppers who have a picture, but not the words, our visual search allows them to simply upload or snap a photo and instantly find similar products from our catalog, turning real-world inspiration into a shoppable reality. When customers have specific questions, our AI-powered assistant provides instant reliable answers by drawing directly from product specifications and reviews. These interactions feed our ability to learn and ultimately to personalize. This is where we combine AI scale with our unique home expertise. We had our own interior designers annotate nuanced style pairings then used LLM to scale this understanding across our entire catalog. The results are compelling. Customers who see these designer quality personalized recommendations are a third more likely to save, add to cart, or order products, reflecting a much higher confidence in our selections. And we are just getting started. We are now preparing to test a new generative AI feature called, Complete the Look. What's unique here is our proprietary ability to generate a complete styled room scene where the products visualized are directly inspired by real shoppable items in our catalog. This allows customers to move from individual product ideas to a complete shoppable design plan more intuitively than ever before. None of this is possible without world-class execution. This brings me to our second pillar, supercharging our operations and our teams. A core part of our operational excellence is the quality of our product catalog itself. We are using generative AI at scale to improve the accuracy, consistency and completeness of our product information. This makes our catalog more reliable for customers and simplifies the management process for our suppliers. This catalog enrichment is already delivering an impactful lift in add to cart rates. At the same time, we are using AI to automatically detect and process duplicate items, which keeps the customer experience clean and is projected to reduce the cost of this review process by three quarters. With a more reliable catalog as our foundation, we deliver superior customer service. We recognize that the unique nature of our category, which involves high consideration and complex orders, requires a sophisticated approach to service. For immediate 24/7 resolutions on common inquiries, we use fully autonomous conversational AI agents. For the more nuanced situations that benefit from human expertise, we've equipped our associates with a powerful real-time AI copilot, which combines several advanced capabilities. It uses our patent-pending intent-based routing to connect customers to the right expert on the first try, and it uses advanced reasoning models to recommend better, more proactive solutions when a standard replacement won't be enough. This holistic system is designed to live first contact resolution and post-contact satisfaction, all while reducing our cost to serve and driving down waste. This focus on a reliable experience also extends to trust and safety. Our multimodal AI now uses computer vision to detect fraudulent imagery in real time, better protecting both our customers and our suppliers. Just as AI is evolving our operations, it's also up-leveling how we work. We are committed to ensuring that every Wayfarian can benefit from this AI transformation. Our engineers are integrating leading coding assistants to accelerate development cycles, while business teams, in marketing and merchandising use generative tools to automate repetitive tasks and focus on more strategic work. We have provided a generative AI license to every single employee, and we are fostering a culture of hands-on innovation that goes beyond just structured training. We're encouraging our entire team to find new ways to create value with these tools through programs like our Gen AI Innovation Challenge, where any employee, not just technical ones, can submit ideas that solve real business problems. In fact, many of these have already been implemented across the organization today. By using leaderboards and other engagement models, we are making AI experimentation part of our everyday culture. This mindset, where our teams are learning with the same urgency and curiosity we expect of the technology itself, is fueling innovation that translates directly into better supplier tools and richer customer experiences. Finally, our third pillar is about powering our platform and ecosystem. We win when our partners win, and that means using AI to both improve their operations and to drive more qualified customers to their products. For our suppliers, we've developed an AI agent that automates service ticket classification and resolves a portion of inquiries without manual intervention, a truly agentic implementation that we expect to drive measurable savings over time. Simultaneously, we are using generative AI to put those suppliers' products in front of more customers. We've utilized LLMs to rapidly scale and optimize our SEO titles, leading to greater Wayfair presence in Google Search and a higher volume of free traffic. We've also used generative AI to create superior titles and ad copy for our Google Product Listing Ads, driving strong, consistent results and a powerful synergy between our organic and paid marketing performance. This leadership in search is now the foundation for our work in generative engine optimization to ensure our products are not just discoverable, but are selected and recommended by these new AI platforms. Looking ahead, we are actively shaping the future of agentic commerce with a clear dual-pronged strategy. First, we view this as a new additive channel for growth, so we will be where our customers are. This begins with ensuring a vast and specialized catalog is deeply integrated and accurately represented on leading AI and search platforms, including Google, OpenAI, and Perplexity. This provides the foundational third-party truth on our selection, pricing, and delivery promises, but we are moving beyond just discovery to enable seamless transactions. Our plan is to make our catalog fully transactable on leading AI platforms, allowing customers to shop with confidence and ease wherever their journey begins. Simultaneously, we are building deep competitive moats to ensure our own site and apps remain a premier shopping destination. These moats are built on our unique advantages, a powerful inspiration and personalization roadmap, fueled by our proprietary data, our foundational strength in selection and fast delivery, and unique programs like Wayfair Verified that build customer trust and confidence. That belief in our unique advantages underscores how we're thinking about differentiation in the AI era. In a world of AI-driven commerce, retailers with a large, well-detailed catalog of products, verified supply chains, transparent fulfillment, and deep technology capabilities are advantaged. We believe that customer attention will flow to the most trustworthy API, not the loudest ad. The disciplined investments we've made in our core data and technology architecture position us to deploy these technologies safely and at scale. This turns our deep technical heritage into a sustained competitive advantage, and it gives us confidence that we're not only keeping pace with the AI revolution; we're helping lead it. Thank you. And now I'll hand it over to Kate to review our financials.

Thanks, Fiona, and good morning, everyone. Let's dive into our financial results for the third quarter before we move to guidance. Starting with the top line. Revenue grew by 8% year-over-year on a reported basis and 9% year-over-year excluding the impact of our exit from Germany. We saw healthy growth across both our segments with the U.S. business up 9% year-over-year, and international up by 5%. Let me 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 third quarter came in at 30.1% of net revenue, while customer service and merchant fees were 3.7% and advertising was 10.6% of net revenue. As I discussed back in August, our focus is on improving contribution margin, that is gross margin less customer service and merchant fees and advertising, and balancing the trade-offs between these three line items. The structural gross margin improvements we are achieving through initiatives like supplier advertising and logistics provide us with a wider envelope of dollars to reinvest back into the customer experience. We're doing this while driving savings in other lines of the P&L, such as advertising. We think about where the ROI of each dollar of spend is maximized on a multi-quarter basis as we map out the mix of investments in the customer experience and advertising that generates the most EBITDA dollars. The net of this was a contribution margin of 15.8%, up 150 basis points year-over-year and our best result since 2021. The bulk of this was driven by the considerable leverage we saw in advertising this quarter. We're continuing to see the dividends of investments made in prior quarters paying off as well as the compounded effects of efforts to improve the mix of free versus paid traffic. Last quarter, I mentioned the success we've had in driving adoption of our mobile app, and we saw that ramp even further in Q3. In fact, the revenue from our mobile app grew by double digits year-over-year and total installs grew by nearly 40%. Some of this reduction in ad spend is one-time in nature. We ran several holdout tests in the third quarter, which drove the outperformance versus guidance. These tests are important as they help us refine our perspective on incrementality and spend and play a valuable role in refining the machine learning algorithms that drive our advertising operations. Selling operations, technology, general and administrative expenses totaled $360 million for the quarter. In total, we generated $208 million of adjusted EBITDA in Q3 for a 6.7% margin. This is a remarkable achievement, up by more than 70% year-over-year. We ended the quarter with $1.2 billion in cash, cash equivalents, and short-term investments and $1.7 billion in total liquidity when including our undrawn revolver. Cash from operations was $155 million, offset by $62 million of capital expenditure. Free cash flow was $93 million, an improvement of more than $100 million compared to the third quarter of last year. The improvement in our profitability picture has demonstrably changed our capital structure profile. A year ago, our net leverage was more than 4x trailing 12-month adjusted EBITDA. Today, that sits at 2.8x, well over a full turn reduction. Having managed our 2025 and 2026 convertible maturities, we've begun to turn our attention to our 2027 and 2028 bonds, which have strike prices of $63 and $45, respectively. In August, we used roughly $200 million of cash to repurchase about $101 million of principal on our 2028 notes. Given the trading price of the stock, these bonds essentially trade as an equity substitute. So said differently, the $200 million of cash was effectively an offset to roughly 2.2 million shares of potential dilution and future interest expense through 2028, all while reducing the gross debt balance outstanding. We are operating with a dual mandate: reducing leverage while also managing dilution, and you'll see us continue to balance these goals opportunistically in the future. Let's now turn to guidance for the fourth quarter. Our quarter-to-date performance is skewed by the timing of our fall, the Way Day, which ran in early October last year and is running right now for 2025. Controlling for that timing, we're seeing strong performance over the first month of the quarter and we're excited about the holiday season ahead. Going forward, we're planning to move away from giving quarter-to-date results given how often it is contorted by comparability issues and will instead just anchor on the full quarter guide. For the fourth quarter, we would expect net revenue to be up in the mid-single digits year-over-year, which includes the roughly 100 basis point drag from the impact of closing Germany. Turning to gross margins, we will continue to anchor you to the 30% to 31% range, likely coming in at the low end of the range once more as a function of both our reinvestment as well as the typical seasonality we see in the holiday quarter. Customer service and merchant fees should be just below 4%, and advertising should be in an 11% to 12% range of net revenue. As I mentioned a moment ago, the outperformance we saw in Q3 was driven in part by the holdout tests, which were onetime in nature. While we're certainly making strong progress on driving structural improvement in ad cost as a percentage of net revenue, we would expect Q4 to come in modestly higher than Q3 in the absence of these tests on top of our typically higher spend in the final months of the year. The net of all these moving pieces should get us to a place where we drive a contribution margin that is in line with where we were in the second quarter of this year and a considerable improvement on a year-over-year basis. SOT G&A is expected to stay in the $360 million to $370 million range, likely at the top end of the range given seasonality in the holiday quarter and some spend here tied to revenue like cloud computing costs. This continues to be the appropriate run rate to think about as we look to 2026. Following this all down, we anticipate adjusted EBITDA margins in the 5.5% to 6.5% range for the full quarter. Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $80 million to $100 million. This includes approximately $20 million of impact from the CEO performance award approved by our Board in September. You should expect this to become a recurring part of stock-based compensation in the quarters ahead. The accounting treatment begins expensing the fair value of the grant today, but I want to be clear that there are no shares being issued right now nor will any be issued until the share price targets are met. Depreciation and amortization to be approximately $71 million to $77 million; net interest expense of approximately $30 million, weighted average shares outstanding of approximately 130 million; and CapEx in the $55 million to $65 million range. I want to now wrap up by taking a moment to turn the clock back to where we began 2025. In the shareholder letter, Niraj and Steve published in February, they talked about our three core goals for the year: one, focus on tight execution to drive profitable growth through taking market share in what is likely a continued challenging market; two, continue improving the financial position and strength of the business; and lastly, invest in building the five long-term moats of the business. We're very proud of how much we've been able to achieve across each of these. As we turn our sights to 2026, we plan to invest judiciously to grow the business at a rapid pace while growing adjusted EBITDA faster than revenue. None of this would be possible without the work of an exceptional team. So I want to end today with an enormous thank you to everyone that worked so hard to make all of this possible across the entire Wayfair team. And with that, we hope everyone takes a moment to check out the exciting Way Day deals. Thank you. And now Niraj, Steve, Fiona and I will take your questions.

Your first question comes from the line of Christopher Horvers with JPMorgan.

This is Jolie Wasserman filling in for Chris. Our first question is about your expectations for consumer behavior this holiday season, especially since you moved Way Day back a few weeks and stepped away from some major promotions like Prime Day. Are you expecting consumer spending to be more distributed this year, or are you sensing a stronger urgency to respond to the potential 232 tariffs?

Thanks for your question, Jolie. There are a few things to address here. Regarding the tariffs, we haven't really noticed any changes in consumer behavior attributable to them. As we mentioned earlier, the minor pull forwards we observed were brief and minimal. We don’t believe these tariffs have influenced shopping habits. In fact, we expect holiday shopping to resemble previous years. With Way Day, we reverted to the timing we had in the two years prior, which is late October, rather than moving it earlier as we did last year. We concluded that late October is likely the best time for this event, so we're sticking with that approach. Therefore, you can interpret this as us maintaining a seasonal rhythm similar to our traditional practices.

That makes sense. And our second question is just more broadly, how you're thinking about 2026 abilities to lap accelerated share gains, whether price increases are expected to become a bigger driver and also just how you're thinking about getting some more of the gross margin, advertising margin expansions for 2026 more broadly?

Yes, yes. Great. I mean, so for 2026, what I'd say is, we're definitely focused on driving further top and bottom line growth, and EBITDA growth will definitely outpace revenue growth. And I think the way we're going to do that, it's kind of what we've been talking about since the beginning of this year, which is that since late 2022 through now, we've taken share through continued investment and improvements in the core recipe, which is price, selection, speed, and availability. But then what we've been able to do this year is augment that with the two other pillars of growth that we've historically had through the bulk of our 20-plus year history, which is that we always improve the recipe, which is that core consumer value proposition, but then we augmented that with the second pillar, which was really about new programs and innovation. So some examples of what's been added over the last year and is really scaling is, for example, what we're doing in physical retail stores, our loyalty program, Wayfair Rewards, what we're doing with our editorial program, Wayfair Verified. Those are three notable examples, but there's a long list. And then the third pillar, and the third pillar is that we have a technology organization of around 2,500 people. These are software engineers, data scientists, applied science folks, product managers, designers. And these folks, generally, the bulk of their effort is focused on improving the customer and supplier experience, which drives up conversion, drives up traffic, and allows suppliers to do more for customers. It compounds through repeat gains. And what we did for the last two, three years since 2022 is we spent a couple of years working on reshaping our organizational model so that we could be lean and focused and execute well, but we also spent about three years on a very large technology replatforming effort for almost all of our core systems. And as we've gotten substantially through that by the end of last year, we've then seen the technology cycles return to driving the business forward. So that's part of why we're able to launch all the new programs I mentioned in the second pillar, and it's also contributing a lot to the experience, which is the third pillar. So when you take those three pillars of growth, you see how they provide this compounding benefit. You can then see how we've been gaining momentum through this year, and you can see how it should go into next year, you'll see further top line growth, further bottom line growth, and you'll see EBITDA growth outpace revenue growth.

Jolie, I want to touch on your question around how to think about the gross margin and the ACNR for next year because I think that speaks to a really important point that we spoke about a little bit in the prepared remarks, which is thinking about that contribution margin. So the gross margin less the customer service and merchant fees, less the marketing expense gets us to that contribution margin. Obviously, it's been sort of 15%-ish plus over the last few quarters. And we increasingly think that's a thoughtful way to sort of look at the business, right? We want to make sure that that contribution margin is in a very healthy place. And then the flow-through to EBITDA is really strong because that SOT G&A line below that is holding relatively constant. So as you think about that contribution margin staying healthy, that could be some interplay between gross margin and marketing spend and then the flow through being quite strong, that's how that EBITDA dollar growth is really outpacing that top line growth. And we're very focused on the EBITDA dollar growth continuing.

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

I want to first ask about sales, a little follow-up to the prior question. So your top line is running in a place where I think it aligns with the slide deck that you put out, I think, in 2022, mid- to high single digits, if not maybe close to that. Do you think the business is now at this inflection point where it continues to grow at that level? You said it was past some certain technology investments. I realize you can't control what the industry does, but it feels like you've gotten past a bunch of bumps or tough compares plus industry normalizing. So do you think we've gotten past this inflection point?

Yes. So I'm not 100% sure what you're referring to. I think you might be referring to the Analyst Day that we had in the summer a little over two years ago, in the summer of '23 and August '23. There, I think we were talking about kind of the long-term potential of the business, and we provided a view as to how the revenue growth could be kind of meaningfully into the double digits. But when you think about our different lines of business and the initiatives we had and the potential and then getting past the technology replatforming, et cetera, and that we're still very bullish on how this compounding benefit will continue to accrue and when our momentum will climb. And then we also give a view on EBITDA growth and how that could grow over time and get meaningfully into the double digits as well. And you're seeing that play out as we go through time. And we think a lot of benefits are still ahead of us as we get the benefits of volume as we continue to deploy technology, et cetera. So I would say we feel very good about the direction we're on from that meeting we had two years ago.

Yes. I think I'd maybe add to that. I think what you're seeing here is share gains, as Niraj spoke about, that are compounding frankly because of the initiatives that we started a year plus ago. So things like the replatforming being completed and tech advancements that Niraj spoke to our loyalty program, Wayfair Verified, over time, you'll see physical retail. And so you're seeing that ongoing momentum. Obviously, there's a macro context that we're operating in, and we think the category itself right now is flat to slightly down, but that macro context could move things around on the top line.

Okay, and then a quick follow-up. Do you have any predictions on how a shift towards agentic paid search might impact the advertising line? Is this something you can analyze, and do you have any visibility on it, or is it purely theoretical at this stage?

Well, I think we can both think about it and it is theoretical at this point. So I'll give you some thoughts, but it's very, very early, right? And so I think the way to think about it is so there's no question that the use of the chatbot is growing quite quickly. And you could see how search will then evolve, and whether it's the search interfaces that exist today like a Google search becomes more agentic or whether it's that chatbots become a new way to search, there are different things, and they could all emerge into whatever that new version is. At the end of the day, the goal historically of search was to show the best answers to questions. And the goal of these agents is to help you find the best answers to your questions. And it's just a different way of doing it, trying to get you closer to answers that help you. Ultimately, if Wayfair is providing the best offerings and provides the best solutions for people, we're going to surface really well. Ultimately, whoever are the media owners of those properties, there's probably a high chance they're also going to monetize them through advertising, right? And so I tend to think that paid search may turn into a different form of paid services and organic search will turn into a new surface of how organic answers are provided. We've had a long history of being a great partner to all the media properties, whether you think about Google, or you're thinking about Meta, or you're thinking about Pinterest and the list goes on, codeveloping products with them, being an early tester of them, being very optimized for them in the early days. And so the work we're doing with the various AI chat LLM companies is no different, and we're working with a number of them very closely, and that's part of the benefit of having a 2,500-person technology organization and being very technology-oriented, and how we think about how we approach the business and being led by folks who are definitely closer described to being engineers than merchants.

Your next question comes from Peter Keith with Piper Sandler.

Great results, guys. So clearly, there's some share gains happening with your business, but it does seem like the industry backdrop is getting better, which I think is surprising to some investors given a sluggish housing market and tariffs. So Niraj, I was wondering if you could just opine on the industry backdrop, if you think it's getting better and, if so, why and perhaps maybe there's some type of replacement cycle that's already starting up.

Yes, I think the industry landscape is improving. It's no longer deteriorating at a rapid pace. Following several years of significant declines, we have seen a substantial drop from previous levels. Compared to the pre-COVID trend, we are quite far off course. Currently, instead of a steep decline, we are seeing more stability. It may have peaked and is now in a lower, more depressed state. Even at this low point, factors like the replacement cycle, ongoing relocations, and continuing household formations will drive purchases. It’s not at a point where there are no purchases being made. There are cycles to consider, and we observe that each quarter, the percentage of mortgages below 4% decreases as people refinance, often prompted by a reason to move or sell their homes. This transition is occurring gradually, but I believe that we’re at a low point for existing home sales, which should rise. The purchasing activity in the sector will also increase. Over time, I expect trends to revert to the mean, indicating a likely improvement. However, it’s unclear if this will be a sharp turnaround. That's why we took the time to clarify our strategy, emphasizing our ability to drive growth and enhance our share through factors within our control. We aim to improve our offerings, launch new programs, and invest in technology to enhance the customer-supplier experience. This approach is essential as we have only captured a small share of the total addressable market, presenting significant opportunities for growth, especially as the overall category gains momentum.

Okay. That's very helpful. I guess I had a follow-up question too, from a topic that's been kind of ongoing during the quarter, which was that Amazon had stopped advertising through Google Shopping early in Q3. And I guess I'm wondering if you think this provided any benefit to sales or maybe ad leverage during the quarter?

Yes, Amazon significantly reduced its spending in a specific channel and then completely withdrew before re-entering in certain regions. They've been testing the value of their advertising approaches. Most advertisers conduct tests to ensure their advertising is effective and worthwhile. What Amazon did did not significantly affect us because we're already a major player in the areas they target. When considering who appears in paid services, there are multiple participants, and if you already hold a substantial market share, it doesn't impact you whether another competitor withdraws or not; they are simply replaced by others. Moreover, if they are advertising in areas that aren’t relevant to us, we wouldn't engage in advertising there, regardless of the cost. The overall impact is likely minimal for others who might have been just below Amazon in market share, as they could benefit from available inventory. However, this situation is narrow in terms of who it would help. For us, given our specialization and market position, it really didn't have any effect.

Yes. To your question around the sort of what drove the ad spend leverage in the quarter, I would think about it as a few folds. First, we are seeing nice gains in free traffic. We've talked about that. I mentioned in the prepared remarks, increased downloads, frankly, of the app and app usage, which is an area that we've been driving for some time. And then there are some one-time benefits because of our own holdout test this quarter. And so when you think about the sort of efficiency beyond that general 11% to 12% range, some of that was certainly driven by the holdout testing that we do. We think that's quite important frankly to ensure the efficacy of our modeling. But I would think about that in general. Yes, and those are one-time in nature.

Your next question comes from Maria Ripps with Canaccord.

Congrats on the quarter. First, can you maybe give us a little bit more color on what drove sort of revenue acceleration in the later part of the quarter? Is there anything sort of worth highlighting in terms of performance by brand or consumer income levels? And can you quantify the impact of this pull forward to Q3?

Maybe I'll just start on sort of revenue and then, Niraj, you can jump in. So we don't typically disclose revenue by month or within the quarter. In general, revenue growth has been aided by all of these factors that we've been speaking to, which has been really the compounding share gains from initiatives that have been begun over a year ago, so Wayfair Verified, the loyalty program, the improvements to the site experience from the replatforming, and we're seeing that continue to build momentum. As it relates specifically to brands and income, we are seeing strength in the higher-end brands. That's been for quite some time. So Perigold, which is our luxury brand, and then the specialty retail brands, those all operate at a higher average order value, higher price point, have seen some really nice strength, which I think is consistent with what others have seen from consumers that, that higher income consumer has held in a bit better.

Yes. I want to emphasize that the strength we're experiencing overall is attributed to the structural business initiatives we've implemented, not due to a pull forward. We're maintaining good momentum with these initiatives, which are within our control. Therefore, I wouldn't consider a pull forward to be a factor in how the quarter unfolded.

Got it. That's very helpful. And then just to follow-up on agentic shopping, and I appreciate all the color there. Can you maybe give us a little bit more color on how sort of agentic shopping for the furniture vertical could be different from shopping across maybe like other simpler items? And can you maybe give us a little bit more specifics in terms of how you're optimizing your platform and listings for organic chatbot search results?

Yes. So great. Maybe, I'll let Fiona share some thoughts and then I'll add anything that may be necessary. Fiona, do you want to share any thoughts?

Yes. So certainly, I think for agentic shopping, one of the things that is a little bit different for us in the home category is the fact that it is a more complex category. We've got high consideration items and very complex delivery promises. So one thing we want to make sure that we get right is the foundational first-party truth as to make sure that our catalog, pricing, and fulfillment is perfectly integrated, and that's the critical first step. And we're working on that actively with all the partners that I mentioned earlier, the AI platforms. And then we also make sure that once customers are able to discover our products also that they're able to transact, so something that we are also working on with the partners.

Yes. I believe one thing we've consistently observed is that, even dating back to the early days of search with platforms like Google, Pinterest, and Meta, this remains true today. Our category is not something that can be categorized as simply commodity-driven where you can just specify what you want. A significant portion of purchasing behavior revolves around replenishment, where customers repeatedly buy the same items, knowing exactly what they want, whether for delivery or pickup. This makes product discovery quite distinct in our category. Customers are eager to learn about what's available, emerging styles, and shifting trends. In the evolving digital landscape, there are many ways we can assist customers, such as through product visualization, illustrating how their space could look. Additionally, there are opportunities with AI chatbots, but we also have substantial data on our customers that can enhance their experience on our platform. You'll notice that some aspects may start at the upper funnel and, as customers progress, they may require different experiences that facilitate product discovery, education, and informed decision-making.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Congratulations on a strong quarter. My first question relates to gross margin. In this quarter's commentary and in recent discussions about the focus on contribution margin, is there a shift in your approach to gross margin? Are you identifying a specific strategy within that area that you are more inclined to leverage for improved results?

Let me say one thing before I hand it over to Kate to answer your question. We're very focused on the long-term potential and profitability of the business. When considering the long-term, we think about how to maximize EBITDA, which can be achieved in several ways. Margin rate is one aspect, while revenue volume is another. When you multiply these factors together, you arrive at the EBITDA dollars, or we can also discuss free cash flow dollars. Ultimately, our priority is optimizing the owner's earnings dollars, which we view as a significant cost, particularly stock-based compensation. We are committed to optimizing these owner's earnings dollars through growth and effective cost management, as there's a relationship between the two. Now, to provide a more precise answer from a financial modeling perspective, I'll turn it over to Kate.

Yes. I think Niraj articulated actually the philosophy and the philosophy that's been consistent for some time, right, which is ultimately what we're focused on is adjusted EBITDA dollars growth on this multi-quarter view. Perhaps what you're hearing from us is we're trying to do a better job of articulating how that happens and the components there. So if we go to contribution margin, again, that's the gross margin less the CS&M, less the ACNR. That contribution margin, we are also focused on optimizing contribution margin dollars on this multi-quarter view and how do we manage the levers that make up contribution margin to get to that point. As we think about those, the variable cost components that sort of drive that contribution margin, we are constantly testing what is the optimum mix and what works best, again, with this multi-quarter dollars view. Right? And so to the specific question on gross margin, for the last many quarters, the optimal place to be has sort of been between the 30% and 31% range, closer to 30%, as you all have noticed. And that's been the right place again to optimize multi-quarter contribution margin dollars and then, obviously, multi-quarter adjusted EBITDA dollars because as we think about having that fixed cost piece of that SOT G&A controls, as we grow those contribution margin dollars, that flow-through to adjusted EBITDA dollars, you're seeing that these last several quarters is quite nice. So again, not a philosophical shift, but hopefully a better articulation of how we're managing it.

No, that's really helpful. I appreciate all the insights shared today regarding generative AI and how Wayfair is utilizing the technology. It’s nice to connect with you over the phone, Fiona. My follow-up question is, while I don’t want to focus too much on the short term, it’s clear that Wayfair is experiencing an improving market share dynamic. Is generative AI contributing to that? Alternatively, from an investment perspective, what indicators in Wayfair's results should we look for to determine that the company is effectively leveraging generative AI to distinguish itself from competitors?

Yes. One thing I would mention, Brian, is that the potential of generative AI is quite significant. If we compare it to a baseball game, while a typical game lasts 9 innings and last night's extended to 18, we are really just in the first inning of what can be achieved. We are making notable advancements ahead of most retailers, but we are still in the early stages relative to our potential. The majority of gains are yet to materialize. Regarding market share, looking back at this year, generative AI hasn't played a significant role in that growth yet. However, we are excited about what we are developing and implementing, and we can see the positive trajectory. Over time, we believe it will have a meaningful impact, but this is just the most recent evolution in our technological journey. We've been utilizing machine learning for over a decade, and we've always leveraged technology effectively. It's hard not to be optimistic about the possibilities with generative AI. I believe some companies will excel in using it in a way that sets them apart and enables them to move faster than others. This is just the latest development that will distinguish some companies from others through technology.

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

Niraj, maybe changing topics to the multichannel fulfillment offering, curious if you could just expand on the general receptivity from their supplier network. Any comments on how you expect the offering to mature? And just how fast we should sort of think through CastleGate utilization as that program ramps over the coming years here?

Sure, Steve. Regarding multichannel fulfillment, we discussed it last quarter, and it's a great example of our growth strategy. It falls under the three pillars of growth: the recipe, programs, and technology. Multichannel fulfillment is an important program that required significant technology development for its creation and launch. It's something we implement within our physical operations, adding substantial value for our suppliers. This approach helps us maintain a larger inventory pool, creates a new revenue and margin stream from our existing infrastructure, and strengthens our partnership with suppliers. The program has a number of compounding benefits, including direct profitability, and suppliers have responded positively to it. We've designed it to cater to their needs by optimizing it for larger, bulkier items, unlike most other fulfillment services that focus on smaller, lighter packages. Suppliers are excited about this offering; they typically start with a trial, find it beneficial, and gradually increase their usage. We're optimistic about its trajectory. Our fulfillment center infrastructure is significant, allowing us to leverage it effectively. Regarding CastleGate penetration, Kate, did we mention how it reached an all-time high last quarter?

Yes. Last quarter, we noted that there was roughly 25%. We mention that statistic from time to time. Looking at the bigger picture, we're seeing positive momentum, which is certainly aiding our efforts to enhance our customer offerings and deliver them to our customers as quickly and efficiently as possible.

Yes. And just to be clear, that 25% number is the percent of our order volume that ships out of CastleGate facility, not the percent of our fulfillment centers that are utilized. I think I've seen sometimes confusion on that. So just to clarify.

Maybe just a quick follow-up. You talked about the replatforming in the shareholder letter earlier this year. I don't know if you could just maybe speak to how you would sort of qualify the benefits of moving past that, how they're trending relative to expectations and if any sort of new opportunities have emerged as you sort of plan for the next couple of years here?

We are 23 years old now, and as we have built our technology infrastructure, we've grown to have thousands of employees. Over time, our core systems became quite intertangled, and replatforming them has its benefits. In the beginning, it wasn't feasible to build systems discreetly due to cost, but as we have grown, it's essential for our systems to function independently while still interfacing with each other through APIs and other data streams. This allows teams to interact with different systems without directly accessing each one. Replatforming is a complex and costly endeavor because it takes significant technology resources over an extended period. However, the outcome is worth it as it significantly increases our developer velocity and enhances our ability to prevent errors, improving overall quality and reducing costs. It's been crucial for us to undertake this process. We're now far along in it and starting to experience the benefits in terms of our ability to launch new products quickly and utilize third-party products alongside our own. There's still more to gain from this, and I want to emphasize that our second pillar, which focuses on new programs, and the core experiences for suppliers and customers, heavily depend on technology. We are now in a much better position where we can invest in these areas, unlike when we were focusing on replatforming. We're seeing positive changes and benefits from this shift.

That concludes our question-and-answer session. I will now turn the call back over to the Wayfair team for closing remarks.

Thanks, everybody, for joining the call this quarter. We're obviously excited with the momentum we're building in the business. Thanks for your interest in Wayfair, and we look forward to talking to you next quarter.

Thank you.

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