Wayfair Inc. (W) Earnings Call Transcript & Summary

Okay. Hi, everyone. I'm Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. It's my pleasure to welcome Wayfair to this conference and to this event, represented by Niraj Shah, CEO, Co-Chairman and Co-Founder; and Kate Gulliver, CFO and CAO. I'll read a quick, I'm going to say disclosure, that I know partly by memory, quick intro, and then we'll get into it. As with all of our sessions, if you have questions along the way, feel free and we'll make sure there's time at the end. The disclosure is, for important disclosures, please see www.morganstanley.com/researchdisclosures. As for Wayfair, first, thank you for being here for the first time at this event. This is one of the most fascinating stories in our coverage of a business that is building a moat in terms of a brand, in terms of being dependable and reliable on home furnishings, quickly and in quality. I think the pivot that we've seen over the last, call it, 2 years have been pretty impressive, a gross margin transformation showing the value of this business to the value chain or the supply chain as well as the cost discipline that we're -- engineering a much better and sustainable EBITDA outcome. So with that, I'm going to take a seat. Thanks. Thanks for being here.

So if we -- you weren't here last year, but if we were talking at the beginning of '23, end of '22, and you're looking at how the year played out, sort of the good, the bad -- we don't have to go to the ugly, but surprise to the good, surprise to the bad.

So by the late summer of '22, so we would have seen this at this point. We'd seen that normalcy had returned in terms of supply/demand, in terms of the inventory of goods. So selection was now available again and inflation had really abated, because the ocean freight was the primary driver of inflation in our world. That had come down and it had stayed down for long enough suppliers had been pulling it out of the pricing. So the fourth quarter of last year was kind of like the first kind of normal post-COVID quarter, in our mind. Now it felt very recessionary and it's continued to feel recessionary, but [ just ] normal decade has a couple of recession years and normal years but no COVID years, right? So we finally had normal. So I'd say by the beginning of this year we felt like we were in a recessionary environment. We thought that was going to last awhile. We thought supply chain, we're going to continue to drive that normalization of the pricing as -- kind of beat out all the inflation. That played out through the first half of the year. It was pretty normal by the middle of this year. And then we also knew that we had definitely let our cost structure get bloated during kind of even the pre-COVID years, but definitely during the COVID years, particularly '21 into the first half of '22. And so we had started an effort in the middle of '22 to start ripping a lot of that cost out. And we're not done with that yet, but we've kind of moved along that agenda, which started 1.5 years ago. And we knew that was a big topic for this year, driving out a lot of that cost kind of all through the P&L. And so that's kind of been the story of this year. We've taken share on the back of the recipe work-in. We've been taking share at a pretty fast rate. It has continued to feel very recessionary. Consumers are acting exactly as they do in a recession period in terms of leaning in on promotions, looking for that value story. And we've continued to take a really critical eye at cost and keep ripping it out. It's a little bit of an iterative process, but you can kind of see in our P&L, we've taken a lot out already.

The outcome's the outcome, it feels recessionary. Do you care or do you think it could be reversionary mixed in with recessionary? And does it even matter?

What -- how would you describe what reversionary means, in your mind?

Very theoretical, but it would be an overconsumption to trend line that occurred in a couple of years, and now we are correcting from that overconsumption long-dated product cycle such that we don't have to replenish in the near -- [ any ] time. So it takes some time to get back to the line.

Look, everyone can -- you can read into it, I think. But I don't know that we see that, because to us, recessionary, what you see is you see a little bit of trading down. You see promotions taking a higher share of the total and the everyday being a lower share. And we saw that this quarter. The C5 period, we saw a nice year-over-year growth there. And so -- but kind of the pre-period, a little slower, people waiting for the promotion they knew was coming. So I wouldn't say that they're not buying and that they don't have needs and interests and desires, but it's -- the pattern of it is such that they're going to be a little more sitting on their hands. They're going to look for that value story. Yes, I mean that's my take. I think the one overhang could be moves and housing is slower. And so that is one of the things that bolster the categories, so if you say, well, hey, what's the time frame where the category's back to 4% growth? That could take a little longer, right? So I think people are saying, hey, anyone who gets super bullish on interest rates diving quickly and demand taking off quickly, I think that you could -- you want to be careful there.

What was my next question. I wanted to say, hey -- oh, I'm sorry, Kate.

No, no, I was going to -- the point I was going to make on is it a reversionary and so is there a pullback or is it a recessionary, either way, we're going to continue to navigate through it, right? So it doesn't change sort of the recipe and how we think about it. But if you do think about the category pre-COVID, having grown at like 3% to 4% a year, and you just CAGR that from 2019, I think you'd actually see that the category is down further from what that CAGR would be, which would suggest that there has been a recessionary impact, not just a reversion to what should it have been if we hadn't had that explosive growth. And so I think that's a way to frame has this category been in a recession for the last 12 to 18 months. Probably, right, beyond any normalization of pull-forward and pullback.

Yes. And is that consistent if you look at units? And you can't match up unit to unit.

Yes. That's total dollars. It's harder to say unit to -- obviously there's been some unit and AOV trade-offs. We talked a lot about that today with various folks, but in terms of what's happened to us this year on that. So that's harder to say.

Right. Okay. So potentially a macro story, and you mentioned it may take a little time. I guess the category, I was going to say, hey, when does the category return to growth dealing with all these factors, but what's your best guess?

I mean if -- my guess would be the -- I think, the soonest is mid- next year, so the second half of next year. But that could push a quarter or 2, right? And I think this does tie out then with the macro. If you could tell me when the first rate cut is, it will help me answer your question.

I think we're highly -- it's a discretionary category that is susceptible to consumer sentiment. And so how does that -- quickly does that turn? That depends on how quickly consumer sentiment turns, which probably depends on rates to a large extent.

Yes. Middle of June of next year is the Morgan Stanley forecast for the first rate cut.

There you go.

Yes. So a lot of them are sort of then or even maybe a couple of months before then. A lot of the forecasts are in that stretch. That seems very plausible, because I would say that we have a lot of demand data. We get it from our suppliers. We get credit card data from multiple sources. We see a lot of the inbound flows. And it just feels like the government data is a little slow to show how much things have slowed. And so I think that seems very reasonable.

Yes. Inflections in top line, I feel like you've been prescriptive about this year in terms of top line growth. I forget if you got to top line growth sooner, I think, than you promised. And it makes sense, e-commerce growing faster. And you seem to be taking share, especially relative to the retail sales data we look at, but you're not in that cohort. And then it's moderated a little bit in the fourth quarter or at least quarter-to-date, when last we spoke. What are these pivots? Is that recessionary stuff rearing its head?

No, I'd say we're continuing to take share at a really nice rate. The difference is, as I mentioned, things returned to normal in the fourth quarter of last year. So it's our first comp over what would be a good period, kind of a normal period. So I think you're going to continue to see the kind of numbers develop. But like in terms of just -- if you just look at a year-over-year number, it's, I think, what you're saying is that you believe it's kind of stepped down. That could -- my view is that a lot of the shape you're looking at is actually the shape from last year rather than the shape from this year.

Fair enough, yes. So it's technically an unfair comparison. And the...

We've been encouraging folks to look at things sequentially as well. Because if we look at it sequentially, the trend line is much cleaner, and then you can predict where you're going. If you want to do -- you can, of course, then turn it into year-over-year, and that's fine to do. But in terms of -- the problem with year-over-year is it works great if last year was a normal year, this year is a normal year, what's happening.

And the, I don't know, back to baseline, industry getting better a year ago, that is the clearance of excess left the system, the inventory situation favoring Wayfair as a brand and as a channel?

It's not so much the inventory favoring us, it's just the widespread availability of inventory for every retailer was then back to good. And the pricing, the inflation, ocean freight inflation, whether or not a supplier had cleared all their inventory, they put the price down, because they wanted to be competitive with the folks who had cleared it and they had now been pricing it on kind of what the normal new price will be. And so some folks had cleared it and so they're pricing and making their margins. Some folks hadn't cleared it, so they're pricing it. They're not making their margin yet, but as soon as they get fresh goods in, they will. As you can see, ocean freight stayed very stable. It's at a rate very similar to pre-COVID. So there's sort of not a lot of magic as to what the difference, kind of the COVID price versus the now price, is due to. And -- but with the kind of inventory available and that artificial kind of supply chain congestion driving odd outcomes, everyone is now competing kind of on an even playing field.

Even though their back half of the year, the people, some of the companies we follow, higher end, it seems like sales have gone a little bit weaker than planned such that inventory could be rebuilding a little bit marginally. Does that seem -- is that fair?

I mean, I think -- I'm sure we could find some examples where that's happening. I think by and large, inventories are pretty healthy.

Okay. The difference between some of your premium brands and nonpremium brands, I guess Wayfair versus Perigold, if that's the right way to strike the example, can you juxtapose the trend lines for both?

When you look at our total company results, they're obviously, to some degree, a proxy for Wayfair, because it's so big relative to our total. Perigold is growing at a very nice rate right now, very fast rate. But it's just -- it's smaller. And so it's in its earlier days. So part of that is I think we have a great proposition, but part of that is it can -- it's easier to grow at a much higher number off a smaller base. So that's going to be a piece of it.

It's taking share, but it's growing off a small base. I think the last time we talked about it was a few quarters ago, and there, the growth delta was quite a bit different than Wayfair, of course, but you have to put that in the context of the size of Perigold, which is much smaller.

As prices normalize, as freight comes in and there's maybe some relief, are you seeing incremental volume? Or is this not the backdrop where there's elasticity in that regard?

Well, I mean, certainly orders have been up, while AOV has been down, right? So if that's what you're referring to, we've obviously -- we've long spoken about, even before it started happening, that when AOV started to normalize and get back and pull back out the inflation that we would see an uptick in orders. And you saw that last quarter and the quarter before. So that dynamic is continuing to hold.

And Kate, in the third quarter, was it like orders were up 16% and revenue was up 5%?

14% and AOV was down 8%, 9% -- [ Ryan ] is telling me 9%. I said 8%. But AOV was down, orders were up. So you saw like a pretty wide divergence in where that was. And U.S. was up 5% on revenue.

Yes. And the driver of the lower AOV?

Is the inflation coming back out. So there's 3 components to AOV, right? It's unit price, it's mix and it's items per order. What we're all really talking about when we've been talking about AOV is the unit price coming. And that's really that, as Niraj spoke about, that dynamic where the suppliers were actually already pricing landed goods at what they thought the new product was going to come in at once they took out, in particular, that container freight ramp up and then quick ramp back down. That's that inflation was spiking up. You saw our AOVs went up 19% to 21% some quarters. And that's come back down starting in Q2 of '23. We said this quarter would probably be the sort of trough of the year-over-year decline, but we've got to get back to Q2 of next year to really anniversary it.

One more to hopefully put a bow on this. The backdrop being, call it, recessionary, the tempo or rate of change between, call it, I don't know if everything is discretionary, but some of the more consumable items, which, I don't know, I'd do textiles and items versus some of the bigger-ticket items, the furniture, has that gotten worse throughout the year? Or has it been about the same for your business?

I mean we tend to think of our entire business as being heavily discretionary. And so we haven't seen that. But I think if we're selling grocery, I'm sure demand is steadier, right? But we sell discretionary. So I think the momentum we've built is off the fact that the reality is, even if the market is down some amount, the market is still very large. So then the question is, how can you take share? You've got -- it's a very fragmented market, a lot of competitors. And we've just focused on that core recipe of great availability, great prices, great delivery, great experience on the site, on the app. And that's driving the share gains. We're seeing nice momentum with our repeat customers. We're seeing growth in new customers. And there's still a lot of demand out there. So I think that's the thing to remember. Even though the total aggregate dollars in the market may be down, there's no reason why any given company can't decide to make sure they do a good job and -- relative to others -- and take share.

All right. Going to pivot to international on sales before we go into margin. Just keep in mind if people have questions, feel free to chime in. International, more of a generic question. It's performed less good than the U.S. business. Talk about your market exposure, your cost or your investment in those markets. Yes, leave it at the top line and the trajectory. Are they behind the U.S.? Are they ahead of the U.S.?

Well, I'll start and then, Kate, maybe you want to jump in. What I'd say is, first, the international geographies we're in, Canada is more similar to the U.S., but the European geographies, U.K., Germany, the macro there is definitely more challenged than the U.S. And so there's kind of no question about that. And so we -- same kind of phenomena. How are you doing on share? But then it's relative to what the macro is doing, and then that's going to give you an outcome. Our biggest market by far is the U.S. So you can kind of see that in the segment, because we disclose the U.S. versus international. International is much smaller than the U.S. But I would say the macro challenge there. But what you've also seen is that we -- similar to what we've been doing in the U.S. business in terms of being very discerning about what costs have we let build up, what makes sense, what doesn't make sense, we've also pared a lot of the losses there by being pretty aggressive with the cost structure, which we think is totally the right move. But then in the near term, that could also impede some growth if you're comparing it to a year ago when you add some of those costs in.

Maybe [indiscernible].

No, I would only add that I think some of them we -- and you're probably going to get to this as you move to margins. But as folks think about the cost actions from last year, they -- or this year, they were global in nature, right? So as Niraj mentioned, we pared some of the work in Europe with cost actions, but that was up and down the P&L. We saw that everywhere. So ops cost savings, but also marketing spend, how do we think about marketing spend, particularly in those markets where it's already been challenged? So that's where you might have seen potentially some opportunity if you'd invested in that more heavily. And then obviously, on the comp expense, we've been focused on that market as well. So these were not just U.S.-specific, it was across the board.

Right. To margin -- to gross margin, I think this is where the P&L has profoundly changed pre-COVID to now. Can we talk about the buckets first? And then I'll try to probe on that maybe we're 25%, call it, to 30%. I don't know if 5 points is the right range that you rule of thumb it, but the buckets to build up to the margin expansion?

Yes. So maybe if I can go back a little bit, in the pre-COVID time period we talked about 25% to 35% walk on gross margin over time. And there were a few different levers within that. So one was sort of mix shift as our brands and product mix, as you mix towards things like Perigold that are higher end, but also even within the categories that we sell as we mix towards our flagship brands, which maybe have a higher gross margin. So there's one component of that. There's a component that is logistics costs and how do we continue to get operating efficiency around that piece of the business. And that's obviously been a lot of what you've seen this year. So I'll touch on that in a minute. And there is a component around supplier advertising and other ancillary services. The one that we've been talking about more recently is supplier advertising. And that -- and then there's obviously, as we get scale, we continue to get improvement in wholesale economics with our suppliers, right? And so those are the sort of key levers in that original 25% to 35% walk. You obviously saw a step up right at the beginning, almost, of the COVID period, sort of pre-COVID in 2020 as the margin improved to that sort of 27%-ish period from the 25%, that's as we started to get, I would say, smarter and more efficient and thoughtful on some of the pricing models and how we thought about similar in substitution and demand retention there. And then what you've seen throughout this year has been that logistics piece, that ops cost piece, where we did announce in January that more than $500 million of cost takeout that we were going to be achieving throughout this year, and really operational execution and improvements on a number of areas in the supply chain that got even sloppier during COVID than I think anyone would have wanted them to. But when the business doubles overnight, that's what happened. And that's driven a lot of the growth this year. We did say we would invest some of that back into the customer experience. And indeed, we actually did do that. Particularly in Q3, we mentioned that on the call, we said we still came in a little bit above -- and now is where you'll probably say "But you still beat guidance" -- we came in a little bit above guidance. Because of that mix benefit actually that we talked about, we achieved a little bit more mixed benefit in the third quarter than we expected. As we think about going from -- we obviously guided 31% -- 30% to 31% for this quarter -- typically, by the way, the fourth quarter in a normalized period is slightly lower gross margin, because of the mix of products within that quarter, more giftables. It's also typically a slightly lower AOV sequentially again because of the mix of products within that quarter. So -- but let's just take that guided range of 30% to 31%. As we think about getting from there to the mid-30%s, we particularly called out supplier adds as having the largest single impact on that and that being about 2 to 3 points; and then logistics costs and mix, each about 1 to 2 points.

That's helpful. Supplier ad, that is -- where is that today in the P&L, meaning what kind of contribution?

Very small. The last thing that we said was at our Investor Day, it was about 1%, right? So it's a small part of the business today. We think that there's significant upside and opportunity there. A lot of the work on that has been around opening up supply. So how do you expand supply without degrading the customer experience, particularly in categories like ours that are differentiated, so unbranded. So it's not going to another marketplace and seeing a bunch of the same products and it's all a bunch of marketplace guys jumping in and trying to jockey for the first position. We still want to make sure that we serve up to you the end table that you want. And so how do we not degrade that experience? So one, how do we test and open up supply; and then two, how's the technology performing? Is it easy for a supplier to manage it, to bid in the right way? And are they seeing the [ ROIs ] that they want to see on that? And as that's gone tighter and we've invested there, we see real opportunity there that's somewhat irrespective of the top line growth, right? Top line certainly helps accelerate that, but as you open up supply, we open up opportunity to sell in a way that even on the same top line we didn't have before.

The move from 25% to 30%, it shows that you're important to the suppliers, you're important to the customer. Is the walk that you originally built to move from 25% to 35%, for example, did it play out? Are these the similar buckets or are they happening in a different way? I don't know if it matters, but also thinking about the speed at which you can go from then 30% to 35%.

I can start, but you can feel free to jump -- or if you have a thought.

Well, it's very similar buckets, right? We talked about logistics, we talked about our private brands, we talked about supplier services, we talked about suppliers optimizing for profit dollars. These are the same things that we're pointing to. I would -- what I would say, though, is like to your point, I think that is the key point is that there's still a lot of opportunity ahead of us. Like Kate, for example, just mentioned when we had the Investor Day in August, we talked about supplier advertising. We said it's 1%, and we talked about the potential for that to get to be a few percent. That's just one of many things. There's still a lot of logistics efficiency opportunity. And so all these things would add up to a bridge that could get you quite far, above 35%. But of course, some things play out more slowly. And then you may want to reinvest into the customer experience, which we found so far a good balance of doing, because then that's driven up our Net Promoter Score, that drives up the repeat. You then monetize that increased volume through the retail revenue you're getting. So it's a balance, but I think it is playing out as we've been discussing.

Yes. The levers are all the same. I think the only things that move around are the timing of it. So obviously this year we turbocharged the logistics savings, but we think there's ongoing logistics savings opportunities, right, maybe supplier advertising. We had to spend more time on the opening up the supply than we would have initially anticipated, and now that is an opportunity for growth, right? So the timing moves around as you dig into these things, but the levers are the same as they have been and the same that they -- we spoke about in 2017-2018.

I think it could be just my own misperception and just surprise that a lot of these benefits accrued right when the business -- not right, some of it was pre-COVID -- as the business was contracting post some of the COVID gains. That really showed the value of the brand that's been built, to be able to retain some of these outside of the cost takeout from the supply chain from this year. Can we talk about the SG&A cost reduction plans? Dimensionalize them, please, and then talk about the path to getting there and I think even beyond, because we've talked about beyond.

Yes. So I can start. In January, we referred to about $750 million in total SOTG&A -- or total labor cost takeout, let me actually frame it that way, total comp cost. And so there, we're really focused on not just the expense that runs through that SOTG&A line, but also the stock-based compensation, which is meaningful and real expense. And that didn't just hit on SOTG&A but also hits a little bit further up on customer service, a few items that we pulled. So that was the focus that we said we would take out, combining those very similar to what we would see really in 2023 for that. What we've also said even following that is that we continue to see opportunity in labor efficiency. And that meant that, obviously, at the beginning of the year, we guided to that SOTG&A line actually coming in quarter-on-quarter. And that hasn't been exactly linear, but you've seen us deliver that. And as Niraj, I think, framed up at the beginning, this has been an iterative process. We've done 2 large actions now. And then we've gone -- you've seen ongoing sequential improvement. We continue to see opportunity. And we want to be very thoughtful and mindful of labor cost in particular, and not just how we think about that in a sort of challenging macro potentially in 2024, but really what is the right scale for this business, not just today but for the future growth, knowing that we've already embedded a lot of the cost of the future growth in the P&L structure as it is. And so how do we maintain the efficiency of that? How do we think about spans and layers, seniority, that kind of thing?

The time frame in which to achieve mid-single-digit EBIT margin, the macro wasn't there. Is that not -- is that achievable? Does it make sense to push the business there or invest back in, into the value proposition?

Well, I think we're balancing the two. But like right now from where we are, like even if next year was flat to this year, we'd have EBITDA of over $450 million. So the D&A -- our CapEx right now is lower than it was in the past. So depending on what the period is that you're amortizing, it may take a while for that to come down. But that would -- just on a -- if you're looking at EBITDA less CapEx, I would have you very clearly past that. Really, the number we're looking at is like we want EBITDA less CapEx, less stock-based comp, we want that number to be positive and then grow at a nice rate. When we turn it back at EBITDA, we talked about getting to 10%-plus EBITDA and how that can get meaningfully higher from there. So we're focused on driving that fairly quickly. And obviously the macro plays a role, because obviously, with revenue growth, it's a lot easier for that to grow much faster. But there's a lot underway that is going to drive these outcomes irrespective.

Yes. And if I could touch on that for a minute, obviously on the last call we provided a framework for how to think about how all of the cost actions in '23 would flow through in '24 when you got the full year of that. And then we also said that we would continue to be very cost disciplined. And that's where you just pencil out flat revenue growth and take into account what we talked about on that call and ongoing cost discipline, that's where you get to that north of $450 million. But we want to continue to be mindful to, Niraj said, not just to driving -- we often refer to EBITDA lock, because that's what everyone's focused on is adjusted EBITDA -- we're really looking at the adjusted EBITDA less the SBC, less the CapEx, or in other similar language, getting to net income-positive, right? We're very focused on that and driving towards that.

Some of the big public companies, they are holding back on promotion, basically sacrificing sales from margin. How do you think about market share, ability to tolerate market share loss? It doesn't seem to be a challenge for this business, especially in this backdrop, but how do you navigate that? And do you prioritize one over the other?

Well, we've been gaining market share without sacrificing gross margin. So I think the way you posit it is, you either would lose market share and protect gross margin or you would lose gross margin and gain market share. But I think the actual results we've had would show you that we're both protecting gross margin and gaining market share. So we believe that there's a way to balance these 2 things. That's what we're doing. And we think we're getting really good results, where we're seeing the earnings move the way we want and we're seeing revenue market share move the way we want. And so we -- that is the focus we have. And I think, again, customers are discerning. It's a great opportunity to take market share in an environment like this because they're curious what's out there. They want to get a good deal. They want a great offering. They want to find that right item. They're not just kind of spending money left and right. And so if you have that offering, you're getting in front of them, and they see something interesting they like, they'll buy that. We don't believe that the right move would be for us to lower our margin in order to try to buy that revenue. But we think impressing them with the quality of the offering, and that means everything. That's what is the product, what is the price, what is the delivery, what is the customer service, what -- all -- the whole experience. The product experience of finding the item is the way to do it. And then that's durable. That lets you compound it over time. So then in other words, if the market turns up, you're going to see -- well, first, once we anniversary the deflation, order growth becomes revenue growth. Then as the market turns up, you're taking share over some baseline. If the baseline looks like this, you're taking share over it, your revenue number is going to look a lot worse than if the baseline looks like that, right? So these are the things that will play out. And that's sort of the history of how -- when we started in 2002, we would have had 0 market share. And pre-COVID, we're at $9 billion in revenue. Today, we're around about $12 billion in revenue, but again, doing it while growing profitability and taking market share.

And this balance, investing in the customer, let's say, total experience, versus investing in advertising, for which you've also struck a nice balance, which one do you push harder on? Where do you get, I guess, a better return? I think the more durable one you've answered in terms of customer experience, but how do you think about them?

Well, I mean the way to think about the advertising expenses, you definitely need to be present. Now if we are a brick-and-mortar retailer, present means have physical stores in locations that people are going, right? If you're online, it means get traffic. And obviously, the best traffic are the loyal customers who are just typing in your name and coming to you or opening up your app. The truth is there's a lot more customers out there that might be early in the journey of getting to know us. They may not yet be that truly loyal customer. So advertising plays a role there. And as you move them up the loyalty ladder, you find that you don't need to really spend that money on advertising for that cohort of customers. So we do it very mathematically, basically, right? So we're not going to chase kind of that low-calorie revenue. But at the same time, we understand that being present is a piece of what you do to get the customers in. But you definitely don't want -- advertising cannot make up for not having a good value proposition. So you're not going to raise price to drive marketing spend, because that's just not going to get you a great outcome.

Connected to advertising, repeat versus new customers. Throughout '23 repeat has been growing sequentially. New has been -- I'm sorry, yes, new has been relatively steady. Can you talk about what's driving that? And if there's -- is it the value proposition? Anything in particular that you can point to?

Just one comment on the repeat metric, because I, unfortunately, was the person that developed that metric 10 years ago when we went public. It's all-time repeat. So that number should generally be going up. So we look at internally -- so if you've ever purchased and come back and purchased, even if you haven't been active in a while, you're going to show up as a repeat customer in that metric. Internally, we look at a number of different metrics on repeat, including repeat within a certain time period and how frequently one -- somebody is repeating. So are you a sort of a onetime repeater or are you a 4-time repeater? And trying to understand different engagement levels. We also -- in the past, we've certainly spoken about our cohorts of customers, and we look to make sure that those cohort curves look pretty consistent over time. So we're looking at a lot of different metrics there. I think what you're seeing, though, is it goes back to the basics of that recipe being strong and price, availability and speed being where we want it to be and seeing the engagement of the customer from that perspective. But that metric itself is probably gets less and less relevant as we've tapped more and more of the market.

Back to overall market growth, you talked about average industry or annual growth of around 4%. What does e-commerce grow relative to that, just thinking big picture? And then market share or a prescriptive way to think about how fast Wayfair should grow within that context?

I think as we got to COVID, the market for a while had been growing at 4% and e-commerce had been growing 12% or something like that. So that's kind of what it had been. The COVID period, obviously very wonky numbers. I think right now we have a typical recession environment where you're seeing negative numbers. But you're seeing e-commerce perform better than off-line. So that pattern has resumed. I would think that this market, if you roll forward a little ways to kind of post the recession, I think you would expect like 4% overall growth, and you'd expect e-commerce to be in the double digits.

And the e-commerce trend line is actually -- it spiked, it went up and around. But if you look at sort of -- if you were to straight line penetration 2019 to 2023, it would have stayed -- we've sort of evened out from those spiky periods.

Right. So the COVID boom went way up off the trend line. It's reverted almost entirely back to the trend line, yes.

Back to the trend line. So there's not been a structural change.

Right. I'm going to ask about new items. Anybody have any questions? So part of -- sorry, part of, I guess, the past, we spent time on conference calls talking about new product additions, and that helped expand the TAM and probably generated new growth. Can you talk about -- are you -- is it part of the market, you're big enough now where you're an amalgamation, you're selling everything? Or are there certain product categories? I don't know if it's white goods that are growing faster than the House.

So across our categories -- we're seeing kind of good momentum broadly. So it's like our current results are not bolstered by any 1 or 2 areas making up for the rest or anything like that. In terms of adding product selection, I'd say we're always open to adding product selection as long as we think it's additive for the customer. So there's like a ton of products out there, and we have certain competitor sites that are flooded with products where it's a lot of the same product over and over again. Some of the quality is not necessarily described accurately. It makes the shopping experience for the customer very difficult, a lot of customer disappointment after getting items. So we don't quite take a view as like, hey, anyone could post anything super easily anytime. We don't -- we have a tighter view than that, because we want the customer experience to be a good one. But at the same time, we don't say no, no one can post anything new. No, absolutely. We're open at getting new suppliers. We just want to make sure the quality is going to be additive.

Maybe we'll close, if there are no questions, on the balance sheet, the convert, you're controlling your own destiny more by generating EBITDA in the U.S. So can you talk -- just frame what the balance sheet looks like? How you think about, I guess, some of the changes over the next few years?

Yes. I mean, I think you actually hit on the biggest thing, which is we are increasingly trying to, of course, drive adjusted EBITDA, but ultimately cash flow, right, so that we can be in control of what our options are relative to the upcoming maturities and making sure that we're expanding the option set. So as we think about -- there's the '24 maturity. That's just $170 million. We've been very clear we will pay that with cash. And you get to the '25 maturity of $750 million remaining on that '25 until late '25. And the important thing that we're focused on there is optionality. And to your point, we got to get EBITDA and free cash flow and keep driving that to maintain the optionality, but we want to make sure that we're looking at a range of options from -- certainly, we've obviously become successful tappers of the convert market, but also what does high yield look like for a player like us and what could -- how could that pan out. And then ultimately, as we continue to drive EBITDA and free cash flow, we generate more free cash flow. And so that becomes part of the option set on how you manage the entirety of the $750 million. Beyond that, the '26 is at a point where TBD on what that looks like and how that converts. But the more optionality we create for ourselves, I think the better position we put ourselves in. And so that's what we're focused on.

And I think, obviously, there's a lot of -- this takes you a little off the balance sheet topic, but a lot of talk about EBITDA. I would say the main financial metric you're going to see us working to optimize is free cash flow per share. You're going to see us keep working on that. And yes, we can report the EBITDA number, we can talk about the EBITDA less current CapEx less current target stock-based comp, but all of this factors into this kind of concept of free cash flow per share. So really, the problem with the converts is they can be quite dilutive, right? So your share -- it can look inexpensive if you just look at the debt piece of it, but it can be a lot of share count. So I think if you think about free cash flow per share, that will be how you see us make decisions.

I think a number of folks have asked us, hey, the converts are at a really nice and low attractive rate historically. Even today, obviously, they still are relatively low compared to high yield. And so isn't that appealing? But when we think about the dilution impact there, that's obviously in our cost, [ actually ], it's very costly to us, right? And so it is very important for us to look at the full cost when we think about these options.

Great. Oh, please, one question. If we have the mic runner, please.

Can I ask, if I were to try to take the long-term growth algo that you guys laid out at the Investor Day and tried to -- you guys mapped it as kind of industry -- the way you guys mapped it compared to maybe the way some of the KPIs that you guys report from a reporting perspective, if I wanted to map it to active customers frequency, AOV, to get to that low double-digit kind of rate that you guys talked about or a double-digit rate, is the right way to think about it kind of high single digits active customers, low double digit -- or low single digit frequency, low single-digit AOV as a decent framing? Or what would be the right way that you guys think about that?

Yes, I can take a stab. So we -- I think the right way in terms of those metrics would be on AOV, we've been pretty transparent that a typical time period, AOV should not be a huge driver of the top line, right? Now again, you'll see the general industry maybe like-for-like items grow roughly 2%. And then obviously, we have some mix benefit as we mix in things like Perigold and the SRBs are coming in at higher. But that's not going to be a huge driver. So therefore, you're making -- the growth is really coming from active customers growing, to your point, and also the frequency of those customers. Not disaggregated that, but that's going to be the bulk of that growth. And we've spoken in the past about wanting to take more of a share of wallet of the customers that we have. They're generally purchasing with us 2 times a year, we know they're in market somewhere 6 to 8. So it's taking more of that share of wallet and then, of course, growing the annual active customer number.

One quick one, if you don't mind. I think you said Cyber 5 up nicely year-on-year. Just any other texture you'd add to that comment and how you're thinking about the holiday -- obviously, people don't give furniture necessarily as gifts -- and how you think about discounting this year versus prior years?

So I'll make a couple of comments and Kate can jump in. So Cyber 5, yes, the revenue was positive year-over-year. The point I was trying to make there is that the pattern we've seen for the whole quarter is the same pattern we've been seeing this year, which is promotions are punching bigger and nonpromotions are a little more of a lull. And that is a common pattern we've seen in other recessionary periods. That's also been true this quarter. So that was kind of like the main point I was trying to make about that. All the data we have has us kind of cleanly continuing to take share. To your point about furniture not being giftable, what I would say is that's where -- when you look at our fourth quarter pattern, as you get into like the week or 2 right before Christmas, those are not necessarily the big weeks for us, because, again, a lot of what people would buy from us, they'd buy kind of earlier in the quarter, because maybe they're planning on hosting or they want to spruce up their space so they're buying something for themselves, or -- these are not your last-minute purchases typically. But that said, there's -- the pattern we're seeing in the cadence of how revenue comes in over the quarter, it's not particularly different than what we would expect. It is exactly as the recessionary scenario would expect, and it's not -- the recessionary versus non-recessionary is not super different. It's just a shift a little more into the promotions out of the non.

But to your point on the mix of products, I mean, we said -- and I think I said it at the beginning, in a normalized period, the Q4 quarter is a lower-AOV quarter, which suggests you're mixing more towards less of maybe the really big items and more towards some of the smaller and it's a tighter gross margin quarter, too. So there is a seasonal impact in the mix certainly.

With that, we are definitely out of time. Appreciate it.

Thank you.

Thanks, everybody.

Appreciate it.

Congratulations on your pivot in '23. Good luck in '24.

Thank you.

I'm cut off.