Wayfair Inc. (W) Earnings Call Transcript & Summary

I'm Curt Nagle, the SMID Cap Internet Analyst at BofA. I'm going to cover Wayfair. I'm very pleased to welcome Wayfair's, CFO and Chief Administrative Officer; Kate Gulliver, and James Lamb, who runs IR for Wayfair. Before being appointed to your current role, Kate, those 2 years ago, Kate actually led the IPO of the company, when she led IR and then served as the Head of Talent for Wayfair. Since her tenure as CFO, the company has gone through a pretty substantial turnaround. This includes now 5 straight quarters of market share gains or starting to regain market share, return to customer growth, taking over -- well over $1 billion in costs now taken out and driving sustainable EBITDA profitability and now the company is targeting over 10% margins over the long term. We'll go through a series of questions at the end, we'll open it up to anyone who would like to ask the questions. But first, again, Kate and James, welcome. Thanks very much for joining us in the time.

Thank you for having us.

Yes. We really appreciate it.

I guess just starting from the top, first thing I'd love to dive into is just how to think about the state of U.S. home furnishings, potential ARPU recovery. Basically had a situation or have a situation now where I think we're kind of 2 years into, I guess, what you call a recession, 1Q off to a little bit of a softer start with guiding 2Q down about mid-single digits. So I guess just first, what do you see as the most important lever is, I guess, to get growth going or improving into year-end? And I guess, just as a kind of a side question, in terms of kind of what the baseline is for industry total sales relative to pre-pandemic kind of where are we? So just kind of level setting.

Yes. I can start and then James, you should jump in. Obviously, you and the team have done a lot of work on this. So just to sort of to use your exact line which level set a bit, we have had 9 quarters of industry year-over-year decline. Of that, 6 quarters has seen double-digit year-over-year decline. And what you may be saying is, well, of course, it ran up so much in the pandemic, it inevitably had to come back. But what I think is interesting and maybe, James, you want to go into this a bit is how we think about what the trajectory would have been had you not had the pandemic.

Sure. So a simple way to look at it is, it's a category that historically grows at a low single digit kind of rate, so call it 2% to 3%, right? That's over a long 30-year plus time frame. If you would erased COVID and simply apply that degree of growth in mid-compounded rate from 2019 to now, versus where we actually are as a category to be about 7 points dislocated lower. So we think that we're under-indexed versus what would have been the case and that's some opportunity.

And that's on a dollar basis, not a unit base because there's obviously quite a bit of inflation...

That's right. So on a unit basis, it's arguably even more dislocated down.

So to your original question, obviously, the category is quite dislocated in terms of what are the levers that move it from here. Obviously, this cyclical category will come back. People need a chair to sit and a bed to sleep on, right? This is not something people can forever not buy. I think that there are a few factors that folks can look at to sort of drive growth from here. Inevitably, there is obviously some housing element to the category as a whole. We always say Wayfair is less housing related than folks think it is. I know you've done some work on that to show what the correlation is. It's less than other furniture retailers. But with the category that's dislocated, that's obviously weighing on the category as a whole, even not housing directly, but as you think about interest rates coming back in, certainly that would have, we think, some benefit on the category. And if you look at the mix of discretionary spend on goods versus services, we're still a little bit out of black from where we were in the pandemic. So I think as those things continue to write over time, certainly, you'll see the category return.

Okay. So I guess, under that context, as we've mentioned, you guys have been performing really well, I think, averaging maybe 10 points above the industry. Could we dig into, I guess, what's been driving that? How much of that is pricing and inventory normalization? How much of that is things that you're doing on your own in terms of specific growth drivers? And I guess just what gives you confidence going through this year into next year that you can continue to compound market share gains, which is pretty clear that that's the target.

Yes. Great question. So even though the category has obviously contracted quite a bit, we're really pleased with our share position. We said on the last call we're at the highest share position we've reported and our tracking of the data. And throughout, starting really in Q4 of '22 onward, we've been gaining significant share and pleased with where that's going. We think that, that has really been driven by a return to form of our core recipe. So across price, availability and speed. We actually lost share in '21, '22 when the recipe got a bit out of whack. That was driven by the inflationary environment in the category, lack of availability. We obviously don't inventory. So when the supply chain got backed up it's harder for us to get our hands on goods. And then speed, obviously, took a beating when the category backed up. We believe we're now very well positioned across those key metrics and continuing to improve them, and that's what's driven the share gain over the last year.

Curt, to your question on kind of the future state, we had our first Investor Day last August and we laid out a growth algorithm slide where again, you take that low single-digit compounded growth rate for the industry, higher amount for further online penetration and then a further amount for Wayfair specific growth drivers, we're very confident that we could be a double-digit grower over the long term. So that would embed future share gain as a result.

And then I'd love to talk about some of the specific initiatives that you and Niraj highlighted on the call a couple of weeks ago, I think 3 in particular. Maybe just because it's a little topical, we'll start with the new brand campaign. I think you just launched it on Sunday, which is exciting. I think it's the first one you've done since 2018. So I guess just could we go into -- first, why now, how is the brand messaging changing? How are you communicating to your customers? And are you expecting a lift from this campaign in terms of revenue? How much of it?

So first of all, the new campaign, you're right. It did launch on Sunday, welcome to the Wayfair Hood. Encourage you all to check it out. As we started developing this campaign, it was really driven by a few factors. So one, to your point, the last really big campaign refresh we did was when Kelly Clarkson came on as one of our spokesperson, which was several years before the pandemic. And in sort of natural course of the history of the brand, certainly a good time to revitalize. But to do that, you also want to be in a good position. So it would not have made sense to launch a new brand campaign, while we were still getting the core recipe back into shape. So we had to get that core recipe back to shape before putting money behind a campaign. Overall, I would think about it less as driving specific lift within the next few quarters and more a long-term push towards really investing in the top of funnel to continue to grow the direct traffic to the site to over time, pull back more from the performance marketing PLA-driven traffic. And so when we do our own research and where we have opportunities, obviously, the brand is quite well known. We think there's opportunity to continue to push our brand to the initial destination that folks come to our average customer, we believe, is in the market 6 to 8 times a year, but she's shopping with us or buying from us maybe 1 to 2 times a year. So there's a real opportunity for share of wallet gain. And as the Wayfair Hood sort of helps demonstrate, there are a wide range of places where we could meet the customer that she's maybe not shopping at us today, and we want to get those incremental purchases. And I think it fits really nicely frankly with the improvements we've made in the recipe and then, in the back half of the year, we've also talked about launching Loyalty, which maybe was one of your next points. And I think that the campaign and the Loyalty piece really tie in together, too, and it's all about building that direct traffic and that real affinity for the business.

Why don't we go into the Loyalty Program. So I think you have an existing one now tender based, right?

That's right. That could be tender-neutral.

Yes, tender-neutral, tender credit card. Yes, maybe in terms of just kind of what the facts are, how I think the idea here is to push, obviously, more purchase frequency, but just the structure of the program. And yes, how do you see that as a tool to increase that frequency to 6 to 8 would be nice?

You absolutely hit it right. It's really about driving frequency. And sometimes Loyalty Programs are about getting customer data. We obviously have a lot of customer data. It's not that -- it's we want her to come to us for that incremental purchase that she maybe doesn't think to come to us for. And again, we feel well positioned to do that now. We feel that the offering on those parts of the catalog is quite strong, and we're very competitively positioned, which makes sense then from a point of launching Loyalty. The tender loyalty program obviously limits the customer base that you kind of appeal to because, they have to be folks that can actually get access to that card. And so we're excited about a tender-neutral loyalty program where we can appeal to a broader base of customers. We haven't articulated exactly what that looks like. We've been modeling off of a number of programs that we think are quite robust and strong programs. And we think sort of there's a variety of factors we can leverage from early access to promotional events, to more dedicated customer service support to maybe a point's component TBD, all of that is very not specific at this point, but is the kind of things that we've been exploring.

And rather than I would think that would certainly be a good way to leverage again all the first party data you have?

That's right. We have the data. We can target folks for the program that we think the program makes sense for. We can help personalize the offering. So I think there's quite a bit that we can do with it. And again, it was the kind of thing that we want to wait until we were well positioned on the core recipe across these areas of the catalog before we went out and launch that.

That makes sense. I'd love to move on. So first, I guess, large-scale store in the works, right? So you have, I think, maybe 6 or 7 locations now for your sub brands, but you're launching the first Wayfair big-box store, I think 150,000 square feet in Chicago, I believe in May. We'd love to hear just kind of in terms of what the expectations are whether from a revenue or maybe a scaling perspective? What gave you the confidence, right, to launch such a big location right here? Obviously known for being an online destination. And then I guess what would you need to see to justify or to push further growth in terms of footprint?

So great questions. So let me start with first why get into physical retail? When we look at the category, you can pick your estimate on where you think sort of penetration levels out in the category, but there's always going to be a substantial portion that's offline, whether that's 40%, 50%, 60% TBD, but we see no reason to see that share. And when we think about the things that make a successful offline retailer, we believe that many of those we've already established and built over our 20-year history. So the brand, which we were just talking about. Our deep supplier relationships and the access to that product, our customer file and of course the logistics infrastructure in our space is particularly critical to getting that product to your front door. Those are all areas that we've already invested in. We've already built out and we have a national capability on. And so to us, it's illogical to open up this incremental channel. We wanted to test it out initially with the specialty formats. As you highlighted, those are about 10,000 square feet stores, and it's allowed us to test in a much lower cost, lower risk way. The point-of-sale system and the staffing and the training of the team and what the customer experience is and the merchandising mix in the store. And we wanted to be thoughtful about what that look like before opening a 150,000 square foot store, which is what we'll be opening outside of Chicago. To your point on sort of what do we have to see? We intend to be quite thoughtful and I would say, moderated and how fast we roll this out. We, as with all things Wayfair, I want to sort of iterate and learn. So it's important to us to get this store open and start learning from that before we think there's a lot of potential, but before we go out sort of stamping out a lot of stores. And I think you saw the first evidence of that, and we opened the specialty retail stores. We learn from them, and now we're opening this first store. I don't know if anything you would add to that, James?

No. I mean it's imperative eventually to address the full TAM. Clearly, the economics, the modeling, that's TBD in terms of details and disclosure, but you can [ optimize ] we've done a lot of work on that to make sure that the stores can be stand-alone viable and similar in terms of retail economic model.

And then maybe just as a follow-on, do you see them perhaps more as supplementary, more complementary. I'll define complementary as added sort of existing customer sales -- supplementary maybe more adding more customers, both?

I think it's both. So what we aim to do is, one, we want to pick you up on purchase occasions. Maybe you're coming to us and you're buying your end tables, but you still feel like you want to sit on the couch in person. So that would be complementary to the -- our existing customers maybe adding on, or maybe you're a customer that hasn't been aware of the full breadth of what we offer and it's curious about us that needs to come in and see it in person. So I do think it's both. That said, at this point, we've been around for 20 years. We do know most of America. And so generally, a lot of people have experienced us in some way. So I think there's less of, "Oh, I have no idea what Wayfair is, and I'm going to come in and get it." I think it's more of -- but I wouldn't have thought to go to Wayfair for one thing we noticed in the SRB, for example, is people told us, oh, we didn't realize you did so much tabletop. We tend to think of you as core furniture and yet I can go in and buy a new linen set from you, and it looks great.

Got it. Then last one, on the stores, I promise...

Yes. We love this [ trend ]...

Keep on it. I guess, how to think about, are there any implications from a balance sheet perspective, inventory? So again, you're mostly a flow through model, right? So not taking it on the balance sheet. Does that change with the stores?

Yes. We're not taking inventory in the stores. It's a great question, and thank you for the opportunity to clarify. So we will be forward positioning that inventory as opposed to being in our last mile facility, it's in the store. And we're working with our suppliers on that and no change to that inventory line structure.

Competition. So again, I mean, I don't know if you need to go through to these iterations, I mean you're taking tons of share, right? Inventory is in a great place, pricing, that will make sense. Maybe going a little more specifically, just in terms of some of the conversations we have with investors. Overstock is one that pops up, kind of TBD, right? So they're in the middle of a transition right now. They've stood up, recently stood up, I guess, Bed Bath. Now going back to overstock and that's traditionally been a furniture heavy site mixing some other stuff now. But just in terms of, I guess, thinking about, let's say, for the last 6 months, did you see a lift from when they took over stock back on? And just kind of how to think about that being as a new competitor? I guess, coming back [indiscernible]. And is that a potential? Do you see that as a threat or no?

Yes. When we look at the competitor base, we look at the entirety of our category. And I think it's important not to over-rotate on any single competitor. We've seen, in general, share shift has consolidated among the largest players in the space. So us, HomeGoods, we've seen as a consistent share gainer but also Amazon, Target, Walmart, Home Depot that folks that you would expect. And that trend has been pretty consistent over the last many quarters. So we're generally focused on sort of where is the sort of directional trends in the category. Obviously, we always pay attention to anybody. We've certainly been following the Beyond story. But they're relatively small today. And so as far as the overall dynamic goes, they're a small player in a $400 billion market, do we follow and pay attention to it? Yes. Is it causing undue churn right now? Not that we're aware of.

How about [indiscernible].

I think I've always seen Temo [indiscernible] throw them all in. So for us, we are seeing them not real play in the categories where we are strongest. And really, if you think about the core furniture and decor, this, this is a lot of what they're selling is in the home space, what they're selling. Of course, the ton of what they're selling is apparel and other stuff. But in the home space, what we see being sold is much more on the decorative accents, the much smaller, lower price points. Frankly, under the de minimis threshold from a shipping perspective, of course. So less of a direct competitor than you've probably heard about from an Etsy or frankly, from an Amazon. That said, obviously, we watch them and continue to watch them closely. And I think as we think about ongoing points of differentiation, Niraj spoke to this a little bit in his letter not specifically to Temo, but in general, he talked about how in a shareholders' letter this February, he talks about how you can -- anybody can make anything look good online now, right? Like the merchandising can be spectacular, but the quality of what you get may be questionable. And so part of what we're trying to do is leverage all of that great data that we have, the experience that we're actually getting with going into physical retail and touching that product to be able to put more of a signifier on sort of what you're actually getting, and that will roll out throughout the course of '24. And so I should think those become important differentiators over time.

For sure. Are they topical in terms -- so you have Wayfair has a reasonably big base of Chinese vendors.

Suppliers, yes.

Are they topical or at this point, to your point, de minimis is obviously something that was maybe an issue for them. But if you read, could they move themselves up the value chain? Or just is that -- just too hard to speculate on or just unlikely?

Yes. I would never say that somebody -- so I probably wouldn't speculate on that. I think all of it is possible with our suppliers that are directly based in China. Again, those are largely furniture and decor suppliers. They are less around the sort of small, although we do that business, but that's less of what we're focused on in directly. So it's not as if we're hearing about any undue competition again on this kind of product.

Makes sense. Moving to the margins first, right? So again, enormous success story, certainly over the past 2 years now almost, right? Sustainable EBITDA, cash flow, all that great stuff. On the call, you laid out, I guess, what I'll call a framework and I'm using the right terminology, please correct me, but...

We didn't say guidance.

I didn't say -- I know that. I know it wasn't guidance, but the framework for this year, right? So I think relative $400 million or $450 million or a bump of 50%, right? And then a framework of $600 million on flat revenues. Could we just walk through, I guess, the parameters as much as you can say on the revenue side within that range. Does that contemplate additional cuts, way to hiring. Kind of what's baked into that -- take into that framework, if you could?

Yes. So what we were trying to do is say, was really provide the framework to understand the magnitude of the ongoing cost throughout 2023 and then obviously, the most recent restructuring in January '24. And how does that all flow through? What should that materialize? And so on a flat revenue basis, not that we're guiding to that by any means, but if you just think '23 to '24 as a whole, the incremental cost savings will get us to about $600 million, we said we could get to $600 million-ish of adjusted EBITDA or north of $600 million of adjusted EBITDA. And that's really that $150 million of EBITDA impact from the cost savings action in January, getting the full flow through that, plus all the flow through of the '23 worked. And so that's all we were trying to do is say, here's how you might think about this. And then on the call, we further elaborated that we think $450 million, which is really the 50% plus on the $300-ish million of '23 EBITDA, that was a reasonable floor somewhat irrespective of where the top line goes, right? And what we're trying to help folks understand there is, one, the magnitude of the cost savings and the actions that, that's taken and how that's provided us some protection on that adjusted EBITDA line. And then two, we do, to your point, have some flexibility in ongoing cost actions in '24. So that $150 million of savings that we said we would get from the cost action in generally, that's a net number. And we did intend, and we do intend to hire back at a more junior level as we sort of continue restructuring to make that pyramid shape that we really want for the org. Obviously, that hiring can be metered out a bit. And so that's a lever that we can adjust and pull, as necessary. And then we've obviously talked for the last many quarters about the ops cost savings and how we make the decision on what we pass through to the customer in the terms of price for customer experience and what we pocket and our flexibility in making that choice. And so those are ongoing -- that's an ongoing lever that we have throughout '24 as well.

And then just kind of as an extension of that, and this is something I think you talked about in your share letter. For the next incremental $100 billion, I think the framework would be...

The next incremental $1 billion.

Did I say $100 billion.

Yes. I mean I love it. I'd love a $100 billion, but...

$100 million. Flow-through is mid- to- high teens, right? Is it terrific that as just, again, continuation of that framework that's set up or anything else kind of incremental baked into that aside from the revenue?

Yes, that's what we've already done. So that's not saying, hey, we have to take out more cost to get to that. That's all what we've already done. Incremental $1 billion will come in at this mid- to high teens. If you just run the math today on the gross margin, less customer service and merchant fees, less the ACMR, you get to mid-teens, right? And we said that the [ SAKA ] doesn't need to grow for some time. The OpEx expense doesn't need to grow for some time because we are already investing in these growth drivers. That cost is already baked into that line. And then it goes up to the sort of that mid-teens as you put any more volume through that supply chain, that's a large supply chain. It's built, frankly, can handle the COVID volume, right? Now it doesn't love handling the COVID volume, but it can handle significantly more volume that's going through today. So you will get some leverage as you put more volume into that. And so that's why you get to that mid-teens or high teens. But that's not us saying, oh, we can get there if we take out incremental costs. That's not what we already had.

Terrific. Next I'd love to focus on the gross margin. So I mean that's been another clear area of success for you guys, consistent gains. I think at least 3 or 4 years now, just steady improvement. Long-term guidance, I think suggest at least 500 bps potentially, right, on a number of factors. So number one, just I guess focusing a little bit more near term, '23 was a year of very strong gains, right? Going into '24, I think a little more limited. So just kind of walk through, I guess, kind of what's driving that differential. I think some of it is a degree of reinvestment and just kind of what gets us back on the arc of, I guess, larger margin gains on the gross line.

Yes. Maybe do you want to talk about the overall walk from sort of the 30%, 31% to 35%, and then we can talk about '24 versus '23.

Yes, happy to. So just for the audience, a number of years ago, when we were in the mid-20% range on gross margins, we laid out about 1,000 basis points of opportunity to get to the mid-30s. And today, we've captured about half of that, right? And it's really coming from 4 different vectors. You've got just pure economies of scale, right? As we get larger in volume, we can command better wholesale prices. You've got the logistics network that Kate touched on, right, whereas we put more through our proprietary fulfillment center network, there's gross margin benefits to us. You've got services like supplier advertising, for instance, which is a very high gross margin. And then you have merchandising and mix, right? Is the pie of our revenue shifts more towards things like our high-end brand, Perigold, some of the specialty retail brands, those are higher margins. And so there's a mix benefit as well. So all 4 of those things have gotten us to where we are today and that at Investor Day from the, again, 30 to 31-point to the mid-30s goal, we laid out the disaggregation of what those components would look like from here. And supplier advertising is going to be about 200 to 300 basis points. That's a more nascent business for us, a lot of opportunity there. We may touch on that in a moment. The logistics component is about 100 to 200 basis points in that supply chain. And then we group the other two in Other which is again kind of economic scale plus merchandising mix.

And I think that's sort of the holistic view of how we get to that mid-30s. And then as you think about, well, what can you add in '24 versus '23, obviously, '23, we had a much bigger focus on the ops cost takeout. And there candidly was some low-hanging fruit that had crept in during the boom years of the pandemic, our volume doubled overnight in Q2 of '20, right? And so when that happens, some messiness enters your supply chain. So there was some low-hanging fruit that we took out. We said more than $500 million of cost savings in '23 and that we'd make decisions on how much to pocket versus pass through. And we pocketed actually a little bit more than we would have said it would be optimal in Q2 and Q3 because we were just actually achieving it faster than we anticipated. And then as we look to '24, like any go logistics player, there's another round of cost savings. We should always be doing that. But this is, this gets harder each time you do it. So part of that is how we think about how quickly we can achieve that and then how we think about how we pocket versus pass through. And on those three levers that James talked about, you can get some of the ops cost benefit without incremental volume. You can certainly get some of the supplier advertising with that incremental one because we're still a little penetrated today. But to get the full merch benefit and the full ops cost and the full supplier advertising, you definitely need some volume going through that.

Then why don't we touch on the supplier advertising. So yes, again, targets 2 to 3 points of potential margin gains. Where is that program now? I guess what is, not so much the impetus, but. So if, let's just say I was one of your vendors and one of the CMOs, right? Why Wayfair, why not another program, right? And I guess how do you balance could be tricky between you don't want to have too many ads in people's faces, right? And just I guess going back to what makes Wayfair a desirable place to advertise and yes, I'd love to just hear your thoughts on that.

So a few things. So one, if we think about where we are today, we said it's about 1% of revenue today when we gave our Investor Day in August. So it's relatively small, right? And obviously, this flows through a really nice margins and it shows up in our P&L just over [ clearance ] on that gross margin line, it's a contra complex. And if we think about why we think we can push that more now throughout '23, we had two changes in supplier advertising. One was that we were able to open up more supply. So exactly to your point around how do we think about the customer experience. We were very hesitant to just turn on sponsored SKUs and sort of let it rip. Because this is a considered purchase, it is a browse purchase. It's very motive, it's very personal. It's not a, let me find the lowest iPhone charger that I can find, right? And so we wanted to test out what level of sponsored SKUs was appropriate to not then degrade the customer experience and the customer trust and the offering. And we were able to open up some supply based on that testing. So that's one, gotten better. Two, the actual tech that we use for the suppliers for their bidding to be able to see the efficiency of that ad spend has also improved. So they can actually look at the efficiency of that and understand it. I will say in our category, many of these suppliers are mom-and-pop business that they may not have done this before. So there is certainly some handholding from our team to help educate them on how to think about the returns that they should be getting. To think about the balance and trade-off of supplier advertising versus wholesale costs versus investing in different promotions. And that's sort of an ongoing conversation and our category team and our supplier advertising sales team has with these suppliers. If you think about why Wayfair versus other sites? I think it's more on Wayfair, how do I optimize my spend across those buckets. So I, as the supplier, I can drop wholesales or I can spend in advertising or I can spend on this promotional event or I can actually put my product through [indiscernible] and get a 2-day flag. That's much more a discussion is how do I balance across those things and what's the right mix. And that's very specific to the supplier. This is on sponsored specific, I'll get to brand in a little bit, but that's very specific to the supplier. And it really changes depending on what their objective is. So maybe they're over inventoried on a product, in that case, the sponsor SKU might make sense more than anything else to just boost it up into the top of the sort of blow through a bunch, right? Or they're trying to launch a new product, maybe they want to push that up and get some real sales history on that product. And so that is -- that's really the discussion. The branded piece in our category, obviously, there's less brands. So most of the branded marketing that you see on the site is color, [indiscernible] or [indiscernible] or GE appliance. So the parts of the category that are branded, that's less inventory over time, obviously, than the sponsored SKUs and those folks they know exactly what they're targeting on the returns and how to optimize that and how to use that.

Makes sense. International. So it might be one of the more, I guess, controversial parts of the story, lagged on revenue, lagged on EBITDA a little bit, trailing U.S. on a macro level, so I think that makes sense. It's just less scale, right? However, right, I think at least in the past 2 quarters, it's seen a pretty nice uptick and Canada might be part of that, U.K. is part of that. Love to just kind of dig into what's driving that. How do we think about investment in that region? And kind of what would happen to happen to get to a point where firstly, kind of breakeven and hopefully, we get to a point where your general EBITDA, is it a matter of scale? Or just how are you thinking about the return and the profitability framework for instance...

Yes, great question. So over time we think that the international business should operate on the same cost structure as the U.S. business and from a profitability be no different than the U.S. business. As a reminder, the international business today has Canada, the U.K. and Germany and a very small business in Ireland. The U.K. and Canada, to your point, have had better, slightly better macros in Germany, and we were also further along in our journeys in those countries pre all the disruption our brands are more established. I think seen over the last 12 to 18 months, though, is a really concerted effort to dramatically reduce the drag of the International segment. And so when we've done these cost takeouts, they have not been, they've not protected international, right? They've not been specific to the U.S. market. They have been broad-based and that has included significant headcount reductions in Europe, which is the European business, obviously, is headquartered there, and ops cost efficiencies across that network as well. And so you're seeing that benefit show up actually if you look at the reported segment EBITDA, the losses have dramatically mitigated over the last several quarters. And so the drag is much less than it used to be. Over time, as I said, we think it can look very similar to the U.S. There's no structural difference that we see and how it looks relative to the U.S.

Okay. Staying I guess, on the just broadly international kind of topic, who knows post '24 we can quite see another round of tariffs. How are, I guess, are you prepared to do this? Obviously, after going through 2018 and all the disruptions from COVID, I'm sure, far more prepared and nimble. And I'm sure diversified your supply chain. But yes, if we were to get another round of, I guess, China tariffs, how quickly could you respond? And would that be, I guess, I mean, who knows in scope, unless a potential headwind or disruption kind of near term as you adjusted compared to a few years ago?

Yes. So I think you're absolutely right that we, along with everyone else, has certainly gotten more nimble in how they think about supply chain management and drew 2018 tariffs, 2020 tariffs, even the mix of where goods come out of has evolved some, right? Southeast Asia has grown in prominence. Mexico has gone a little bit better churn for our second category. So yes, there has been I would say, a sort of a healthy election from the initial round of tariffs in 2018. I think what is unique about us is that because we offer such a broad range of selection because we don't inventory the product, we're not working with one particular supplier to manufacture or chair to our specs. Our ability to boost in the sort order, a product that's coming out of Indonesia versus a similar product that's coming out in China because now that product coming out of China is less price competitive, we have total ability to do that. And we can also flip to adding more suppliers, I think, much faster than other folks can. They said there is, I don't want to minimize it, there will be an initial period of digestion. Everybody goes through that. And certainly, because we don't sit on inventory, as the tariffs come out, you see sort of an initial, and you saw this in 2018, initial uptick and then we were able to manage it back down faster than other folks because we could pivot where that supply base came from much faster. And we're now set up better to do that, again, like most folks, I think, but we are set up better to do that than we were in 2018 and 2020. So it's definitely something that we're mindful of. And we continue to work to make sure that we have, our [indiscernible] business come out of many places in Asia, not just out of China, so we're able to bring containers into from different parts of Asia into the U.S. and Europe, and we have a lot more flexibility than we've had historically. I don't know, James, if you would add anything to that?

That's pretty comprehensive.

I targeted all the time on the mic. So just before I go on to the next question there. Anyone else would like to ask a question, please?

A little bit on international. You guys specifically called out the U.K. in the last earnings call. Can you walk us through that market a little bit more in detail relative to the competitive dynamics relative to the U.S., et cetera?

Yes. So the U.K., we have been at for a bit longer than Germany, which is part of why we called, and the market is doing a little bit better, which is part of why we called it out. Our brand has actually gotten more established there and our brand awareness and recognition is better than it is in Germany. Maybe you want to speak a little bit to the market dynamics, some of what we spoke about on the call in terms of the competitive dynamics that there.

It's substantially similar and that it's very fragmented, but the names of the players are different. So you have a few multinationals, a few larger regional folks and then a very long tail. To Kate's point, what we're encouraged about is the market share data that we can track there is showing an inflection up as well and given the aided awareness given some of the changes we made to our playbook over there, we're very excited about what's happening.

But we've, when a group of us went in November. We were visiting our Berlin office and our London office, and we watched a bunch of stores. In the U.K., [ Donnell, Jon Lewis ], the look and feel like similar retailers in the U.S., right? So to James' point, names are different, but it's not that the competitive dynamic is essentially different. And IKEA is a bigger player over there than it is in the U.S. But otherwise, fairly consistent experiences.

Maybe I'll just end with one and if we get any good Internet analyst, I have to ask about AI. So in terms of, I guess, just we touched on it a little bit, I think, in the Analyst Day, but in terms of what you're doing now in terms of how you're utilizing the driving efficiencies, I mean, a whole number of possibilities, whether it's customer service, logistics, back office. How much is that in place now? Is that kind of a factor in the model? And how do we think about the, it's a broad question about the opportunity from efficiency, from margins, from speed of doing business, I suppose.

Yes. I mean, that's one way that we'll see benefit from AI, right, which is on the cost side. But I think we'll also see a benefit on the top line and how people engage and do search and how the personalization can happen. I want to disagree we've been using AI in the form of machine learning for some time, that's how our pricing models work, that's how the personalization on the site works. The real [indiscernible] obviously in generative, and part of how we are utilizing that today, for example, is on the customer service side, with some of the generative plug-ins that we're working with, we, the generative tool can actually draft the initial responses and then a human still does need to review those responses before they go out. Over time does that step go away? Maybe. Probably right now, it's not advanced enough to forego that human step and this is a complicated enough category that we think it's important to have that element. But as you look at places where you could see ongoing efficiency, we are exploring everything from how does copy get written to on the finance side. Frankly, I think it's going to unlock a lot in accounting. And I think there'll be a real opportunity there. Legal document review is another one that we're testing out. So we're exploring it up and down like most folks are. I think we have a deep partnership with Google, and we've been able to leverage that for exploring, particularly around the cost efficiency unlock. I think that's where you'll see it jump first in the P&Ls and then on the cost side. But you should also see a real benefit on the top line. I think somebody that has a large 1P data set like us, certainly has a benefit there and how they leverage generative.

And how big is the customer file, just...

Over $85 million. Indeed.

Well, I think on that note, we'll end it there. James and Kate, thank you so much for your time, and I really appreciate it.

Appreciate the opportunity. Thanks all.