Wayfair Inc. (W) Earnings Call Transcript & Summary

Great. My name is Keith Terry. I want to thank you all for joining us today. We're really excited to have with us the team from Wayfair, Niraj Shah, Co-Chairman and CEO of the company; and Michael Fleisher, Chief Financial Officer of Wayfair. Niraj, Michael, thank you both so much for taking the time to join us.

Heath, thank you. Thank you for having us here.

Thanks for having us.

So Niraj, we obviously have a lot to talk about in the little bit of time that we have today. But just to make sure that we cover the basics at the outset for anyone that's joined us that might be new to Wayfair. How would you describe to investors what it is that you and the team are building there?

That's a great question. So we are building the leading home goods platforms across North America and Europe. And what does that mean? Well, across all of the home categories, furniture and decor, housewares, home improvement and renovation, large appliances, we want to be the best place for a consumer to come find what they want and for a supplier to put forth their goods in front of the consumers. And we want to eliminate all the frictions that this large category historically has had. And so that's the $400 billion B2C and B2B TAM in North America, the $400 billion B2C and B2B TAM in Europe. We want to be the underlying platform where everyone prefers to go.

And so look, I think for most of us, the last 6 months, it felt like 6 years, and I can only imagine what that's been like for you and your team, given what you've seen. But where it's possibly most accurate is in the category that you run, the household goods category online. We've seen almost 6 years of adoption compressed into this period. What has that meant for Wayfair?

Well, here's the way I would think about it. On one hand, what we're seeing is no different than what we've been working out for a long time, which is simply that each year, each quarter, each year, we're looking to attract new customers while we're very tight and rigorous with the economic payback, which is we're only willing to expend. It's less than 1 year's worth of contribution margin to acquire that customer. But then through the tremendous selection, the merchandising, the algorithms, the delivery and logistics, the service, we're looking to impress that customer so much that they then want to come back for repeat purchases. And that's the fuel that grows the business. And that is what has worked. So we went from 50% repeat. When we went public 6 years ago, and we were only a little over $1 billion in volume. To now 6 years later, we're $14 billion roughly in volume, and we are up to 70% repeat. And if you look at the ad costs, it's come down dramatically. The gross margin has gone up dramatically. It's all a function of becoming that platform because it's not just an ideal place for the customer, it's an ideal place with the supplier. So when we get that many more customers in a quarter, for your question, on one hand, you'd say, well, that's fantastic. That would have taken a lot longer to get those customers, et cetera. On the other hand, we feel like we would have gotten inevitably. It's fantastic that we're getting them now. It's fantastic that our repeat customers are repeating more than ever. It's probably a multiyear change in the mentality towards e-commerce. A great category I would point to is grocery, where you look at all these folks who have surged and bought groceries online and you look at the survey results and they say things like, "Well, I don't know why I never did it before. Oh, afterwards, I think I'll continue to do it." It's that type of phenomena you end up with where the selection and the convenience is very obvious to anyone who's engaged. But it's not necessarily obvious to someone who hasn't yet engaged and who has had a lifetime of behavior in a different direction. And so I think this is -- it certainly helps e-commerce. It helps us. But I think it's just an acceleration of a road we were on.

Yes. I mean, if you'll allow me to put some numbers around it. You saw growth accelerate 60 percentage points in the most recent report that you reported. You had a $16 billion run rate of revenue, which, prior to consensus, didn't expect this, that until 2023. And right now, forecasts are expecting you to hit profitability this year. That wasn't expected until 2024. So when you look at all this, how much of it do you see as being a onetime function of the pandemic versus that fundamental shift that you mentioned in consumer behavior that means that your business has forever changed?

Yes. So there's actually 3 effects. So I would say a very significant portion of it is just, I think as a company who's had a long-term horizon, I think we've not necessarily been well understood. So in other words, if you look back over the last 5, 6 years since we went public, our annual growth rate has averaged 40%. So our CAGR has been 40%. If you look at our given quarters, a quarter was anywhere from 20% to 100% growth. And it has ebbs and flows because when you grow at that rate, comparing a given quarter to a quarter or a year ago is an odd ball comparison because so much has changed. And the growth rate moves around based on the time frame in which we launch initiatives. And we have a lot of initiatives underway that really drive great advances in customer satisfaction and behavior, repeat rate of economics. And so things like the profitability inflection and the growth continuing, we believe those would have happened without COVID. And so when you get to consensus numbers and views on that, I think there's a natural conservatism that gets put in. But that said, to your point, the structural changes that are underway, on top of the things that were afoot, are very permanent, which is you've seen a one-way shift towards e-commerce. And while category penetration, which has jumped up over 30%, and we actually want to stay there. It's not going to come all the way back down to the linear track it would be on where it's only advancing a couple of points a year. It's that big burst of 10 or 15 points. More of that will stick than just a couple of points we would have gotten. So I think the structural benefits towards e-commerce are definitely, I think, going to persist.

Yes. So I won't accuse you of having seen this coming, but over the last 3 years, you've put over $0.5 billion into CapEx just on your fulfillment infrastructure. With delivery networks stretched beyond capacity over the last few months, how important was that owned delivery capacity, that owned infrastructure to you being able to serve your customers and grow the way you have?

I'd say it made a big difference. I mean, as you can imagine, during a period of time like this where demand has taken off and supply wasn't necessarily there, the ability to control your own logistics, the ability to flex your transportation, induct into different locations. We were building the logistics network because after the product cost, it's our second biggest cost. It's a larger cost than advertised. So we're building it because there's efficiencies you get in lowering the cost. There's efficiencies you get in reducing damage. And there's customer gains you get in improving speed of delivery that each would cover the cost, the logistics, obviously. So you say, okay, well, no-brainer to build it. In a period of kind of rapid change like this or kind of spike or whatever you want to call it where things change dramatically overnight, if you control those assets, you can pivot and do things in a way that's very hard if you have a more rigid network that, effectively, is relying on third parties, where your induction points are your induction points. And if those points are jammed, those points are jammed versus where you can change where you're going to induct or where you're going to flow or you can ramp up to take a lot more inbound from suppliers or different things that become at your control. So it's been a great asset. To your point, if I was savvy enough to have predicted this, I could tell you, there's a number of things I would have done different in my personal choices and decisions leading into this. I would have been much well prepared. But no, we -- it was a benefit of planning for the long run for us.

Yes. So I mean, we've started to hear from some of the third-party networks. UPS has said that they're going to hire 100,000 people in the fourth quarter, which, shockingly, is the same number of people that they hired last year in the fourth quarter. So it doesn't sound like you're going to be getting a lot of incremental help from the third parties this year. How are you thinking about the company's need to invest further in more warehouses, more last mile delivery capacity?

Well, I think 2 things have happened. So one is, while there's a number they'll hire in the fourth quarter, I think one thing that's happened traditionally, the parcel networks gear up over 6 or 8 weeks leading into holiday with the additional folks and have them through the holiday period and then ramp back down. One of the things that happened this year is as COVID hit, you've seen them ramping up since then. So I think the number they're going to hire this year is on top of what they've already hired, which is not a normal phenomena for them. That said, their networks are saturated and full. And so that's where our ability to flex and induct, our ability to basically participate as a joint partner and integrate the networks allows us to both have more capacity and allows us to manage the speed of delivery better.

So you mentioned the growth in the repeat rate that you've seen already. But when you look at the overall business, how much of growth, overall, would you say is coming from capturing additional wallet share from your existing customers versus seeing new customers that have discovered Wayfair in this environment?

Well, it's interesting. Every quarter since we went public, that percent repeat has gone up a little because repeat is growing faster than our overall growth rate with new growing lower than our overall growth rate every quarter. This last quarter was the first one that changed that, but it only changed it by a little bit. So repeat was still 70% of the total revenue. And so what's happening is while new has spiked up, and that's not a phenomena that will stay that way, repeat has spiked up as well and stayed that way. So I think repeat continues to be the lifeblood of our business and for many reasons. One is, if customers are happy enough to want to come back, you create a new revenue stream. The advertising cost, you don't have those in the successive period. So it's a highly profitable future revenue stream. And then frankly, share of wallet, we have a very low share of wallet relative to potential. And so the repeat is sort of the door opener to, frankly, grow our revenue per customer tremendously over time by taking share of wallet.

And so when you think about the world getting back to some level of normal, the reopening that we're going to hopefully see at some point, how do you feel like that affects each of those things, the share of wallet, the pace that you're adding new customers?

Yes. So it's -- so if you look forward to a new normal state where you say, well, we're all back out and about, COVID is a thing of the past or what have you, I do think, to my earlier point that maybe this category online was 15% and maybe it's spiked up to 30% or 35%, that will reverse. It won't go, I don't think, all the way back. But it's going to drop some. And so you'll see a different mix of sort of online/offline that we do right now. And I think that will result in new customer additions dropping back some as well. We won't be getting a year's worth in a quarter. That said, I think the trends, if you look at the trends, the trends will have inflected up from what they were before. And so for our business, where you have a loyal base coming back repeatedly, you've now added people into that base and our average per customer revenue per year has been running around $500, which is, on average, about 2 purchases. And that number has also kept ticking up every quarter if you look back over the last 4, 5, 6 years, which I think we have a full track in our Investor Relations slide deck. And you can see how it keeps inflecting up. I do think there's a lot of room for that to go up dramatically over time, and I think this would be helpful to that. To give context, I think our average customer spends $3,000 to $4,000 per year in Home across all the categories we're in. So at $500, on one hand, we have a meaningful portion. On the other hand, there's a lot of room left for us to get a lot more. And so as they become more aware of the categories we're in, as they become more loyal to Wayfair, as they download the app, as we're able to better personalize the experience for them based on their behaviors, I do think it keeps letting us unlock that, which is kind of the -- that's the good news into the future, even post-pandemic, what have you.

Yes. As we're starting out, you mentioned the leverage that you've gotten in marketing, and I know it's hard to look seriously at metrics like customer acquisition costs or marketing efficiency in a time like this. But what are you learning about your ability to drive growth profitably through marketing as we go through this?

Well, what I'll say is -- so one of our biggest strengths as a company, if you go back through our history, is we've always been very good at quantitatively understanding the cost and the benefit of our marketing. So advertising, measuring it, attributing those costs to the appropriate customers, revenue and channels, measuring that and then using things like targeting, different technology innovation, innovation around the creative -- the ad units, to basically keep unlocking more and more productive advertising. And we -- that is something that we continue to be very good at. I think as you roll forward through time, the reason advertising keeps getting a lot of leverage is the repeat customers. Overall, on average, they're at like 7% ad cost as a percentage of revenue. But if you look, the second purchase is more expensive than the third. It's more expensive than the fourth. So that 7% doesn't stay at 7%. It keeps dropping as you go down into a more seasoned customer. And then if you take a big step back and you look forward to the next few years, one thing that I think is interesting is I was recently looking at a list of the top advertisers in the United States. And the list I was looking at was 2018 because the 2019 one wasn't out yet, but it don't want changes a couple of percent a year. It doesn't change dramatically. And the #1 advertiser was Comcast, and I think it was $6.6 billion of ad spend. And #25 was McDonald's, $1.5 billion of ad spend. And everyone you would expect was on that list, whether it was Booking.com or Amazon or Procter & Gamble, or BMW. The list was -- there was no one surprising on that list, as you would guess. What's interesting in the United States this year, we're going to be meaningfully over $1 billion in ad spend. And so one of the things that will be a beneficiary for us as you go forward, not necessarily overnight, but in a few years from now, what have you, it happens over time, our ad spend will reach levels where you frankly won't need to increase it despite the fact that you'll continue to get more and more customers because you'll have more and more channels get to saturation. Today, television is one that we feel is reasonably well saturated. We don't need to run more television spots and necessarily get in front of customers more for big pockets that we're leaving open, that we're not covering. Well, that starts to happen more and more broadly. And so you get more and more customers on better and better economics. And so I think the advertising agenda, on one hand, we have a lot of room to get customers profitably, productively, efficiently. We're not willing to relax our constraints. And in fact, we've even heightened them. We've made them more efficient. When you look back over the last 12 months, because of some of the technologies, some of the things we've had breakthroughs in, we've chosen to just use that to tighten our efficiency rather than spend into it. When you look forward, I think there's some big opportunities for us that just come out of the scale we'll have. More frankly, there's a lot of leverage that comes out of the scale as a function.

Yes. And so -- and maybe this is a question that's best for Michael. Michael, given the capacity constraints that you have seen and you look at the ROI and customer acquisition that Michael -- or that -- I'm sorry, that Niraj is talking about, how aggressively can you drive incremental demand, I guess, one, first through marketing, but then, also to the point that you need to start looking at putting more CapEx into infrastructure?

Yes. I think -- thanks, Heath. I think the thing we've been saying now for the last couple of quarters, last 3 or 4 quarters is we believe that we can run the business EBITDA profitable while at the same time, making investments in all those key areas. And so as Niraj just talked about, the marketing spend is extremely quantitatively driven. And so in any particular quarter, I never know exactly what we're going to spend because we're going to make those ROI decisions in real time. Everybody is sort of well aware of that. And so we'll take advantage of the opportunities that exist in the marketplace, but we're going to sort of hold ourselves to those ROI targets in a pretty hard way. Though I do think as Niraj mentioned earlier, we're seeing a sort of emotional change of people's willingness to sort of shop online. And so if you've got a large audience today and I think a larger and larger audience tomorrow, saying, "Hey, maybe this is a category I don't need to go to the store for. Maybe this is a category I should start my shopping online." That's going to sort of create lots of opportunity in the ad markets for us to be in front of those customers with good high ROIs. On the CapEx side, we think we've got a really good plan around what we need to continue to invest in and sort of build out the network. As everyone, I think, is aware, we said at the end of last year, we didn't -- we weren't going to open any new buildings this year. It's actually worked out quite well for us because we've been able to run a lot higher utilization through our existing network with the increased demand. We spent meaningful CapEx dollars regardless, though, because we are racking out and making those buildings that we already have and that exist sort of full functioning. And so that I think going forward, over the next couple of years, you'll continue to see us add capacity, but that capacity is really going to be driven by demand need, right? How big is the business? How fast is it growing? And what do we need to sort of serve customers as opposed to what we've done in the past, which has been building out the footprint for the logistics network, right, putting buildings in place because you needed to be in that geography, not just because you need -- you had the increased demand.

No, that's really helpful. Niraj, we're obviously all focused on the U.S., where we've had sort of our own unique response to the pandemic. How would you compare -- characterize the state of your U.K. business at this point, particularly given the fact that they seem to have at least made a more substantial rate of progress towards reopening?

Yes. So we see -- so we're in 4 geographies. We're in the U.S., Canada, the U.K. and Germany. And we saw all of them react very similarly in the beginning where all of them more or less close down around the same time. And the U.S. have seen regions varied, to some degree, in how long they stay closed and then the second close. But the beginning was very similar. What I'd say is, as you've seen over time, obviously, when a place reopens, you see the rate of growth drop some. What we've been interested in seeing is that the rate of growth, even when it drops, remains elevated. So we've not seen any reversion back to what you'd call pre-pandemic-type trends. We've seen them remain elevated, but off of sort of a more acute spike that was in the May time frame. So May, if you would call May the height of it, and you've seen it then kind of settle in to a very elevated level, but one that seems very durable. And so while it's slowing, it's not slowing at a very significant rate. It's basically holding in there.

No, that's interesting. I mean, Michael, with profitability having reached the levels that it has how do you evaluate additional geographic expansion opportunities from a financial standpoint?