Wayfair Inc. (W) Earnings Call Transcript & Summary

Good morning. Thank you, everyone, for joining. My name is Nikhil Devnani. I'm Bernstein's U.S. emerging Internet analyst covering Wayfair. It is my pleasure today to be hosting Niraj Shah, Co-Founder and CEO of Wayfair as well as Kate Gulliver, CFO, and former Global Head of Talent. Niraj and Kate, welcome to the SDC. Thank you so much for being here.

Thank you for having us.

Before we get started, I just want to remind everyone that you can submit questions via the QR code in your conference agendas or you could go to pigeonhole.at, and use the passcode SDC 2024, and I will try to incorporate those in the discussion today.

So with that, let's get underway here. Niraj, in your shareholder letter, you talked about 2023 being the year of reset. You talked about the challenges the industry went through, changes that you made to the business from a headcount perspective as well come out of it stronger at the other end of it. We'll get into the discussion of demand trends shortly. But can you just level set for the audience in terms of -- as you describe in your core recipe, where things stand today for Wayfair selection, availability logistics? How do you feel about how the business is positioned at this point in time?

Sure. Thanks for the question. Yes. What I would say is the roller coaster of COVID certainly threw us for a loop as I think it did many others. But by the end of 2022, I think we had gotten the recipe back intact. And so selection, availability, price speed, these are kind of core dynamics of why we continue to take market share for a long time. And by the fourth quarter of 2022, we were back taking market share. And so now for the 7 or so quarters, since then, we've consistently taken market share, outpacing the market by a fair margin. And it's on the back of sort of great execution on our strategic agenda as well as making sure that recipe is continually getting better in ways that our competitors cannot necessarily do. And so I think the cost structure stuff that you referred to earlier was one of the things that got out of back during COVID. And so part of getting the execution type was also was cost discipline, also prioritization, but I'd say all of that started going the right way over 1.5 years now.

In terms of that cost head count perspective, can you kind of contextualize for folks just how much kind of cost came out of the business over the last couple of years? And obviously, what is the impact then on productivity with the smaller workforce today? Have you seen anything? Has it actually improved? I guess what have been the learnings from? Because there were some fairly big changes made on that front. So what have been the learnings from that?

When you think about the cost, series of actions we took, the headcount was a piece of it. There was also efficiency on the advertising spend and then there was a very large amount of operational cost savings. So in aggregate amounts to, I think, just shy of a couple of billion dollars. But Kate, do you want to go into some more detail.

Yes. So on the headcount piece specifically, we obviously publicly announced the 2 risks. The total of that cost takeout is just around $1 billion from those 2 actions, and that included the actual cash comp expense and also the stock-based comp expense, right? So the aggregate. And if you think about the cash comp expense, if you look at our SOTG&A line, our SOTGA line, you would look at Q2 '22 compared to actually our most recent quarter and $150 million out on a quarterly basis of that line. So $600 million annual just on that line. And that's not the only places where head count action was taken, headcount action was also taken on the customer service and merchant fee line. So really up and down the P&L. So the total magnitude on headcount, in particular, is quite high also in operational cost savings as Niraj mentioned, we spoke to more than $500 million of cost out actions there that would primarily impact that gross margin line. There, we said some of that we may choose to reinvest in the customer experience. Some of that we will pocket, you can sort of see how that flowed through on the gross margin. And your second part of the question was around how has that impacted productivity when it comes to the headcount piece. And if we think about the various restructurings that we've done, the most recent one was really around org design and getting to what we consider to be a clean org design. So really reducing layers and reducing seniority, frankly, to have more of that true pyramid structure. The idea there being that we actually were creating some inefficiency with folks having to sort of go through numerous meetings to get something done, produce more content that was necessary to get to a decision. So I think most people would tell you that it actually feels more efficient and that productivity is improving as when we folks.

And I think historically, we've seen the business higher to support growth in that SOTG&A line. But when you think about what you've kind of learned from the last couple of years, I mean, philosophically, has your view around hiring to support growth in the future changed? Is it a different a framework as you think about it going forward today?

Yes. I think through the -- we started the company in 2002. And through the vast majority of our history, one of the things we pride ourselves on is being very lean. I think there's a period of time where we did have very large amounts of headcount growth in the kind of corporate staff, which is the piece of headcount you're referring to. And I think our hindsight view of that is that a lot of that led to inefficiency. So I think our view is that we would rather have a focused team that we can support with technology resource, which is historically the model that we had that worked very well. We have a large technology organization and drive gains that way rather than just do it with sort of large amounts of corporate head count growth. As you grow, you may need some headcount growth, but also there's a lot of efficiencies you can unlock with technology. So I think there's a netting effect that you can redeploy people on new efforts. And so I think that's kind of how we think about it. And we've had success with that not just recently, but in the past as well. So we'd be, the period of time where we took a different approach is more the aberration and not something we're looking to go back to.

And being as 2024, I guess I have to ask in terms of the tech helping with productivity, the degree to which certain maybe tools have been used internally. Some companies are starting to talk about this more now. Is it just very early still? Or are you actually internalizing and rationalizing some of these tools?

So we've always been an aggressive adopter of technology. And I would say that's a big piece of how we've won. Proprietary logistics is one piece, a large technology organization. Just a couple of thousand people building things that give us competitive advantages and other reason. And so there's kind of a set of reasons why we've won. We believe that those are really powerful. So when you think about AI and machine learning, these are things we've been using for a very long time. How do you price a catalog of 20 million items well and these types of things. The more recent advances in Generative AI, I think, unlocks a whole new set of things where I'd say we've made a lot of headway on things that drive efficiency, reduce cost, and allow to scale volumes at some things like merchandising content, marketing content, helping our customer service agents where thousands of agents respond to customers more effectively and articulately in both and faster. And so there's a set of low-hanging fruit that we've been aggressively going after. And I'd say we also have some efforts on what I'd call a little more R&D, which is around how can we change the shopping experience for customers in ways that would be nontraditional relative to how it's been done in the past, but perhaps can be more engaging and more effective for them. So I'd say we're -- we generally, we'll watch what others are doing, but we will also want to be relatively fast in doing things ourselves, whether that's adopting someone else's tool or building our own, so that we can get that advantage.

In terms of where demand is at this point in time. I think you've described it as bouncing, bouncing along the bottom. Do you think we're finally at kind of that tipping point in kind of category demand overall? And how do you think about that within the context of your growth this year?

Yes. So what I would say is having seen some normal recessions in the business. I would say that curve is relatively easy to predict, relative to the current period where you have this COVID era that's very unusual. That sort of was the precipitating event of the period we're in now. And so what I would say is if you look at demand levels now for the total market, were below 2019 levels in nominal terms, and in real terms, we're far below 2019 levels. And so even with the early boon of COVID demand if you want to call [indiscernible] a pull forward, you try to fill in the area under the curve, we're still way off trend. So you'd say, okay, well, you could just -- whether it's the great financial crisis or demand during the great depression and you can use things that kind of like both were 3-year negative cycles, I'm trying to project, but it's hard to say that that's a one-for-one. What's very clear is demand is quite weak and far off of trends even after accounting for any sort of pull forward. And so that's why I characterize it bouncing along the bottom. What we haven't yet seen is that recovery start. So that makes it hard to say whether we're fully at the bottom, does it weaken a little more? Does it start curving up and firm up. Obviously, housing is another factor. Housing then is impacted by interest rates, projecting interest rates, perhaps in the cumbersome [indiscernible] [ Jamie Dimon ] has good insights into that, but that's hard to project, right? So you have a relatively kind of tough environment for the category, but it's also been weak for a while. So that sort of leads us to this kind of bouncing along the bottom view, but without clarity on turning up. So what we've done is we focus on the things we can control, which is when you mentioned the recipe earlier, price availability, speed, price sorry, price available speed availability, selection. And the question is like how do you take good share in the tough markets? It's easier to take more share in a good market. How do you take that in tough market. Well, you get for customers with -- in our case, we have a -- they know [indiscernible] We get in front of them with an offering that they are really excited about, which is great items, merchandised well, with great delivery options. And they're -- it's interesting when you talking about it being a weak market is it's still a huge market. And so there's demand every day. And what we found is that the same way we've taken share in good and bad markets before, if you put forward a great offer, you can pull them in, they'll buy from you, and you can take market share. And that's what we've been. So the reason we've been doing much better than others is entirely on the back of market share and what's been a declining market. And we believe we can continue to do that. And then what happens is when the market firms up and turns up that market share drives real growth..

What do you think replacement cycles are like for some of the stuff that you sell we're 4 years on from some of the initial COVID-buying. Is it 5 years? Is it 10 years? Like what is typical replacement cycle? And when does that start to kick in?

It varies by the types of items. You have some items that are a little more fashion style oriented that people will replace more frequently than what you described. And then you get some of the more durable items that will be in the time frame you describe maybe a little longer. So you have a whole spectrum of time frames. And what you're seeing right now with the demand environment, it's not that any particular segment that is particularly weak, particular segments is particularly strong, the demand environment is soft kind of across the board. And I think people -- there's a lot of pent-up enthusiasm in various consumer survey work we've seen. So our view is, again, this bouncing along the bottom, we can take market share. And we believe that it's going to firm up and turn up is just exactly time boxing, it's hard to tell. But we use the phrase bouncing on the bottom because we don't think there's a lot further to fall before you get to that point.

And just on the market share point, if you could just sum up -- so you're flattish at this point in time. Industry, you estimate is what, down high single digits, something in that kind of ballpark.

High single to low double.

Double.

And that delta is pretty big. So when you think about the sustainability of it, how do you frame that? Is that a durable kind of delta?

Yes. I mean, again, I'd just refer to our history, whether you look at just the history since we went public in 2014, when we did $1 billion in revenue, and by 2019, we were doing $9 billion in revenue pre-COVID, now we've been settling around $12 billion in revenue. We've taken more share there. Obviously, we started zero a decade before we went public and ended up at $1 billion from 2002 to 2014. So we've always taken excess market share because the market is sort of like a 3.5%, 4% growing market, right? So it's only growing at a certain rate. We've always outgrown that by a fair margin. And I think we have a recipe, a brand and offering technology that's going to let us consistently do that.

And maybe in terms of what are the mechanisms for taking market share, maybe a follow-up for U.K., it is just around pricing and how that factors into it. So you're well within the bounds of your kind of gross margin expectations. But last year, there were a lot of excess costs in the system, right? There were -- there was too much inventory, there were freight costs, they were replacement costs that were high. Those came out, those funded some of the AOV compression -- some of the AOV compression that we saw in the industry and helped drive some demand. As you go forward, it feels like some of those costs have normalized now, and consumers are responding to promotions, consumers are responding to pricing. Is that a lever you tweak to try and drive some of that to meet consumers where they are and meet some of that demand?

Maybe let's start with the AOV just to talk through that story and then we can go to sort of the broader pricing. Like what you're referring to on the AOV is that as inflation crept into the system, we actually saw AOV sort of rising rapidly end of '21 through '22, right? And so AOV is actually generally not a number that we're targeting. We're targeting things like order growth and trying to get that frequency in that demand. AOV being an output of items per order or the unit price and the mix. And unit price went up quite a bit when the inflation came in. Since Q2 of '23, you've seen that inflation start to come out, to your point, you had suppliers that we're working very actively to bring that out. We were passing that on to our customers. So it was really trying to renormalize that average unit price. And that's what drove those AOV declines throughout 2023. And what we said when we spoke to the first quarter was, we think we're not through that period. So we think we're through the period of deflation that was hitting on the AOV and back to what would be sort of a more normalized AOV growth, which is [indiscernible] or over time. So that's sort of the AOV story itself. Now how do you use price as a lever to drive demand? I think is the second part of your question. And what we have said is as we look at it, we want to make sure that we have competitive prices, absolutely competitive everyday prices, and we certainly track that. And then we've partnering with our suppliers actually to fund the promotions, so you mentioned the promotional environment. We've certainly seen and, we've said this for some time now that promotions are really significantly on punching every day and are a very important part of the calendar right now because the customer in a time where the category is out of favor, she needs a reason to come in and shop. And so even if she's not buying the promotional item, she needs a promotion messaging to bring brand. And what we'll do will turn with our supplier partners on drop in price for the promotion. And the reason we've been able to maintain is low gross margin during that time period is those drops are largely funded by the supplier.

So in terms of every day, I don't know, take rates for lack of a better word, is there any shift in strategy around that piece of it?

No, I wouldn't say there's a -- so you're absolutely right. The way that we would influence every [ freight ] prices would be, one, we partnered with our suppliers on making sure that their wholesales are very competitive and even deep relationship with our suppliers and a very strong partnership with them around that. And two, we could certainly drop take rates on our side to manage everyday prices. The question really is how much does that stimulate stands. And so what we're constantly vetting and this has been our approach, we have a highly algorithmic pricing approach. And what we look at is where is the demand curve and what is the value you are now in terms of driving gross profit dollars. So we think about how are we driving gross profit dollars over time. When does it make sense to change takes on a particular class or category, and when does it make sense to not change them. And those are the sort of constant balance in the past. But I wouldn't say that, that's a new philosophy or approach by any means, it's very actually core of our DNA.

And is there still more in the cost of revenue side that you're doing to fund some of this because you did a lot of that last year.

Yes. So we spoke about last year, it was the first time we sort of were public about actions on really [indiscernible] inside to improve the costs there. And what we said, we outlined that is more than $500 million. And what we said was that we would make decisions around when we pass that on to the consumer versus when we pocketed that. So when we actually look in the gross margin, saw our gross margin grew quite nicely throughout -- sort of the back half of '22 throughout '23. We did say in Q2 and Q3 '23 got a little bit ahead of us as those savings materialize faster than we could appropriately invest them. But as we thought about sort of the path versus reinvestment decision, that really goes back to that pricing question, when is appropriate in terms of driving gross profit dollars on this multiquarter basis. We always are evaluating what are the cost actions we can take in our supply chain, like any good logistics player, there's an ongoing piece of work there around efficiency. And then the question becomes, do you pass it through to you pocket it.

Niraj, earlier, you mentioned building a brand people love. Is it hard to build a brand online? Because cynically, I could say the cost -- the switching costs for consumer are very low. One Google search way to a competitive marketplace. Talk about maybe how difficult it is to build around the line or not, if you kind of project that idea, but just how do you build loyalty around Wayfair given the ability for consumers to price compare? How do we make sure that this is not a market that's just the race to the bottom?

Yes. So I think -- to really think about it, first, take a little bit of a step back and just remember what we sell. So home goods, the majority of the subcategories we're in, the majority of the revenue we have are in categories that do not have national brands. And so we sell coffee makers, which you may know [ Quiznos ] or just coffee or what have you, when you're looking for a bar store, you're looking for rugs, there are no brands. And so first thing is how do you find that item you want. There's no brands. There's a huge selection, you have aesthetic desires, you want the right quality level. And so there's a lot of kind of consumer questions that can affect how your stock. It's not a commodity item where just on page 1, you'll pick your 3 pack of iPhone cables. Then there's sort of the kind of how is that item going to be delivered, what happens if I have a problem, what kind of specialized services do you offer that might make it easy for me? I want 2 folks to put it in the room that I choose, take away the package name or assemble it or I need a warranty or I want to use financing. So there's a lot of nuance on how what kind of services make it work for a consumer. And so you both have how do you offer that, but also you have to have the capabilities to deliver it. And so the Wayfair brand which we've built up over time into a household brand in the U.S., in Canada and the U.K. sort of staying, providing all of those things. And our biggest competitors are more generalist players in their core categories, the other categories whether it be grocery or general merchandise or [indiscernible] materials. And so they all participate in the categories we participate in, but generally as an aside, where it's a nice adjunct category versus their main focus. So I think when you have something specialized like that, you can build a brand around it that consumers get to know and appreciate, and then, therefore, become loyal too. And then there's mechanisms. For example, our app. So we have a lot of persons downloaded the app. Then are regular users of the app. We offer them advantages. We have Apple [indiscernible] sales. There's a specific features and functionality. And so these things make it easier to be inherently more loyal because they have a mechanism where they're already locked in. We already know them, that we can provide levels of personalization through some of the proprietary technology we have that makes shopping more exciting. We have products that others don't have, offers that others don't have. We're going out a loyalty program later this year. And then obviously, we have the scale where we can then conduct brand-building exercises from a marketing standpoint. So we just launched a new brand campaign earlier this year. and to spend that amount of money producing the campaign running it on television, social, we can afford that because if you look at across the revenue basis, it's a relatively small amount of money. If you look at it in absolute dollar spend, you have to be a meaningful player to be able to do that. Just the same thing as with logistics. You cannot absorb cost of logistics network and make it work well if you don't have a certain level of volume. So then you start talking about like who are we really competing with? And then all of a sudden, we're competing with folks that don't specialize in the category. I think that's the reason we can successfully do it. I think there's a small number of categories that afford themselves sort of that opportunity where they're different enough automobiles is one generalist, retailers tend not to sell automobiles to the exception of eBay Motors doesn't really happen. And so it's that series of reasons is why.

The long purchase cycle factor into this where maybe that lends itself to a structurally higher reacquisition cost because the customer comes back a few years later? Or when you look at your cohort curves, and the amount you spend on retention and engagement when that person is back in the market, do you still get a good amount of leverage on that relative to your initial kind of customer acquisition cost?

Yes. So our average customer is buying from us twice a year. And he is visiting many multiple events. So we have a good amount of engagement with customers. I do think there's a big opportunity for a share of wallet to grow because our average customer in twice a year is spending a little less than $600 a year. The $600 is a relatively small percentage of a few thousand dollars that they're spending on average. And so we do view that opportunity gaining share of wallet is meaningful. And so when you think about things like the brand campaign and the loyalty program and there things we're doing, how can they -- what would be some of the goals we [indiscernible] .

In terms of selection and assortment, obviously, a big component of the offering and your advantage there. how do you keep suppliers loyal to Wayfair, such that they're not trying to cross-list on Amazon and Walmart down the road? Does it matter to you if they do start to cross list. How do you think about loyalty of suppliers such that 10 years down the road, you're still -- you still have that advantage over your competitors?

Yes. So other than our upper end platform, Perigold, suppliers across mass, which is really what you see in Wayfair, they are on all the major platforms. Now what they sell in a Walmart a Home Depot, and Amazon or more the commodity items. Those items generally available from numerous suppliers, they're the opening price point type. There's a lot of volume in them. There's limited margin in those. We have them as well as everyone else has those. That's sort of the base volume that's kind of on the other platform. As you come up off that bottom up through the middle, there's a huge amount of selection available. We tend to be the dominant platform selling those items. But the suppliers, I don't want you get to the suppliers are exclusive to us. That's not really -- when we talk about exclusive, that's not really what we're talking about. What we're talking about is that the core items that anchors are offering. We talked about tens of millions of items, but the tens of thousands of items out of the core offering, those items are increasingly exclusive to us. And one of the things that we can do that makes the shopping experience great for consumers is to have those offering price point commodity items, would you make it easier for them to explore pass that and find that perfect item. Or if you go in the journalist platforms, you flip on Page 1 to 2 to 3 to 4 to 5 to 6, you're seeing the same commodity styles over and over again because that's what their volume is. And they're just sort of getting those items from all the different suppliers and that's what you want. You can get that item anywhere, but the very hard platform to actually show.

Maybe switching gears to your fulfillment network. I think you have over 22 million square feet of logistics footprint now. It used to be $16 million a few years ago. Obviously, demand has been up and down. So I guess how underutilized is that logistics network at this point in time?