Wayfair Inc. (W) Earnings Call Transcript & Summary

So we're going to get started. Good morning. My name is Chris Horvers. I'm the broadlines and hardlines retail analyst here at JPMorgan. Welcome to JPMorgan's 52nd Annual TMC Conference. It's my great pleasure to introduce to my right, Co-Chairman, CEO and Co-Founder, Niraj Shah of Wayfair and to his right, CFO and CEO, Kate Gulliver. So we -- this is a 35-minute session. There will be time for audience questions. So please, if you have any questions, I'll open it up in a bit and happy to answer any of your questions.

So maybe kick it off starting at a very high level. Over the past 2 years, there's been a significant amount of change at Wayfair. Bulls call it, healthy maturations, [indiscernible] sort of say like you had to like every other Internet company coming out of COVID. I'd love to set the table here for investors and ask you to speak about what drove that significant amount of change? And what goals do you have going forward?

Yes, sure. Well, first, Chris, thanks for having us here. We're really happy to be here, and thanks, everyone, for coming. And I think we still have a few seats scattered about if anyone wants to see who's in the back. But yes, thanks for your questions. So I guess the way to think about it is right before COVID, we had come to the conclusion that we thought we had over-hired and that our team had gotten too large and we had lost some efficiency. So we actually did a layoff of about 500 folks in February of 2020 right before COVID. And we had a plan and a trajectory to get us back to being basically very focused, lean, execution oriented, but yet well-resourced against our key initiatives. And that's sort of the way we had grown the business because just in a quick history is we bootstrapped the business for the first 10 years. So that's sort of -- we grew with no outside capital for 10 years. We got it to $500 million in sales before we first took an outside capital just to give some context. But then what happened is with the onset of COVID, we had a huge boom in demand. That was followed then by a period where we were trying to hire to keep up to the demand, but that was the great resignation period, if you sort of remember back to 2020. And so we entered 2021 with the old plan not only out the window, but with a series of events that had happened that kind of in hindsight, hindsight being 20/20 thrown us off balance. And so what had happened is by summer of 2022, when it became clear to us because by then kind of the COVID boom had turned into COVID bust and today, we're about $12-odd billion in revenue, pre-COVID were $9 billion, but that boom went up, and then it settled down in the 12 and change period. And that's kind of like where we've been for a little while. What we had realized is, hey, so our cost structure had not only not been corrected and executed -- not been corrected as we initially planned, but it gotten worse, we'd not only hired more during COVID that had created a problem, but frankly, just our levels and spans have gotten out of whack. It was hard to ramp up more junior folks during COVID working remotely. We had to on average hire more senior folks. And so the org model had gotten kind of messed up a few ways. So what we did starting in the start of '22 is we decided to get very aggressive about sort of getting back to the kind of lean, focused, execution-oriented, yet very ambitious driven kind of culture company that we have always been. And that's kind of what we did over 18 months. And very quickly within 6 months, by the end of 2022, we were back to taking market share at a fast pace, outgrowing the category by a significant margin, and that's continued for 6 quarters now. So I think now what folks notice is in arrears they're like, "Oh, wow, a tremendous amount of change. And geez, we didn't really know if that was possible and why it changed and how was that possible and how it end up in that situation." And it's that confluence of events that I described. That's sort of -- or the kind of framework. But where we are now is very much the same culture. That's how we built it over the last 20 years.

Excellent. So maybe talk about -- this is such a unique economic cycle, the COVID pull forward and then you have the past 2 years, the normalization of wallet, you had inflation, then we've had deflation. And we have a consumer that is -- it's a little -- it's not great, but it's not bad. So there's a lot of different factors that are working around you and then you have the e-commerce penetration vector. So can you talk about all that? How do you see -- where do you see the category growing? Where do you see your growth relative to the category?

Yes. So I'll share some thoughts and then, Kate, I don't know, maybe share some thoughts you have too. What I will say is our category has definitely been in a full-blown traditional recession for 2 years now. And while there was a COVID pull forward, I think we've not only gone through that demand level, but then some. If you look at demand today, it's below 2019 levels in nominal terms. And if you look at it in real terms, it will be meaningfully below 2019 levels. Why did that happen? Well, the initial piece that pull forward initial sort of recession sort of onset would have been sort of the boom-bust cycle of goods had a boom, then it had a bust of services, particularly leisure, entertainment, travel, all of that had a huge boom, which has continued. But the bust in this category sort of persisted because there is some correlation to housing. And if you just think about interest rates and how that's hit the housing market, anything related to housing, it's sort of really stifled sort of the general flow of people moving to new houses, selling their house, investing in their house, thinking about doing something with their house. Their neighbor moves and then the new neighbor does something they think about maybe doing something with their own yard or whatever. And so that's kind of the current environment. And then obviously, the overall economy is slowing. Traditionally, travel and furniture and big discretionary goods of the categories that first get hit. We obviously have a significant penetration there. So the category, I know you look a lot at the U.S. government data. If you look at the government data, you see the category continue to be down, whether it's negative mid-single digits, high single digits, you see it down in that kind of range persistently for that period. And I think that's the reality. We've been significantly outpacing that. We've been outpacing that by taking market share. The reason we take market share is the same reason that we went from being 0 in revenue 20-odd years ago to where we are today, which is just the incredible selection, the great delivery experiences, the high-quality merchandising, the good in-stock availability and sort of the fact that we're built for home. And these big bulky fragile items, these items that require consideration. These items that are very decorative and style oriented in nature where you want to find the perfect item. It's just a different shopping experience, and that's what we're tailor-built for. So that's why we've had sort of a different outcome than the category, but the category has been kind of negative. And now what you see folks talking about is how these are cycles and these cycles and I think whether you're talking about the building materials and the renovation side like a home improvement retailer, whether you're talking about the furnishing side, which is a different [indiscernible] of companies, we kind of straddle the 2, you see the same sentiment that we're probably near the end of that negative cycle.

Yes. I mean I think you touched on all of it. I guess, just a few pieces to add. We've talked about the category being down now for 10 quarters and from the data that we look at, so credit card data from a variety of sources, double-digit, high single-digit, double-digit decline for 7 quarters. That's a significant contraction in the category. You mentioned, Chris, e-commerce penetration as part of that. And certainly, e-commerce penetration ramped in the beginning part of COVID and then pulled back. We do think e-com penetration has gone back to its normalized curve. So if you look at sort of 2019 and were going to draw it out, that would be fairly standard. And it's really the category overall that has fallen back. And our ability to gain share has kept us significantly outperforming the category. If you look last quarter, we were down a little bit, the category down double digits. That's that price availability, speed combo allowing us to gain share.

And so maybe talk about the -- there's different sort of you have some retailers seeing green shoots in some of the short-cycle home furnishings category, got Home Depot on the other hand, talking about anything that's financed is just dead right now because given where rates are. So can you elaborate a little bit more about where -- like how close do you think we are into the bottom? And what's the complexion that you see within your business across different categories?

Yes. So I think there's sort of kind of 2 separate ways to talk about the bottom. The one is like when do you see the market no longer falling just being firmer? And then the second is when do you see an upturn? And they are really different questions if you think about it because the context right now is you've had like a significant negative number on top of a significant negative number. So when I say there's a lot of sentiment that that's ending, what I think people really believe it's ending is a significant negative number on top of the significant negative number and people really believe it's firming up. Now how it turns up, I think there's a lot of data saying there's a lot of pent-up enthusiasm for the category, but I do think some of that gets unlocked as interest rates crest and the housing market starts moving forward and then housing is more top of mind for people. And I think there's a lot of different macro factors that may be weighing on folks that would cause consumer sentiment to get better over time. And I think so the stronger upturn, I think, could be a little bit ways away. I think the kind of firming up that we're near the bottom, I think that's what we're very close to. I think that's the way we would think about it.

Got it. And then there's a certain Internet retailer that starts with an A, we won't say the full name here. But it's always been the bear case, like how can Wayfair grow sales and grow profitably in the shade of this big tree, and it's a sort of common sort of default bear case on your business and on your stock. What don't people understand about your business in terms of how you're differentiated and that drives your ability to grow in the shade of this big tree?

Yes. So I think the key thing to keep in mind is that not all physical goods are identical to each other in terms of how consumers pick what they want or how they shop. Most categories of physical goods are either pure commodity items where the brand doesn't matter, and they're just looking to buy good price value, easy combination. So think about buying a 3 pack of iPhone cables there. You don't particularly care about the brand. You just care about the review rating, the price, the length and you buy it. And it's a relatively low consideration purchase because you don't necessarily expect those 3 cables to last a very long time. You're paying $10, $11, $12 for this pack. And as they break, it's fine. And you probably don't remember the name of the last brand of cables you bought in any case. And the other side is where they're branded goods. And there's a few brands. They're selling largely similar items, but like paper towels, Bounty, Brawny, Seventh Generation. They're not super different. And so there's these generalist platforms that are great for all of these use cases. And whether it's Amazon or Walmart or Target, you can go to any of them, you'll have a selection of goods, they'll be quickly delivered, they have the same items as each other, and you have your loyalty to whichever one for whatever reasons, and you go to whichever one for whatever reasons. It's why they all get into grocery. What's interesting is certain categories that are just very different. One is just think about if you're shopping for fashion. And I'm not talking about commodity fashion where it's like white tube socks for your son. I'm talking about you want to pick out a short for yourself or a sports jacket. You don't necessarily think of the same platforms I just talked about, which are sort of ubiquitous in their selection as a place where you're going to be able to navigate and find what you want. And there's very few categories like that. Fashion is a big one and home is the other big one because if you're thinking about buying a bed or an outdoor patio set or a rug or a table lamp or a swing set for the backyard, you're not looking to just kind of pick off the 7, 8, 10 items that are on the top of Page 1. You have some desires around the quality you want to get, the features you want to get. You want to get educated in the process. There could be a significant aesthetic element to what you're buying. You want to know the durability over a longer period of time will be good. You want to know that the price value hits the right spot. These are hard things to do on these generalist platforms. They're not optimized for that. They're optimized for what is a very large market, but have items that fit the characteristics I just described. And that's even before you then get into the logistics of delivering these items, setting them up in people's homes, handling any questions they have either pre the purchase or post the purchase. And so there's a lot of aspects that make this category difficult. It's why basically the 3 large physical goods categories that are not set up well in the generalist platforms are fashion, home and automobiles. And the reason is they're very good sized categories, which is why they can have their own players who then have specialized logistics and do a very good job with them. But it's also -- those are only 3 specific categories. And these platforms behooves them to worry about all the rest of the market, which is a very big piece of the market. That's why they don't worry about things like grocery or building materials as ways to drive tonnage. So it's just a nuance aspect of the category. That's very obvious if you think about it from a consumer lens and the types of goods, but on a spreadsheet, if you think all goods are the same, then it wouldn't jump off.

Going back to the category and focus in a little bit on the near term, it sounds like your description of where we are, it's like a less worsening, like sort of we were running categories down low double digits, now we're running down mid- to high single digits. And you're going to come through the bottom and then at some point, we'll have the release in the right rate environment. On the call a few weeks ago, you talked about trends flattish ex Way Day and you guided to flat to slightly a positive sales growth for the quarter. So a 2-part question. One is how -- within that guidance, how are you thinking about U.S. versus the international business? And can you share any observations in terms of perhaps how Way Day played out relative to your expectations?

Let me say one thing and then I'm going to let Kate answer the question, the 2-part question. The one thing I'd just mention -- one thing just also, when you think about the comparisons, what you're referring to when you talk about the category being down double digits, is now down mid- to high single digits -- exactly what you just said. One thing to keep in context you're comparing to the year before. And one thing will comment on is just shape of the curve last year is that the market significantly weakened both in the summer and again in the early fall. So this year, as long as the market does not significantly weakens those points in time, the comparisons get a lot easier. And so the year-over-year number can flatten out without the market really getting better, simply because the problem with the year-over-year comparison, you typically assume last year was a normal year. But in this case, last year had a lot of weakening in the back half. And so could this year weaken in the back half? Sure anything is possible, but we're at a quite a low point. So unless that happens again, you're going to see that year-over-year number kind of compress. But Kate, do you want to field the good guidance...

Yes. So first of all, in sort of U.S. versus international. As a reminder, the International segment is Canada, the U.K., Germany, a very small business in Ireland. And we've spoken on prior calls about the macro in those markets being more under pressure than the U.S. market, and you've seen some of that in how those comps have played out in terms of what they're reported. The U.S., as you just look at the numbers is the vast majority of the business. So generally, the direction of the U.S. informs what the global comp is. If you sort of think about how we thought about the guidance going into this quarter, all I would say is Way Day was a little bit later this year than it typically is, so we guided ahead of Way Day. We've certainly seen promotions outperforming every day. That's something that we've been speaking about for some time, and that makes the promotional cadence generally quite important and sort of was in our minds as we thought about the flattish performance quarter-to-date.

Got it. Understood. Before I pivot to some margin questions, are there any audience questions?

Immersive shopping and really educate your -- educate your customers on products, so on and so forth?

Yes. So the question was that what to -- when we think about immersive shopping and kind of ways to educate our customers as they're shopping. So I think in reference to kind of how it was describing category, a lot of the goods we sell, there are some that are simple like accent pillows, but there's quite a few categories, which are complicated categories. And if you haven't purchased even something as simple as a queen-sized bed in a long time, you really don't understand what's out there, the materials, the types of items. And then there's a lot of categories that are even far more complicated than that. When we found the way customers learn about items is there's quite a few different ways they learn about items, and they're not necessarily super interested in like a detailed educational approach, but there's a combination of how images, videos, comparison tools. There's a lot of merchandising detail we store to help folks navigate by features that are particularly interesting to them. We have a large customer service organization who can work with folks. And then frankly, with the kind of the dawn and rapid growth of generative AI, there's a lot of ways on a conversational basis, to try to take the wealth of content we have and surface it for customers in an easy way where we can take their queries and just get back to them. So the way we look at it is it's a pretty comprehensive sort of approach you take, and it's not any one thing that does it because customers shop in different ways and then they actually have different questions as they go through the consideration process and sort of down the funnel. And so when they're first kind of approaching a category, you may need to give them kind of the context of what are the first few key questions they should think about that will help them sort of narrow the range. As they get more detailed into an item, they often are looking for things that give them confidence that they picked the right item relative to their goals. And so there's a lot of different aspects there in terms of how you help folks navigate.

Other questions in the back?

I know that you have an initiative to have brick-and-mortar stores, how do they fit into your vision?

Yes. Sure. So today, what we have opened as far as specialty retail brands, all modern, Birch Lane and Joss & Main. We have 8 stores open, and they range from sort of 10,000 to 14,000, I believe, or so square feet. So there, you can think of them as very similar to other lifestyle home furnishings retailers, stores that you visited where you get a real feel for the brand, you see a breadth of product. It's -- there's a broader assortment of product available, but it's a pretty cohesive offering. It's relatively easy to get a feel for whether it's your style or not. It spans all the furnishings categories that you can work with associates, and it's also been a great way for us to start to build an expertise of how to operate stores. Because if you think about brick-and-mortar stores, we have a lot of the key sort of aspects of what a successful brick-and-mortar retailer needs. You need to have a brand, you need to have an assortment, you need to have a supply chain with the inventory in it. You need to have a delivery and fulfillment capability. You need to have a customer list or a brand, a way to market to customers. We have kind of everything I just described. And then, of course, you need to have brick-and-mortar stores, which is what we didn't have. But we have sort of all the other operating pieces, but designing stores, opening stores, operating stores is the piece that would be new to us. The complexity for a lot of retailers once when -- orders, how do you deliver to them? How do you make sure you have it in stock? How do you do that economically? Ironically, that's something we actually are quite excellent at already and have done for years. So the way to think about what we're doing is we're building a craft of getting good at the store piece of it. For the Wayfair brand, the first store actually opens later this week on Thursday. And that store has been 3 years in the coming. And the reason it's so long is that's a large-format store. It's a 150,000 square foot store, it is located in Wilmette, Illinois, just north of Chicago, sort of a dense suburban area. And that -- the reason the store is large is it's meant to bring the Wayfair brand to life. So if you think about the breadth of categories that we're in, that sort of creates that square footage sort of plan that we have. And we also believe it can be quite a destination. And so there's some home furnishings retailer, very few, but who have successfully become destinations. And so they get quite a large draw of customers. The reason we're pursuing stores is that if you think about some categories that are more mature online like consumer electronics or office supplies, what you see in the early days is the online penetration grew really fast. But then they both as soon turned it out around about 50-50 online, off-line. And the reason is there's a lot of use cases online could be handy and there's a lot of use cases where off-line can be handy. And each one, I think one is 40-60, the other is 60-40, but you found the right balance that works for consumers. Well, in our category, you can say, hey, some people would still believe, hey, no one will ever buy a sofa online. But we have an upholstery business over $1 billion. So I would argue that that's technically not true. But the reality is there are some people who may want to touch and feel an item, sit in an item. They may want to work with the designer. They may want to finance their purchase, might find it easier to do in person. They may just be browsing. They may want to browse with a few friends and get their friends' feedback on ideas. There's all these different use cases that you can do in a brick-and-mortar store. And then there's, of course, the categories that are more impulse driven, that you may just shop -- this is a fun category. You shop stores for fun and whether you pick up some pillows or some candles or what have you, a lot of that's done just on an impulse basis. So stores offer a very powerful use case for us online, obviously, with the expanded selection and all the benefits that we bring to bear and have built up over the last couple of decades are significant. So the way we think about it is this lets us complement the 2 and unlock a much larger share of wallet than we could if we only focused on either one alone. And we're in the early days, we'll iterate and we'll figure it out, and then we think it's quite a large opportunity ahead of us.