Wayfair Inc. (W) Earnings Call Transcript & Summary

Mike Lasser, the hardline broadline and food retail analyst. This is the last company-specific presentation in this room today. And we've definitely saved the best for last. So we are super excited to -- we've got the team from Wayfair with us, if I -- as if they needed no introduction. To my immediate left is Kate Gulliver, who is the Chief Financial Officer and Administrative Officer. To her left is James Lamb, who is the Head of Investor Relations. Ryan Barney from the Investor Relations team is here as well. Now if you were to measure a finance team in terms of strength and fortitude by the volatility of one stock price, it doesn't get any tougher than this.

No one has given us that particular compliment, so thank you, Michael.

That is just the beginning of the complements that are coming, Kate. So this is going to be a fun and lively conversation because the Wayfair journey, anyone who has some time on their hands, they should go back and listen to "How I built this" which is a great podcast by Guy Raz, and Niraj and Steve, told the wonderful story of how this incredible company was bootstrapped from the ground up. And I think Kate joined in 2014.

That's right.

So 10-year anniversary, happy anniversary.

Thank you.

Originally heading up the Investor Relations function then moving to the people function. And then more recently [ wearing off ] very small shoes of her predecessor, Michael, who did a great job for the organization.

So where I do want to start the conversation is this is a consumer conference. So I don't know that there is an organization in the consumer world that's got more data, more insight and does a better job of harnessing the power of those insights than Wayfair. So as you look at that data, are you seeing signs that either some of the pull forward in demand that has been afflicting the home furnishings category over the last couple of years is starting to bottom. And how do you think about that pull-forward dynamic where people had bought a lot of stuff over the last few years versus the fact that people just aren't moving right now?

Yes. So there's a few factors at play there. Maybe I could start, and then James, you should jump in. But to level set on where we're at. And the data that we look at for the category, we believe that the category has been down the last 9 quarters and double-digit declines in the last 6 quarters. So to put that in comparison, that is sort of rivaling what we saw in the great financial crisis, another period of housing disruption, of course, 2009, 2010. So the category has been depressed for quite some time. And I think the natural next question becomes, well, how much of that is just anniversary-ing the pull forward and sort of cycling that out versus how much is the category itself is in decline. And -- so I think there's a few ways to look at the pull forward. I know you, you and your team have spent some time looking at, maybe you want to talk through some of what you guys have looked at there and how you thought about the normalized CAGR of the category where it could be.

Sure. So this is a category that historically grows pretty consistently in a low single digit kind of rate, right? So call it 2.5% to 3%. If you were just to race COVID and starting with 2019, continued that CAGR to today, you'd be at a level of total industry volume, it's about 7 points higher than where we are in actually...

Industry revenue units more.

Industry revenue, exactly. Right. And then on units, even more depressed, obviously, because there's been inflation that's in the system. So to Kate's point, we're very dislocated from a historical perspective. And ultimately, we think that, that turns around at some point.

Yes. And then I think the other factor -- a part of that has certainly been that big, you have to ingest the pull forward and then sort of digest that and that as it come back out. To your point, Michael, certainly an element of it is housing related. We've always said that we are not directly correlated to the housing market to the same degree that other folks may be in our category or may perceive us to be. If you look at our average order value, it's around $300. Our customers doing 2 purchases a year from us, so she's not furnishing a whole house with actually furnishing an item for a room. But in general, the category certainly is a housing relationship. And so when housing is as disrupted as it is, certainly that drags on the category. And so I think interest rates, housing, all of these things over time start to move. Obviously, this category starts to experience some tailwinds then comes back. It's -- it is a cyclical category. It's not a category that I think is forever altered. People need a place to sit. They need a bed to sleep on, a dining table lead on, that will come back over time.

And just so combining those two answers, one of the themes that we've heard from some of our conversations today, is that maybe the pull forward has now worked itself out, whether it's mattresses or appliances. And we're just not seeing people move because they're locked in. And so now that the phase that we're in is more about that lack of move events, whether it's into and out of a home or an apartment, the move events, but eventually, that will take care of itself and that will usher in a much healthier environment, especially for these bigger ticket durable items that consumers might be in the market for infrequently.

Yes. I think that's all accurate when you think about the category as a whole. And I would add an element to that, that even if you're not planning to move, if your perception is that you can't get out of your house because the interest rates are such that that's not an option. The market is so backed up, you're probably psychologically less likely to invest in the incremental future house to begin with. And so I think there's both the actual reality of moving being less and to be sort of perception by the consumer at a time where -- maybe feels somewhat stretched already.

Got you. And I would just remind everybody on your app, feel free to submit questions. We got a lot of ground to cover here with who are the finest around. But feel free to submit questions to as part of our conversation. One that has been of interest is, have you seen any evidence to the consumer trading down?

Yes, that's a great question. We've actually not seen a lot of evidence of that. So that was certainly a trend that we tracked in 2009, 2010. We think that's a place where actually we perform well if that happens. We have the ability to trade down on our site. But we haven't seen anything notable to call out there on the trade down.

Got you. Wayfair has done a really nice job of stabilizing its market share. It's been an interesting journey because for a while, consumers didn't or apprehensive about going into stores, and they went back in the stores all through it. Wayfair was steadfast. And just doing this thing and now is seeing some benefit from that because its market share is stabilizing. With that being said, what do you think has driven the market share gains? And how do you see market share unfold from here?

Yes. So when we look at our -- what we call our core recipe to the consumer, it's really 3 critical factors: price, availability of the goods, and then speed of delivery of that goods to you. And we always want to be on our best foot forward on that core recipe and our positioning across our range of categories. What I would tell you is that the back half of '21 and in '22, our positioning worsened across those fronts. So when inflation came into the category, one of the downsides of not being an inventory-based retailer, there are many upsides. So one of the downsides was that inflation hit us first and faster than other folks who had landed inventory. As we all know, availability was quite challenged, and we didn't have any inventory to fall back on. And due to supply chain disruption, speed was challenged. So we felt that our relative positioning during that time was not where it should have been. As a result, we lost some share. That started to turn around in the fourth quarter of '22. And we started to regain share at that time, and we've been regaining share consistently since then, so throughout '23. To the extent that actually on our most recent call, we said based on the data that we look at our share is actually the strongest that it has been from the dataset that we've been tracking for many years now. And that's really due to getting our sort of best positioning across those 3 metrics, so across price, availability, and speed.

And where do you -- were there any learnings that you could take from the past that Wayfair has been on over the last couple of years and say, all right, we can apply these now and accelerate some of our share gains?

Yes. I think -- well, let me talk to -- I think accelerating share gains probably comes from other unlocks and I'll go to that in a second. I think there are learnings from the last few years, particularly around how can we manage price and price competitiveness in a world where inflation, deflation is going up and down, how do we think about that in our pricing algorithm. So that's certainly a factor and something that we will be very cognizant of going forward. In terms of how do we think about ongoing share gain. We've always been a share gainer. So with the exception of that '21, '22 period, through the rest of our history, you said 2002 up to that point, we were a consistent share gainer in the category, both from the benefiting from the shift to online, but also sort of gaining share overall. And as we look sort of going forward, we see no reason why that share gain can continue. We have a number of growth initiatives that we're already investing in today. On the core sort of wayfair.com site, part of our goal is improving sort of frequency and brand affinity. Some of that we'll do, though we actually just relaunched a brand campaign over the weekend. And we've talked on the earnings call about the launch of the loyalty program in the fall, so that's really designed to focus on frequency. But then we have other levers on top of that with some of our other business lines. So our specialty retail brands which are much more targeted and curated brands. Our luxury brand, Perigold. Our B2B business, which is growing. All of these are areas that are much smaller than the wayfair.com business and we think it has significant upside. James, I don't know what you'd add to that.

Maybe just to bring it all together, there's a big opportunity for us in terms of frequency, right? So as Kate mentioned, to your question on the housing cycle, typically, our customers in the market 6 to 8x per year. They're spending about $3,000 over the course of that year, we're capturing about 2 of those occasions today, with an AOV just south of $300, right? So there's a lot of opportunity to be in front of that customer for more occasions than we are currently in that function of being better known for the breadth of things that we sell.

Got you. I want to pivot the discussion a little bit because if you have not read it, Niraj and Steve's annual letter was one of the best annual letters I've read in recent memory, not just for its explanation of what's been happening at Wayfair, but also how organizations work more broadly. And one of the themes was Wayfair had become a little too top heavy. And when you get top heavy, it slows down the organization because you need committees to talk about committees, to talk about decisions to talk about decisions whereas if you pare back on some of that, it just increases both the speed and the efficiency. So I probably didn't characterize it well.

No, I actually I think that's a great characterization.

Yes. So if you could give us a sense of what the journey was that, that I drove this year of reset. My wife tells me I need a reset every year, but Wayfair always do it.

Yes. So I think actually, that was a very good articulation of it. If we sort of step back even going back a little bit further to mid- '22. When we pulled out in mid-'22, after going through just the incredible boom time of 2020, think about in 2020 in one quarter, our business doubles, right? We went from a $9 billion run rate in the prior quarter or 2 and Q2 of '24, it was like an $18 billion run rate, right? That is just a wild amount of growth for any organization to absorb. And as a result, we sort of kicked into gear on the hiring side. And prior to this, we always operated, I think, is sort of a very -- we're a mass-market retailer, so we need to be lean. We've operated lean, and I think it had good design principles around that. And we definitely launched our way a bit 2020 to 2022. We pulled out the mid '22, and we knew that we were overbuilt for what was appropriate for the scale of the business. And so we did that within August of '22, and then the other one in January of '23, those are really sort of top-down targets that we used at those occasions, and it was combined with a broader cost savings package that we talked about at that time. What's been interesting to see throughout '23 was -- and this is what Niraj and Steve were touching on it in out letter was that we actually saw productivity gains. So in within January of '23 by removing some of this excess overhead and some of the sort of maybe gating steps on some of the decision-making and putting more of the focus back on the execution and putting more of the bets back on what had historically been our preference, which is sort of junior team members who we can bet on and can continue to drive growth, we were actually seeing real benefits in how the team was operating. And so when we pulled up again, we saw ongoing opportunity, we believe, to unlock further savings. And what we really wanted to do was ensure that we were applying the appropriate org design principles across the company to continue to enhance that productivity. And so what we did in January of '24 was a much more detailed bottoms-up process to say, "do we have the right spans and layers in this part of the business? Are we appropriately getting headroom to more junior people to give them the opportunities? And are we removing the committee upon committee, upon committee and where can we really streamline?" And that was the action that we took in January of '24. And it was really -- as you described it, it's really designed: one, to remove any excess at that was still remaining; and two, to hopefully accelerate productivity over time for folks. And I think, James, you should add, but I think we are already starting to see some of the benefits.

Yes, exactly. So to Kate's point, in January '23, as we removed some layers, folks had more to own and they ran with that, and they were really excited about it. And we think we've done that again. We're beginning to see that. And I think as Niraj talked about in his remarks in Q4, we're comfortable being frugal with headcount, right? We would rather hire in arrears and staff against resources, staff against projects with resources as they need to as opposed to proactively in advance. I think that's one of the big learnings coming out of this.

So if I could clarify or characterize the 2022, '23, that might have been more meat cleaver broad-based. This was more strategic, is that fair?

Yes. I think that's reasonable. The way I would say it is, '22 and '23 are more top-down target. So saying, Hey, if we look at where the OpEx expense is relative to the size of this business and what this business would be able to operate with, it is too high. Here is what we need to bring it down to. And as a result, that ends up being a little bit -- yes, meat cleaver sort of broad strokes, right? Whereas in '24, it was we went through every single role in -- not frontline roles, right, though not a warehouse customer service, but every single role in the corporate scheme and really ensured that we were structured in the way that we wanted to be structured.

And in practical terms, this may not be the right example, but is vivid in my mind over the weekend. I got, hey, come to Wayfair. We've got beanbags. And would it be that in the past, you wanted to highlight a beanbag. You would have -- the beanbag buyer in the website, a person who would have had to spend on in figuring out when and where the optimal time to send out that type of messaging is and now with a leaner team you're just able to do it. That may not be the best example.

Yes. On that particular example, my guess is...

Did you buy a beanbag?

I know. I know. Well, I'm thinking someone in your house is looking at beanbag and we will target you. So either your wife or your kids [indiscernible]. So that was not an automatic retargeting. But you are right in the way that you talk through how decision-making can go. So that, that is an automatic targeting e-mail based on personalization around what you're browsing. But I'll give you another example that's very similar to that. So as you think about on one of our specialty retail brands, we have recently launched 3 Birch Lane stores in Florida, and the process to get those stores open was a much more efficient scraper process. In fact, it took us about 2 months versus the many months that we took to open all modern stores and Joss & Main stores because there were less decision-makers in the process. So less people, to exactly your point, you have to go through to sort of get some of that approval, and also a willingness to say, we can pivot quickly if we don't have the right merch in the store, these are small stores, it's like 8,000, 10,000 square foot store. We know the right merchant in the store, we can adjust that. And so -- that was work that happened at the very beginning of this year, they just opened a few weeks ago and really took advantage of being quite fast. And in what I would call, given -- I've been at the company for 10 years more of a sort of prior Wayfair operating constructs.

Got you. When speaking of retargeting. James got the [indiscernible] e-mail as I got the beanbag e-mail. So I don't know what's going on there. But you have great perspective on these type of actions having served both as a representative to the outside world from Wayfair then heading up the human function and now focusing on finance. So this question is important because to what degree did some of this layer complexity come back over time? And how do you prevent the inefficiencies from settling back in?

Yes, I think it's a great question, which is really sort of how do you institute cultural change such that some of that inefficiency is not easy for that inefficiency to creep back in. And I think there's a few ways that we're working on doing that. So one is just a much tighter process around the sort of team -- team by team level, the headcount budgeting process for those teams and the reviews and deliberation around that process. And that has already started to get tighter sort of in the back half of '23 and got much tighter throughout -- or back half of '22, have got much tighter throughout '23. So that puts in place sort of the executive management tools to enable some of that construct. The other piece is really continuing to explain and be transparent around what your objectives are and the discipline around those objectives with the team. So we were very transparent around how we did this. We said this is what we looked at. This is the spans and layers that we think are appropriate. This is how this should play out over time. These are the types of things that we took into account. We actually published that letter publicly. It was a e-mail that we sent to all employees a day of the rift to really explain what it is. We then spent several hours with employee or an hour-long meeting with employees, the day following the rift where Niraj and Steve, the 2 co-founders, walk through this process again and explain how we did it. And so I do think there's both how do you put in place the technical controls, which we believe that we've done. But then how do you start to institutionalize the thinking around it. And that's a sort of a softer skill and softer approach, but it takes repeated messaging in management.

Got you. I want to pivot a little bit to your customer base. It's been quite a remarkable journey and evolution, then it get its peak during 2020 and '21, there was 33 million Wayfair customers. There's 135 million homes in the United States. It means that almost 1 out of every 4 homes was buying a product from Wayfair. Something that you should be extremely proud of. Now the customer count has stabilized in the 20 million range. How do you get some of those customers who were part of your active file for a period of time, were engaged in that behavior? How do you get them back?

Yes, great question. So to sort of level set on where we're at today, we're at a little over 22 million active customers and our definition of active customers for those who may be less familiar is an LTM active customer number. So anybody who purchased at all in the last 12 months shows up in that number. But you don't show up if you're just browsing the site and have it engaged. So you may be engaging but not buying. Our customer file stands at about 85 million, I think, in what we last reported. Now that's not an exact compared to households because you could have -- James and his wife may have 2 different accounts in the same household.

One [ integrator ].

Yes, exactly. Well, You never know. So it's not an exact number but it's directionally helpful. And so a lot of our work, we were talking about growth vectors on wayfair.com and James is speaking to the frequency. A lot of our work is how do we go back to those 60 million customers, so we have the data on. And to your point at the beginning, we have a rich amount of data on. And even if you're on the site, we know what you're doing, which is why we can send you the beanbag e-mail, how do we go back and get those folks to come in and convert and purchase again. And what tools do we have to incentivize them to come. Part of the work in '23 was being more promotional. We are very mindful of not overdoing that and trying to not train the customer, but we did see that as a marketing tool that we needed to use at a period where the categories we talked about was depressed, and we want to use that as a way to sort of get people reengaged and to land on the site. Part of the work in '24 is around the brand refresh, around loyalty, around continuing communication of that price availability, speed, value prop. And really, someone was asking earlier, how do you think about the balance and sort of truly net new customers versus lapse customers, well to the point that you make, we have a large file of lapse customers. That's a very valuable file for us. We usually have that 1P data on them and we really want to get those folks reengaged and back in.

And how do you think about the promotional lever as a tool to bring some of those back in now?

So I think it's been a very effective lever throughout '23 and was again, very necessary at a time where the category maybe wasn't top of mind and you were sort of shifting your spend to services or even to other discretionary categories. It's great to have the promotion as a way to sort of get in front of you and get your attention. And we actually said on -- I think Q2 and Q3 call of '23, that in a promotional activity, a customer -- actually, the majority of the product is actually not -- but it's not a product that's on promotion. So all classic end cap aisle strategy, right? So bring them into the aisle, and they will spend somewhere else. And so I think that has been an important lever in '23. As we go into '24, what we're focused on is taking some of the learnings from the various promotional events in '23 and making that as targeted as possible. We're still being cognizant of the environment that we're operating in, but try to be mindful of not overusing that lever. So one thing that you may see from us is more targeted promotion, so an outdoor sale or a white sale versus shutting up the whole site being on sale.

Got you. And conversely, AOV has gone through the ups and downs?

Yes.

Where -- you can't stay without having some reflection on it. So where do you think that this goes from here? There's been a lot of an inflation and deflation. The customer went from big projects to more modular projects, there's been so many dynamics that have been influencing order -- average order value. Where does it stand today? And where do you see the path unfolding from here?

Yes. James, do you want to give the overview of sort of how that's trended?

Sure. Happy to. So average order value is really a component of 3 things, right? You've got items per order, you've got like-for-like pricing, and then you have mix, right? Items per order stayed relatively the same. We talked about we haven't seen much trade down or any kind of real mix dynamics. And so it's almost all price. And the AOV inflation that you saw, which was a function of the supply chain inflation that we take in our model, given the fact that we're not owning the inventory led to the big increases that you saw in kind of late '21 and mid-'22. And then that began to diminish in terms of the rate of year-over-year growth to the point where you got to basically flat and then started to turn negative in the beginning of 2023, right, from a year-over-year perspective. So what we've talked about is an expectation that we would continue to see year-over-year declines in AOV for the first part of '24, just as we completely anniversary that inflation that entered the system now exiting the system such that by the second half of '24, you should be back to a place where AOV is more neutralized. And we're really hearing that across the board. The gen merch has been under this, roller coaster and it's on the downswing, but honestly, to stabilization. It seems like before just echoing some of what's happening in the industry. I want to pivot again as a longtime follower of more traditional retailer, retail. I get a little excited that Wayfair has been experimenting with some physical locations for multiple reasons. To me, this unlocks a whole new addressable piece of the market that may not have been willing to site an unseen like -- my folks, for example, choice [indiscernible] they still -- they don't realize that shag carpeting isn't out yet, but it could...

It's going back here in actually, the tweens love the shag carpets.

They're not in the tweens communities.

But the point is, give us a sense for Wayfair strategy with physical locations, the first one is to set up soon. And how do you see that unfolding from here?

Yes. Great question. So we're also quite excited about it. A little bit around the framing. To your point, they're easy case segment of this a market that is obviously self-launch today, but we think remains offline over time. So today, we put online penetration to roughly sort of 25-ish percent in the U.S. And then take your pick on where that matures to other categories show up to 50%. But wherever you pick whether it's 40, 50, 60, some chunk of this remains offline. And we think that's an important part of the market to be in. And when we think about the things that are necessary to go in, in this category into off-line retail, those are actually things that we've invested in over the last 20 years. So it's the brand, it's the supplier relationship, it's that customer file that we talked about. And really critically in this space, it's the logistics infrastructure. So in pace with big and bulky items, our ability to get that to you and get that to you quickly after you come into the store, we've already built that out. So some of the components that we think are quite necessary to be successful, we already have. And we get very excited about then applying that to meet the customer where she's at. And in some cases, that's probably new customers, maybe like your parents, but that's probably customers that also already shop with us. But want to test out some of it in store or maybe don't know actually the full breadth of offering that we offer and go into the store and really understand that we do in full appliances selection or we do have a full time in selection. As we think about how we get into physical retail because I think that's quite important. We really started out by testing in these smaller format stores. So I mentioned the Birch Lane stores that we opened in Florida. We have a handful of Birch Lane, AllModern and Joss & Main stores. Those are our specialty retail brands. These are 10,000 square foot stores, so they're much smaller than what we're building in Chicago. And really, the intent there was to get an understanding of how the technology was working in the store, to understand how to staff these stores, how to train the staff, what qualities we should look for in a store manager. How we might think about merchandising the store, the mix of cash and carry versus larger items. And so it's been a great way for us to in a much lower cost, lower commitment way, learn quite a bit. And now in May, we'll open outside of Chicago, the first Wayfair store. That will be a 150,000 square foot store. So it's a big store. So it's a full range of what we offer. And we're really excited to get that open and then start learning from that as we think about next steps in physical retail.

A lot of traditional retailers will say that whenever they move into a geography, they see a nice lift to their e-commerce business. Like in the early learnings from some of the tests you've done for broad-based expectations, is this how you expect it to play out from here?

Yes, definitely. I would clarify that we want the stores to hit EBITDA threshold and payback thresholds on their own merits, right? So without sort of benefiting that, what we would call the halo benefit. But we also do see a halo benefit, and that's an important part of story. So if we look at the stores that we've already rolled out, we've been able to get much tighter on our attribution models and understand really what the halo benefit is for those stores. We've always been very technically and quantitative focused on our marketing, and this is just another element of that. And part of the benefit of rolling out these smaller stores first was to get some of that testing. I mean so we certainly think that there will be -- there is sort of 4-wall economics of the store, but also a lift in the surrounding region.

How fast are you willing to push this initiative? Is the capacity in place, once you figure it out to move pretty quickly?

Yes. I mean the first thing I would say is we do want to take some time to figure it out. So given the sort of investments and how new this initiative is for us, it's quite important that we understand how these stores are working before we go and stamp out a bunch of stores. We think that there's a lot of opportunity for these stores, but we do intend to be quite thoughtful and prudent about that. So I would say the gating factor has left the team. We have a physical retail team that's built that's getting the store up and running and more, we want to see some real-time data of how this is all playing out so that we can go into ongoing growth in a very informed way.

And there's crowds outside the door waiting. That will be the sign just like in the Apple locations, but we look forward to seeing them. So it was very helpful. And I would attribute -- I don't know if it's all Kate or all James, maybe it's Ryan. But these scenarios that you've offered.

That Ryan gets the plan.

Ryan, no. He gets the attribution. It's very helpful to help the market understand just the cadence of the business. You talked about $450 million as being a real low case that you feel like under tough scenario mid-single-digit type decline you feel confident that you could hit. Flat, you could get to $600 million of EBITDA. Are those the right benchmarks to think about? And what pushes you within those benchmarks to one end or the other outside of sales?

Yes, that's a great question. So let's start with that $600 million, Michael, I think that's sort of the easiest to understand in the framework that we provided. In your point, these are scenarios. We're not in -- to give guidance.

No guidance. No guidance.

So if we -- the intent of explaining that $600 million was really to say, think about the full impact of the cost savings that we did throughout '23, and that January rev. If you look at that and you apply that to the 2023 revenues, that would get you to $600 million of adjusted EBITDA. So the idea there is that's just the full run rate of the cost savings that have already happened. And importantly, when we talk about that January rev if we talked about a net savings number because we do intend to do some hiring back at the junior levels, where we want to have to keep having that pyramid. So that's the net savings there. And then we said we have confidence in delivering on this $450 million of adjusted EBITDA, somewhat irrespective of the top line. And the intent there is to explain, one, again, the sort of enormity of the savings, but two, some of the levers that we have to pull in a scenario where the top line remains under pressure. So for example, on the gross margin line, we've talked a bit in the past around how we can about the pocketing versus the pass-through of cost savings there. Pocketing being put a year in the gross margin in the past or being giving that value to the consumer in some way, often in the form of price, that's a lever that we can pull throughout '24. And then I just spoke to that hiring, we can meter out that hiring in different ways depending on where the top line is. So we do feel like we have enough levers at our disposal to get to that $450 million point and then, of course, on a for-like basis, get to that $600 million point.

And longer term, one of the debates on Wayfair has been, can it grow its top line at the same time as it improves its profitability? There will be initiatives like we want to get deeper into the flooring category. You'd have to build up a product management team and engineering team to merchants, and they would drive growth, but that would weigh -- those investments would weigh on the margins. So what is the longer-term vision look like? Why is now they're an inflection point where Wayfair can grow its sales and its profitability in simultaneously over the long term?

Yes. Great question. I think the easiest way to sort of talk through that is to reference actually a line from the shareholder letter, where new urgency wrote that every -- for the next $1 billion of sales, that should come in at sort of a mid to high teens flow-through. And the -- what we're trying to articulate there is that actually, we think we have the headcount in place today for all of the initiatives that we're working on. And so after going through that thorough review in January we feel very good about where that headcount fits. And that means that we can continue to grow the business without adding headcount on that [ soccer ] line. Now at some point, yes, you need to add. But we talked about that $1 billion incremental for some period of time, we would not need to add there. And so then what you're thinking about is, well, what's the flow-through then at [indiscernible], we're just getting leverage on and that's staying flat, then we're looking at that 30, 31.

Just billing administration.

Yes. It's a terrible acronym, it's OpEx cost. Thank you. As that remains flat, what are we doing -- what do you see for the flow-through then of that incremental revenue. And that's really just our gross margin where it is today, that's 30, 31, less the CS&M customer service and merchant fees that 4 to 4.5 already today, less the EC&R at that 11% to 12%, you get that mid-teens number. That can push up a little bit higher as you put more volume frankly through the logistics network that can come in at a slightly higher growth. So that's without incremental savings and -- we obviously always want to be looking towards ongoing opportunities for optimization, particularly in the supply chain. So we feel very confident that over the sort of near term, there is not a need to add to that line. We've also said publicly that going forward, that line would grow at a much moderated pace relative to top line.

Got you. And it does seem like there's a lot of opportunities still on the gross margin side, whether it's through the supply chain, there's been a lot of investment in supply chain over the last few years. Advertising is another opportunity.

Definitely.

Can you give us a sense for how these gross margin opportunities line up and where the cadence of how they would roll in over time?

Yes, great question. So we still put in the path, we actually started talking about it several years ago, this path of getting -- we actually have the time or sort of '24, '25 gross margins, and we said we think we have 1,000 bps of gross margin, and we can get to mid-30s. And probably when we said that in 2017, 2018, people didn't give us much credit for it. But now we've achieved half of that. And we said you were 30, 31, we absolutely see very clearly the path to that 35-ish gross margin. It's really 3 primary levers. One is the supplier advertising piece that you just spoke about. So today, and sort of the last that we gave on that, I think it was August of '23 that's a relatively small portion of the business, about 1% of revenue today. So quite small. We see opportunity there. We size that sort of 2 to 3 points on that gross margin line. And that's really increasing the penetration that we have and we intend to do that. We open up supply in '23 after testing. So we have a very considered purchase, the customer's routing. So we want to make sure that with something like sponsored SKUs, we weren't negatively impacting her experience. So we've opened up supply, and we've improved the tech there for the suppliers on the bidding side. So 2 to 3 points there. We said another 1 to 2 points on the logistics side, and then another 1 to 2 points on, we call it other, but that think about that as really merchandising and mix. So if you think about how those things phase in, some of that can come without ongoing top line growth. So again, you can get some penetration on ad sales without significant top line growth. You can get some improvement in the supply chain without significant top line growth. And then to achieve the sort of fullness of those estimates, you would want some top line growth on top of that to get the real leverage and obviously on the mix side, that's really things like Perigold, the specialty retail brands that come in at a higher gross margin, sort of making more of the whole combined with the ongoing sort of pricing power and leverage with our suppliers.

Amazon has 8% to 9% of its GMV converted into advertising. Is there any reason why Wayfair would have a different model or a different level of penetration over time?

Yes, we estimated it for the Investor Day when we showed sort of where we had it going relative to where to say we put it at like 3 to 4 points of revenue. And I do think it is a bit of a different customer experience and that probably does impact, and we think 3 or 4 is very achievable. And one of the compares is when you compare it to an Amazon or an Etsy or others in the space, it's obviously less than where they are already at. On the other hand, it's less of a branded category. There are brands but that's really in plumbing, appliances, that sort of thing. So a lot of the core F&D, there isn't a brand there. So then you're talking sponsored SKUs, and again, we want to be mindful of what that customer experience is. So we see it as an important lever. I think it will probably play out a little bit differently than perhaps that has played out in Amazon and others.

F&D, Furniture and decor.

Furniture and decor. Thank you. So many acronyms to that.

A couple of last questions. Number one is, if tariffs on imported goods come back, how would that impact Wayfair? And what was the lesson last time from...

Yes. Yes, great question. So I think there's been some industry changes from last time and then also they're sort of Wayfair specific. So 2018, what we saw at the time was prices, of course, went up for us because as again, as we talked about with inflation, when prices go up rapidly, when wholesale economics change and wholesale prices went up, our retail prices went up relatively speaking because we didn't have inventory that we're sitting on under an old tariff regime. And so that moves up quite quickly. On the other hand, though, we are able to move to other suppliers faster and other bases of supply faster than our peers. So we may not have the exact -- this exact, surely we probably do have. Well, this is a proprietary chair. But that chair, we probably have many versions of that chair. And maybe some of them are manufactured outside of China...

Perigold.

Love it. Love it. We can shift to supplier that are based in different locations that are not burdened by the tariff regime. The model that we have allows us that agility in a different way, I think, than a retailer that is having product design to their spec at a specific factory then needs to go find another factory. So that's sort of how we react to it and how we'll be mindful of it. There is a period of digestion, but then we think we can react quite well. The other that the industry has evolved from 2018. So the industry as a whole has changed some. So I think 2018, and then again, you had a shock in 2020 with China being shut down for COVID. And so there has been a push to diversify manufacturing. You have seen Southeast Asia come online more from a manufacturing perspective. You've seen Chinese-based suppliers open up locations there. And so I think the industry is a little bit more nimble and a little bit better prepared.

Got you. Rapid fire, we got some questions from the best-looking and smartest crowd around. Number one, are you seeing or anticipating emerging competition from beyond or the market share dynamics?

Yes. The thing I would say about -- we followed both Overstock and Bed Bath & Beyond, and we competed against the 2 of them for years, and we'll certainly compete against them as a combined entity. They are a very small part of what is a large market. Certainly, we pay attention to focus to, but I don't want to overestimate where their scale is today versus the category as a whole.

Got you. Lastly, when you launch Wayfair creating a digital front end or e-commerce channel was difficult, today is commonplace and easy. Does that limit your value add to furniture retailers? And do you think you might add a private label effort to leverage your position?

So we do have private label, just to be clear, and we actually -- we have a number of different private label brands on the site that we curate product in. I would agree that standing up a front-end customer-facing side is probably easier than it was 20 years ago. What I don't think is that easier is the back-end piece of it. So the logistics, the customer experience, how you service that customer, how you find that customer. For example, we work with suppliers today. In some cases, we will pass off a customer, they have a particular problem with an issue. Then [indiscernible] pass off that customer directly to the supplier because the supplier can resolve it better. The supplier though generally is not prepared for that. They don't really want that call. So we usually end up taking it because they don't want to do the customer service. They don't know how to do that. That's not what their business is. And so it's less that you would see suppliers standing up their own website. That's they don't have the brand, they don't have the sort of back-end logistics to actually be able to manage that. So that's not really something that I would say we're overly focused on.

Could we not do this all day? It was so fun. Please join me in thanking Kate, James and Ryan for a wonderful discussion.

Thank you, Michael. Thank you, everybody.