Wayfair Inc. (W) Earnings Call Transcript & Summary

Good morning, everyone. And thank you very much for connecting to our -- this is our 20th Annual Oppenheimer Consumer Conference. And it's the first time we've done this virtually. And I have to say, so far, it's working quite smoothly. So I'm going to jinx it, but it's just the first virtual conference in 20 years. So thank you all. My name is Brian Nagel. I'm the senior equity research analyst at Oppenheimer, and I cover the group that we call Consumer Growth and E-commerce. So I'm very pleased to introduce our next presenting company, Wayfair, so the W. And the 2 -- the company's 2 co-founders, Niraj Shah and Steve Conine. Gentlemen, thank you for joining me.

Thanks for having me, Brian.

Thanks, Brian.

Very much a pleasure to have you. I thought we'd kick it off. Clearly, a very dynamic retail environment right now in the United States and elsewhere. In fact, we've got retail sales. We saw it stay. I think a lot people still look at those and shock as to how it swung there, actually. I know it's swung there, actually. The question I want to throw out to you, gentlemen, first is, now I've followed Wayfair now for several years. I've been -- I admire the business model, the innovation of business model for a long time. I think this is one of the most interesting junctures in your company. Just in that -- it wasn't that long ago you outlined this plan to really harness the growth in the model to really push towards sustained profitability and cash flow. And then COVID-19 came and your sales growth of the company accelerated significantly. So now you have these 2 factors working together. You've said in your comments previously that they're still exclusive. How do you say? Because the question I may ask you is maybe you can talk about both those sides of the story right now. But how do we think about the overall driver for Wayfair and the business going forward from here?

Yes. Well, first, Brian, thanks for having us here. And yes. Let me sort of explain where we are because I think it's something that we try to communicate, but I think it doesn't always get understood as clearly as it is in our minds, which is just that we've always had a long-term orientation. So we're trying to be very disciplined in going after what we see as a very large opportunity. And one of the forms of discipline we've had is we've always focused on the unit economics. And so there's a lot of different things in play to expand gross margin. We've always been very tightly quantitative on the advertising side to make sure that, on one hand, we're getting as many new customers as we can, but on the other hand, we're really being very prudent there. And then the last big place we spend money in the P&L is on the team. And so we have a lot of different initiatives, well, how do we grow the team to go after those? And then obviously, on the CapEx side, there's logistics infrastructure. And we -- a number of these investments, the international business, particularly Europe, the logistics infrastructure, they have a long-term payback. And so what's been hard for folks, I think, is if you think about when we went public 5 years ago, we're $1 billion in sales. And then you think about the run rate pre-COVID was $10 billion in sales. So in 5 years, went from $1 billion in sales to $10 billion in sales, while the unit economics actually got stronger. And I think folks didn't know how to reconcile that with the idea that the P&L is still not showing any current income. And so how -- if you're getting stronger and the unit economics is get stronger and repeat, keeps ticking up, how is it that there's no current income? The answer is, well, we're really investing against the future. And there's these very high-impact, high-potential things that allow us to reap that benefit. Well, one of the things we came to realize late last year is that when we were at $5 billion just a couple of years ago, there was a way to spend the 20%-plus contribution margin of $1 billion productively on advertising to new customers and on building out the team. The challenge is when we went from $5 billion to $10 billion, the money was no longer the constraint. And one of the things we found is that while there's still a very long list of high-ROI initiatives, our ability to go after the mall in parallel, it just was -- we didn't have that ability. And the reason is when you grow the team, we grew the team from 4,000 people on the OpEx side in the beginning of '18 to 8,000 at the end of '19, we just can't onboard that many people in parallel, ramp them up in parallel and actually have that many initiatives advance in parallel without creating that old fashioned logjam. So you're flowing 10 logs down a river, and when that come in, you can flow a lot more logs down, it would be great. So we decided to flow 20. Well, all of a sudden, with the 20, they're hitting each other and they're banging into the side and all of a sudden, everything stopped. That's basically what happened to us because we parallel pathed so many initiatives, each one needs something from 3 other teams. Well, the thing is those 3 other teams, each one of those teams has more teams asking for something, and they, in the end, have started their own initiatives. And all of a sudden, you have really talented people, but you're trying to do 20 logs down the river, and you can't. And so what we found is, well, we can do 16. So we reorganized around those priorities. We're driving those forward. We ended up having to let go some people, not really because of cost, but really because of the execution quality of doing all these things in parallel, really individually talented people, but we cannot, as a company, do that many things in parallel. And then what will happen is, well, we can go from 16 to 18, then we go from 18 to 20, and 20 to 22 and 22 to 24, and we'll keep getting gains from more and more initiatives. But at this point, we're now big enough that we can be profitable while still maxing out our ability to invest in the future. And that's the point we made when we said, "Hey, in Q2, if we have grown at 20% year-over-year, we would be globally EBITDA profitable and I think be able to say, that geez, I don't know what to do with that because by staying at 20%, you're basically giving us a revenue number." And you are saying inside that, the P&L would actually have you globally EBITDA profitable. That's very different than what you've had in the past. Well, the answer is what I just described around how we're not, not investing in the future. It's just we simply can't invest all the money that's flowing through. And at the same time, we said, "Hey, quarter-to-date, revenue growth had been 90%, which obviously is far in excess of 20%." And why is it in 90%? Well, on one hand, as the quality of execution gets higher, we find our revenue growth accelerates. But frankly, the biggest thing is simply the COVID crisis caused folks to be effectively stuck at home and be spending time in their home, move their discretionary income from travel and leisure and tourism into home goods and prefer e-commerce. And so all of a sudden, when you prefer home goods e-commerce, we're going to be the biggest platform that will come to mind. We're the one who specializes in that. And that's what we continue to see, I mean quarter-to-date, we're still [ fit for that ].

Yes. Niraj, let me add a couple of things. So Brian, certainly fascinating times right now. I think at a high level, as Niraj sort of outlined there, back half of '19, we definitely were very focused on adding -- improving team efficiency. And his logjam analysis, whatever or analogy, I think, is a simple way to think about it. We entered 2020 very excited about the business. And we felt like we really -- we're making some changes, getting things really focused and just really dialing in execution. Obviously, then, this coronavirus crisis has caused a real surge in business. I mean you take a business that's running roughly at $10 billion. And all a sudden, a few months later, you're almost doubling that. It's a massive amount of additional volume. That really shines a spotlight on the decisions you've made, and it really highlights for us as a team whether we've made the right decisions. And it's -- in that regard, it's been phenomenal to have that opportunity right away to be like, okay, let's -- we can really pressure test, because you make assumptions to say, hey, we can run this more efficiently. You don't need as big a team doing this. Well, all of a sudden, you basically double the size of it. You really then see where you've made the right decisions, where you might say, "Oh, yes, actually, we're here, we need to post this a little bit." So It's really brought clarity to us. So this -- it's been a fascinating time to be involved in this business and sort of see the dynamic in the market.

So with that -- that's a great opening. Thank you, both. How -- I want to talk maybe a bit about -- before we talk about how you continue to tweak the Wayfair model. Let's talk a little bit more about just the overall environment and what we're seeing there. So you mentioned the 90% number that you talked about in your most recent conference call. As you think about -- how do we -- how should we think about -- or how do you think about the sustainability of this? Because like you're saying, there's clearly this dynamic out there where more people are now shopping at home. There's a greater focus on the home, and Wayfair is just perfectly positioned for this. But how should we think about the sustainability of that type of sales growth? And particularly as we get indications now that markets are beginning to open up, maybe some of the most severe COVID-hit crisis -- COVID headwinds will begin to abate.

Yes. So I think the way to think about it is we're not necessarily expecting revenue growth to stay at 90%. But what we do expect to happen is we're expecting to keep getting more and more new customers, and we're expecting to see them become loyal customers. And that repeat behavior is fundamentally what drives our growth. If you look at what's happened just in the last 5 years since we went public, repeat as a percentage of our total orders has actually ticked up every quarter as you go through time. And now we're having a really particularly unusual event where we're having this tsunami repeat. If you look at just the repeat metrics, they're up significantly. And yet at the same time, the tsunami of new customers, multiple years worth of new customers coming in and deciding now is the time they're going to embrace online shopping for home goods. And so once everything opens back up, certainly, they'll go back to buying at brick-and-mortar, a meaningful portion of what they buy at home. But the piece that will stay online will not be the 0 it was before. It will now be a meaningful piece of their spend. That was going to happen inevitably. But instead of perhaps just playing out over 3 to 5 years, you might have accelerated the adoption of 3 to 5 years just into a short period of time by so many people choosing to go through the trial experience of testing it out, just at this moment in time because of what's happened in the world. And I think that is fundamentally what drives the long-term growth rates, is really the base of customers and the repeat behavior off of it. And if you look at our history, 2014 till now. In 2015, we saw our revenue growth accelerate from the 40-odd percent it was before that, all the way up to 100%, and we saw it come down. I think at one point, 2016, I may have these exact numbers wrong, but I think it decelerated down to like a 26%, 27% number. And then you saw it tick all the way back up into the 40s, and then you've seen it come back down. So we're not optimizing to a revenue growth percentage. What we're optimizing for is growing our base of customers in a way that has them love the experience so that their repeat behavior is very strong. That's the underpinning of the P&L. And I think it's a one-way door because the categories in home that we're in, the B2C and B2B aspects in North America, I think, are about $400 billion. And then Europe is another $400 billion. We don't exactly tackle every last piece of that TAM yet, but that's our aspiration. And at $800 billion, whether you're a $10 billion run rate or $20 billion run rate, the reality is you're still a very small piece of the total market, and it's moving online. And I think what we're building as a platform really sets us up to be the place that folks go. Steve, I don' know if you have any?

Yes. Niraj, the other analogy you've used, I think, is a good one we've talked a lot about as a management team is just if you look at what's happening in grocery, and consumers in our category -- I mean, it's historically been a slower category to move online in the same way grocery, a lot of people are setting their patterns, they haven't tried it. Well, you have an event like we're going through right now. It forces people to try it. And a lot of times, just the act of trying will change your perception of it. And so we really do think that the experience we've introduced to literally millions of new customers over the past few months here will change their behavior. And now that they've tried it, they have a different perception of the ease or they have a different sense of the anxiety of purchasing in this way. And so we absolutely believe that it's accelerated the pace in which people are going to move online in this category will be -- have a larger percent of it being sold online.

So there are some ramps. So really, the point I'm hearing it is that it's not -- the new customers that have come to the Wayfair site, the Wayfair experience now, that would have happened over some longer period of time. It just simply accelerates. So there's nothing really different, so to say, about how the customers that are coming to the experience and how they're shopping the site.

We've watched that extremely closely. Obviously, that's the question. We haven't changed in a period of time like this, our customers is going to continue to look like they've looked historically. And we haven't seen anything to give us any sort of concern that they're not. I mean they seem to be behaving very similar or better than what we've seen. And so they're within what we're looking for. And the frequency they'd visit our properties, the frequency they shop, the frequency that they make purchases, what it's taken to get them to come back in, it looks very similar to what we've seen. And so we don't have any reason to believe that, that will continue to hold.

Now -- so I want to shift now. I want to shift now to just how the underlying business model is what we need to tweak. So we clearly, for a while now, we've talked about the proprietary distribution infrastructure of Wayfair, which I think and I know you know, it has been and it will be a huge competitive advantage long term. Where do we stand now just on the overall build-out of that network? And how should we look at your company, analyze your company? What are we looking for, signals that we're starting to see really the benefits of this playing out?

Well, so I think there's a few different things that -- well, so where are we now? I think last year, we ended the year with around about 15 million square feet, maybe a little more. I think at the end of this year, something like 18 million square feet, because some buildings opened in the last year, some at the beginning of this year, with Jacksonville, later, California, Savannah, Georgia. And so we keep expanding our footprint on the warehousing side, which basically facilitates both lower cost through the supply chain as well as faster delivery and lower damage rates. We're then also adding our own last mile delivery for the larger items for the 2-person deliveries. And so the 2-person deliveries in North America, I think in the U.S., it's over 70% come out of our 40-plus delivery operations. In Canada, it's something like 40%. The U.K. is now ramping. I think it's around about 20% of the -- there, the large [ vessels ] of 1 and 2-men. And so what we're seeing is that we -- when we do this, not only do we lower cost, not only do we speed up deliveries, not only do we lower damage, but customer satisfaction goes up as well. And so that's something that has long legs on it because 80% of the goods are made outside of -- for the U.S. market, made outside of the United States, so there's a whole inbound leg of transportation. There's how you handle it domestically. There's a delivery. Now how will you see that benefit translate? Well, on one hand, you'd expect to see just repeat growth in the business. Now is the repeat growth entirely due to logistics? No. Does logistics contribute to it? Yes. And so that's one of the challenges in our business. What drives repeat? Well, selection drives repeat. The quality of the merchandising, what we're doing with exclusive brands and house brands is really key in driving repeat. What we're doing with logistics drives repeat. What we do with customer service drives repeat. So repeat is the outcome of everything we're investing in. That's one place you'll see it. The other thing we'll see is that our ability to have gross margins expand while our retail prices stay really competitive keeps being enhanced as we take more and more control of logistics. So that's something that will continue to play out. Our gross margin actually has multiple levers that will drive it up over time. And one of those 4 levers is logistics. So that's a place where you'll see it play out. But there's 3 other levers there that are equally big. So I don't think it's so easy for you from the outside to see it as a single KPI. But in terms of that $0.20 of every revenue dollar is tied up in logistics, it's a really big lever for us because it's not just cost, but it's also the customer experience and the quality, and we're doing both at the same time.

And so, Niraj, you mentioned your outside the United States operations too. It's [ base is and it's working as ] we're watching this develop. Is it a similar type dynamic within and outside the United States from a distribution standpoint?

Yes. I mean we have a 1 million square foot warehouse in Letterworth in the U.K. that's new in the last 18 months or so. That's ramping there. It replaced a small facility. In Germany, we'll have a large warehouse open next year. So we're building out the same infrastructure, the warehousing, the delivery, the inbound. A lot of it's a function of volume because you can't really make the delivery operation work until you have a certain amount of volume. So some of these things are time sequenced appropriate to the volume levels we're at, but the same rules apply there. Goods are made outside of the domestic country to a very high percentage. The goods are -- the same goods are bulky or low dollar relative to cubic foot -- feet. They're prone to damage. There's generally not a third-party carrier you can just rely on and use, that's national and well-known like a FedEx in the case of what you find for these larger bulky items. So it's very analogous.

Shifting a bit, marketing. So the marketing -- improving marketing efficiency was another key effort or a key topic you all laid out. We've discussed the business for a while, but particularly really this year. Where do we stand there as far as just improving the efficiency of the marketing dollars you're putting to work?

Yes. A lot of -- we have, multiple times, referenced the plan we put in place at the end of last year when we realized that we needed to sort of tighten up our execution across the board and really make sure that all the people we've hired that we're able to kind of not have a logjam on anything. And that plan was really about, what initiatives are we driving? Do they have the right engineering teams associated with them? Do they have all the interdependencies covered? Well, in marketing, one of the things we've been known for there is our prowess in quantitative marketing and the fact of how we use our own proprietary technology to power that. Both technology that helps us with advertising execution and creation, but also the attribution technology. And so one of the things we were able to do is repeat has grown to be a substantial portion of the total. We've been able to advance the attribution methodology to make sure that, when we spend money acquiring new customers, we're actually getting the financial benefit of not spending that money on a repeat base because the repeat base is already loyal through their own experience. And so the enhancements in the attribution technology, enhancements in how we do the target setting, these got us to even higher yields early this year on advertising effectiveness than we had prior. And fundamentally, it's the fact -- the technology is really powerful, but fundamentally, it's the fact that the repeat base is low. That's really driving the efficiency. And what we now have, we've had a very unusual period in the last few months, where we've had -- we have higher efficiency, we have a customer base, the repeat customer base is repeating at an even higher frequency, and we've had a tsunami of new customers come in that we've been able to acquire at that cost-effective rate. But we're deploying a tremendous amount of money in advertising. We're not shying away. We're being very aggressive in advertising. Not aggressive in terms of the amount we're willing to spend per customer, but aggressive in the form that we're not going to let any customer get away if we can acquire them within our payback framework. And that's working out incredibly well because we're getting these new customers, multiple years worth in this one year, and they're getting the experience. And the early metrics on repeat and royalty look strong.

So to what extent in a lot of -- a number of consumer enterprises out there have discussed lately the rate of simple cost or marketing costs come down. Is Wayfair seeing that? And to follow up to the answer you just gave, to what extent are you sort of say taking advantage of it to capitalize on that at this point?

Yes. I think there are certain advertising markets that got soft in -- particularly in April, I think, and into May in terms of the broad based type advertising that people pull back on. A lot of the intent-based advertising actually stayed. If anything, there are more market participants rather than less because if you're a brick-and-mortar retailer and maybe you've been slow to advertise online even though you have an e-commerce website, you can deliver in your geography. Well, if you're closing your store but you still have delivery, you're going to basically advertise in your metro region or whatever that you're available. And so you actually saw the online market intense, stay pretty competitive. Display and some other markets soften some. None of that really matters to us. This is the same question we got years ago when the Facebook news feed ad was kind of all the noise in the market. And we said, well, no one ad unit or ad type are we reliant upon. And we bid in a quantitative manner. So if others are flexing in, we're not going to just flex in. And frankly, if others depart, we're going to take advantage of the opportunity to get more scale within the economics that work for us. So we effectively keep that same core posture while others sort of ebb and flow. And then we take advantage of the discontinuities in either direction.

And in terms of your supplier, the supplier partners, I mean as I look at the business, I think Wayfair has really proven extraordinarily the powerful partner for these manufacturers to basically get their products to market to customers. So as you look at the dynamic now, where Wayfair has performed extraordinarily well in this crisis, how much more of a valuable partner have you become to these manufacturers? And then to what extent do you think that sticks posts crisis?

Yes. Let me -- I can kick this one off, Niraj, and you can add to it. It's been a really interesting -- there's a number of interesting dynamics, I think, that have been at play here as of late. As you highlighted, we increasingly have become more of a core partner to our suppliers. And I think we've always had very good unit economics for our suppliers. So they've always had a very viable business working on Wayfair, selling through Wayfair, having the relationship with Wayfair. The -- at a macro level, one of the dynamics that's been interesting to watch recently that's really helped the suppliers -- I guess I'll highlight 2. One, the online guys, a lot of the bigger online guys, so Walmart, Amazons, Targets, really -- again, going back to like when you get real busy, you focus on what's core. Those guys were very visible about saying, "Hey, we're going to really focus on core consumables and grocery." That basically highlights to our suppliers that like, look, like if you're looking for a viable partner in this category, long term, we're it. I mean we've really put the stake in the ground around that. And going through a period like this really highlights to our suppliers that like, oh, yes, if I'm really going to focus on a company that's core to my business, my industry, Wayfair is it. And so that's, for sure, helped us with suppliers to say, hey, okay, there's -- I'll be thoughtful about how I manage distribution across all my channels. But I'm really going to think of Wayfair as a core partner in how I'm going to continue to access online going forward. The bricks-and-mortar dynamic has been interesting. And as bricks-and-mortar sales at physical retail sort of decline, suppliers were in a situation where they had a lot of excess inventory. And as one of the few channels that's still moving a lot of inventory, we all of a sudden were a much more attractive partner to a lot of suppliers who maybe were a little more skeptical or a little more slow to be aggressive moving on to our platform. And so that's really helped, I think, accelerate. And we've seen a number of suppliers that we've been building relationships with over the years really lean in more aggressively coming through that because it highlights for them, geez, this is where the trend's going, this is where the growth is. And it's really helped us tighten up the relationship with those suppliers. So then going back in an even '19, I mean we've really been investing a lot of the core tools for suppliers, for them to really use Wayfair as a platform to run their business and to have easy tools to add products, easy tools to market their stuff. We've been increasingly providing additional supplier services like media, where we let them advertise and get new products, new product introductions in front of customers or CastleGate, where they've been able to really help with logistics. And, certainly, through this time period with the asset spike we've seen in transportation, the logistics capabilities we've been able to bring into the industry and to help suppliers balance inventory or move inventory through or just to get rid of bottlenecks in the overall supply chain has really been an asset to the -- our supply chain has taken advantage of. Niraj, I don't know if you'd add.

I think you covered it well. I mean we're seeing -- I mean this has been a multiyear story, but we're just deepening our relationships with our suppliers. And we're removing any frictions that exist between us, whether it be by creating joint logistics offerings or whether it be by adding technology on our Extranet, on the tools they use a partner home that let them do everything that they want to do, but we're seeing it pay off tremendously.

And then another -- so if we go back, I think last year, we talked a lot about the trade war that was happening between the United States and China, the tariffs, the impact that was having upon the business of Wayfair. I guess so the question, as you look at the -- now we've obviously had some time to pass and the demand dynamic has changed. But how do we think about this overall tariffs now? Is any type of headwind or is it a headwind to the Wayfair business model?

What I would say, tariffs are interesting. Right now, the macro environment created by the COVID crisis overwhelms any impact tariffs have, period. When you think forward in time, it's -- there's a lot of uncertainty about global trade relations and there's -- different people have different points of view on relationships with different countries. And that obviously can create uncertainty. The key thing that we found is that the nature of the Wayfair business being a platform where we have all the different suppliers, whether it be the domestic supplier or suppliers sourcing in certain countries in Asia, other countries in Asia, or out of Europe or South America, that resilience it creates is tremendous. And it shows up in the fact that we have a lot more selection available, a lot more inventory available. If one group gets a disadvantage relative to the other group, well, the other group just got advantage relative to that group that got disadvantage. Well, they all exist on our platform, competing against one another. So rather than the traditional retail model where a merchant gets to place a bet, we said, well, it's not wise to place a bet. It's wise to actually embrace the market and let the customers get to pick what they want. And that doesn't work well in the traditional retail model where the merchant was told that they're the wise one who knows better than the customer what they want. But if you think about the resiliency it creates, it not only does have a huge customer benefit and the customer getting to pick what they actually want instead of being told these are your only choices, it actually creates huge resiliency in the supply chain. So whether it be disruptions because of a demand spike or someone like the COVID crisis, or whether it be by tariffs, you actually get the benefit of actually having all the participants there.

I know our time is going to wind down. So the last question I want to ask you, gentlemen, is just from a capital standpoint. Clearly, it's kind of tied this whole conversation together, talked early on about, off course, your profitability and cash flow generation. I think that you very smartly raised capital early in this crisis opportunistically. How do you think about the capital position of the company at this point?

We believe we just have a tremendously large long-term opportunity. So we've always wanted to be oriented around that. Well, one of the things that you want to do is just make sure that your balance sheet is bulletproof. So that if you do have a bump in the road, generally an unforeseen one, that you basically can make sure that you can sustain that bump. And so one of the things we decided early on in the crisis, we were seeing demand rising. But we said, "Well, you don't know what's going to happen next." And now quarter-to-date from through May 5, it was 90%. Well, now we're in the middle of June, it's still -- growth has still been 90-plus percent. So we're still growing at trends rate. Well, even though we thought that, that could happen, what we decided to do would raise $535 million at a time where our stock price was not as high as it is today simply to bulletproof the balance sheet. So let's just once and for all bulletproof it. We knew that there was a good chance we don't need the capital. At this point, I would say the chance that we don't need the capital is incredibly high. But what it's letting us do is advance the long-term agenda. And we don't foresee needing capital given where we are in our evolution and the economics we have today. But we think we benefit by being able to have a passive aggressive caution where we're leading in simply because we know that we're financially super sound. Steve, I don't know if anything you want to add to that.

No. I think, financially, we're in a very good spot. I think as you highlighted, the reason, Niraj, you and I are such big shareholders or the largest 2 shareholders in this business is that we've always had a very long-term focus on this business, and we've always run it very efficiently. And so I think what you highlighted here with tariffs, right? You hit the tariffs, well, it's a 6-month blip where you kind of got to let that work to our supply chain, but it's a change, right? We're going through this coronavirus things. Well, it's something that hits the thing. We want to continue to take a long-term view, where these -- a 6-months blip in kind of wholesale pricing is something you don't have to worry about and you can do what's right for the long-term health of the business. And so I think the financial situation we're in today and the balance sheet we have is very strong. And we'll let us continue to have that posture that's gotten us to the point where we are and let us continue to win in the future, so.

Certainly. Thank you very much for your time. Congratulations on managing the business really well here for a while, but particularly through now through this crisis. So congratulations. And thank you again.

Thank you, Brian.