Wayfair Inc. (W) Earnings Call Transcript & Summary

Thanks, everyone for being here. Good morning. The Citiglobal TMT Conference. I'm Ygal Arounian. I'm on the Internet team. Really excited to have Wayfair CEO, Niraj Shah; CFO, Kate Gulliver, here with us today. Really appreciate the time. Thanks for being here. This mic feels a little out. I don't know if -- if it's annoying to everyone or not.

It sounds good.

Yes.

I'm saying it sounds good in the back.

All right. Okay. Let's start with the macro, everyone's favorite topic. But it's been such a big bagger, I think especially for Wayfair. You talked last quarter Niraj about at earnings about the peak to trough being as big as it's been since the Great Financial Crisis or maybe bigger than that, inflation adjusted. So it's clearly a factor. Maybe just talk about how you're seeing the macro, what you think about? I know a lot of it is outside of your control, but just starting with that framework, I think it might be a good place to start.

Yes, sure. So what I'd say is unlike the normal cycle when you see in the business cycle recession, et cetera, this cycle is a little different. And the main reason it's different is the COVID influence on the cycle, which is -- there's a very beginning period of COVID where there was a pretty big boom for home goods, particularly big online at first and then brick-and-mortar to follow, but there was a boom. So you could say that was like a pull forward or whatever, but there was like an excessive amount of demand relative to like what would be trend. But then it was followed by what's now a prolonged bust. And the size of the bust is significantly larger than the size of the boom. And the reason for the bust is, one, the first thing that happened is the COVID sort of boom then moved to a COVID boom of travel, entertainment, leisure spend because that was sort of precluded during the kind of the goods boom. We're trying to do a goods bust and kind of travel, leisure entertainment sort of boom. And then that effectively rolled into what has been a weakening economy. So the weakened economy is what you normally expect in the cycle, but this kind of boom bust sort of COVID-related supply chain related is what you wouldn't expect. And so what it's created is an oddity where you had a bit of a pull forward, which is now years ago. And then you've had a kind of prolonged kind of drought type period. And one of the things that kind of happened during the scarcity is all the inflation. And to dampen inflation, obviously, interest rates had to go up a dramatic amount, which really slowed the housing market. And so 1 of the drivers in our category is, obviously, the everyday purchasing, which people are replacing items, buying new items. And other drivers when you move, when you move, you spend 6x to 10x as much as you would in a kind of normal year. And so what you have is you have sort of this boom-bust cycle, you have this recession impact and you have the sort of housing market in malaise. And if you look at just the housing-specific data, so there's a lot of pent-up enthusiasm for housing, but it's sort of rate dependent to get flowing again. So you kind of have an odd confluence of events. So what we've basically focused on is, hey, let's just worry about Wayfair. Like how do we take market share, how do we execute well, how do we do things ourselves to really drive the business and do well despite the fact that the market we're in has this impact that I sort of described. And that's sort of what we've been executing now for almost 2 years. It's been working well. But that's also why when you look at this category, how far it's off trend, you say, okay, when it picks up, it's really going to pick up and rates will obviously help in the year since the kind of pull forward is going to help it. That's kind of where we are now. Right?

Got it. Is there a balance between housing market picking up and the consumer feeling better? Or are they just both kind of tied together, the way you think about it? Like can the consumer feel better before the housing market gets better and that picks things up?

Well, the thing that can happen before the housing market gets better is when you think about buying items and the regular replacement cycle and things age, that's continuing to happen, right, regardless of sort of the housing specific activity. And so when you say, there was kind of a boom in 2020 when you say once now 2024, right? And so what's happening is as less goods are bought, the kind of odds that you buy those goods are going to increase because of the aging effect. So there's sort of like that macro effect, which kind of can grow the market, then there's obviously what we can specifically do as a company to get more than kind of our pro rata.

Right. Got it. Okay. I forgot to mention, by the way, we'll have mics passed around later for Q&A. So if anyone has any questions, thinking off, we'll get to that later in the discussion. Let's -- so let's talk about what you can control. You mentioned share gain, and that's been very consistent over the last few years, really. That's also a probably after the macro and the cost side, which we'll get to. The most frequent question we get is just on the share gain, what's driving it and the sustainability of it, especially if we get into an environment where people might be more comfortable to shop up market more. So what are the core factors of your share gain? How do you see the sustainability of that? How do you kind of drive future share gains from here?

Yes. Great. So to make it really simple, just think about how we would get share in like 2 sets of activities. The first set of activities are what we call just driving and improving the core recipe. So that's basically the price of items, the selection that we have available, the availability, so in stock availability of these items and the speed of delivery of these items. And so as you improve those things, the value proposition to a customer is better relative to other sources. You could go to other competitors, you then buy from us more. And that's a very measurable effect. We know how to measure that. We kind of know the activities to do to drive this. And remember, our model, even though we're the first-party retailer to a customer, we don't do the traditional thing of buying inventory. So instead, on the supplier side, we look a lot like a marketplace. So we have a huge selection from thousands of suppliers. They know that there's a huge amount of demand from the tens of millions of customers. When you talk about it being a tough market, it could be a tough market for retailers, but equally be a tough market for suppliers, right? So these suppliers need to drive volume to be efficient to drive their cash flow to sell through the inventory, they're purchasing in advance, et cetera. So when the suppliers see an opportunity to get volume and they see that we're taking share, they kind of know, hey, here are the factors that allow me to do better than the competitive suppliers because we don't have it where a buyer decides to buy the 100 barstools from you and not from you. Well, you already got your order. Now every day, a customer could choose to buy it from you or you, right? So we keep driving that recipe. We give suppliers opportunities to lean in on promotions. For example, in this environment, promotions do well or we facilitate their ability to deliver more quickly through kind of continued advances we make in our logistics network, et cetera, et cetera. We kind of give them an opportunity to lean in, make this core recipe better, get themselves more volume. Obviously, it's helping us get more money. That's the first set of activities. The second bucket of how we get share are what you could think of as kind of longer cycle activities or programs. So we've referenced -- we launched a new brand campaign earlier this year. We talked that -- we have a loyalty program that's going to roll out actually shortly this fall. We talked about or we just opened our first physical retail store in May. And part of the physical retail store is not just that the store can sell items, but what we believe it will do for the overall demand from those customers. So in other words, the halo we can create just on a customer spend per year with us through the combination of online and offline and how it can really bend that curve. So there's quite a few of these activities that we're driving in the business. And each of those make Wayfair a more attractive place than, again, the competitive set. Broad range competitive set of people you can go to. And so we're kind of continuing to drive those. Some of those would also be things -- I mentioned improvement in logistics for speed in that first bucket, but there's also nuanced things, for example, you can do in logistics like -- we're just -- we're starting to roll out something called consolidated delivery. So in our category, it's not uncommon that you may want to buy multiple items that haven't delivered on a specific date in the future. And if you're moving, you're helping your son or daughter move into their first apartment. You're setting up a summer home. There's all these different use cases where you may say, hey, doing a whole bunch of things or even if you're just refreshing your living room, it might be convenient to know that, okay, these 10 items will all arrive on this Friday in the future, 4 weeks from now or whatever. So what we've done on our logistics network is set it up so that you can -- you can choose to say, hey, I want all these big and small items, not just small items, consolidated to this date in the future. And it's not just that folks will drop it at your front door, they'll bring in the items, they'll put them in the room that you want them and they'll set up a big piece of furniture for you. And so that's a very valuable service that you really can't get from anyone else unless you were going to go through the big expense of contracting with a moving company, having your shipments sent there to stage them. And then they'll deliver them, which is a relatively expensive proposition. It's what interior decorators, for example, normally have to do. So it's consolidated delivery offering that allows consumers access to a service that's very economic for them and rare. And it allows our B2B customers like designers, decorators, contractors to take advantage of service that otherwise cost them a lot of money that they then have to tell their customers that they need to pay extra for. So there's all these things we can do in the second bucket that allow us to take share. So kind of the first bucket, think about that core recipe, I don't want to underemphasize how important that is and how our model of being a marketplace on the supplier side and a retailer on the customer side helps us there. And then the second bucket are these types of strategic initiatives or whatever you want to call them that very expressly help the customer want to buy more from us.

Okay. Got it. So let's dig into those 2 buckets or maybe a little bit more. But we will start the second 1 on the frequency, right? So you've talked about increasing frequency. I think it's twice a year on average in the category, right? And to drive that higher, the loyalty program is launching. Probably too early to really give anything around that, but maybe just your views around what that can drive or what it looks like? And then the brand marketing, I guess, to kind of get that message out on some of the things you're talking about, how those can drive?

Yes. So everything about the loyalty program will be public information shortly because it's launching in the very near future. But the way to think about it is those 2 purchases amount to around about $600. So we're getting about $600 per active customer per year. The customers spend on average is in the few thousand dollar range. So it's a $3,000 to $4,000 for the category, for the home category, for the categories we sell. So you say, okay, $600 out of $3,000 to $4,000, you're getting 20-ish percent, 15%. Not terrible, but obviously a lot of room there. Where are they going? Well, they're not going to 1 other place for everything. It's actually a category where things are quite fragmented. So you say, well, how do you incent a customer to want to buy more from you. So if you think about a loyalty program where they're getting benefits where it might be in service levels, where it might be in economic benefits, where it might be in things that just make it the path of least resistance for them, whether it's in kind of emotional benefits like early access to sales because there's a set of benefits you can give them both emotional and financial that would just make you the more top-of-mind place to go. We already see some of this behavior with our most loyal customers. They tend to download the app. There's a series of things that change their behavior. We get far more purchases per year. And then some of the initiatives I mentioned, whether it be consolidated delivery or whether it be a brick-and-mortar store. Those -- each of those, we think contribute to the ability to give us more frequency as well. And -- but we would think of it as dollars per customer per year is the outcome we want, where you can only drive dollars per customer per year if you drive frequency up. And so frequency is kind of a key driver to get to the outcome we want.

Right. Okay. Yes. Frequency is always a big target for retailers is -- driving that higher. On the first bucket, so pricing, so you talked about being up for marketplace, the vendor is doing most of the pricing. But last quarter, you guys talk about stepping more into the pricing. The promotional environment, right, people are purchasing around promotional environments. And not at all, but a lot less outside of that or a lot less than typical. So you talked about doing more on the promotion environment yourselves being on the lower end of that 30% to 31% gross margin target. Talk about what you're doing there, specifically? It sounds like it's not a huge impact, but it is something and why that's the right...

Yes. So the way I think about the way we do pricing is, if you think about a marketplace, today, they have a take rate. So suppliers are responsible for all these costs, you're taking this take rate off whatever they want to sell for and then they have to pay for the shipping. They have to pay for advertising, whatever. If you think about us in that lens, could you say, hey, you are a marketplace, all these folks are competing with each other. We don't buy inventory so that it is the economic model to a supplier of a marketplace. Think of it as where our take rates are more surgical rather than 1 number, which is the average of what you'd want to do for these 10 categories and the different tranches of goods inside that category. We would have a specific percentage we might do for like opening price point bar stools. And we have a different percentage take rate we're taking for kind of mid-priced wooden bar stools, et cetera. So there's collections of goods. They all have the same margin rate we're taking on them. But we set those margin rates using this big data science model, which basically is measuring the price elasticity of these different tranches of goods, which lets us be a little sharper, lower take rate in spots where we think that gets us more benefit, a little higher in spots where we think, again, it gets us more benefit. And that's the advantage we can get by being a retailer on the first-party side because if we want to be a marketplace on the first-party side, then you got a -- it's very -- it would be very complicated because you'd have to just -- you would basically end up using the same kind of blended take rate for big broad sets of categories because otherwise, it's impossible to explain how it works to the supplier participants in the way that then causes the outcomes you want. So depending on the environment and kind of continued innovation, how we measure the data, et cetera, you'll find that there are times where the optimal number changes in a way that we want to then react to that because we get a better outcome. And so what we did is because if you think about the change in gross margin, we're talking about low tens of basis points. So it's not like a big change. But what we found is there are tranches where we would get far better results by being a little lower on these kind of take rates in these specific pockets. So we didn't change it everywhere, but we took a set of pockets, and we changed it there. And that created -- sorry?

No, I was going to say, as a reminder, what we're looking for when we say, hey, we're going to invest in these areas is we're trying to maximize the gross profit dollars, right? So we're looking at gross profit dollars on this multi quarter basis. And so we're making that trade when it makes sense to Niraj's point, in a specific subcategory because we're going to drive volume or sales in such a way than over this multi-quarter period, we actually see those gross profit dollars increasing. So it's not that in 1 quarter, you framed it very promotional. And certainly, promotions are what's hitting, absolutely. And we do choose to invest -- co-invest in promotions with our suppliers, although that's largely funded by the supplier. This is saying the elasticity curve data is showing us in a few areas, we can selectively invest and help maximize those gross profit dollars on that multi-quarter view, which was something that we spoke to last year, we said, hey, we may do this. We've done all these savings that has driven this gross margin up and the supplier advertising is hitting and that's driven it up. And we may choose to reinvest some of that back in the customer experience if we see this outcome, and that's what you're seeing out on here.

So you kind of took the words out of my mouth. It sounds like it's not just a -- it sounds like it's something independent of the macro, some of the learnings that you can kind of use over time where you're trading off margin basis points in certain places to maximize sales and gross profit dollars. Is that the right way to think about it?

Well, I'll start, you should jump in. I would say, one, we always -- Niraj mentioned leveraging data science models. We've always thought about pricing as from these large data sets that we have to sort of understand the elasticity and done it at this very micro level. So that's always been how we've operated. Frankly, due to our scale, we have better visibility into that than most, right? Now right now, what we're seeing is that the elasticity curves are suggesting that we can come in and we come in a little bit. That could be due -- that suggests the consumers a little bit more price sensitive, right? And so that could be due to the macro, could be due to other factors. But it's not a shift in our operating approach to be evaluating this and constantly sort of tweaking where should within a subcategory these take rates be. I don't know if you want to...

I take that.

Okay. Got it. While we're on the topic of gross margins, maybe we'll talk about the other inputs. There's been a number of operational efficiencies and reinvesting some of that into the pricing, vendor advertising is something that you talked about being early and the potential drivers. Can you talk about some of the other factors within the gross margin that you're seeing, whether it's those 2 or other things?

Yes. I can start on that. So we spoke at sort of end of '22, beginning of '23, about the cost takeouts that we were going to take in sort of the logistics space, right? And Niraj spoke to some of the changes that we've been able to make in our network and how that's actually driving better outcomes for the customer candidly, while we've also done cost savings. That was a more than $500 million cost takeout there. So that's a large bucket. The second look at is supplier advertising that you spoke to. And we're seeing really nice -- we spoke about that on our last call. We're seeing really nice engagement there from our suppliers. That's moving along the path that we wanted to move along. The reason we speak about that in the gross margin line is that hits as a contra COGS. So that hits in gross margin. The third bucket that we often talk about because we've spoken about sort of this path over time of growing gross margins is what we would call sort of merchandising mix. And that's a few things. That's one, some of these other brands that come in at a higher gross margin, mixing in. So the specialty retail brands and Perigold to operate at higher gross margins, as you might expect for the type of products that they sell. So as those mix in, and we've spoken about Perigold doing quite nicely even during all of this time. And then within our own products, we can drive better wholesales and better margin as we go deeper with certain suppliers on products that maybe are exclusive to us or that are doing -- moving more volume with us. We call some of those our proprietary brands and our proprietary products.

Okay. So maybe if we take that point and broaden it out a little bit. At your Investor Day last year, you kind of set multi year growth strategy, the growth algorithm. There were multiple points in there. I think fast forward a year later, the macros remain more challenging. Does that change anything in your approach? Or what keep -- what factors are kind of the biggest components of that growth algorithm as we look forward here?

So I think you're speaking to the page where we talked about sort of getting to double back to sort of meaningful double-digit growth. And just to give the walk of that -- so short answer is no, it doesn't change. To give the walk there, it's the categories historically say a 3% to 4% grower. Then you have online growing faster than that. So we've always enjoyed a significant outperformance relative to the category. To your point, we've seen that hold up even in this downturn. And then added to that, so the category returns, plus you get sort of the return to online, which we've already seen online recover and get back to sort of its normal share and growth trends. On top of that, then you have our other growth levers. And so Niraj mentioned a number of them, physical retail, our B2B business, our specialty retail brands, our ex U.S. business, so Canada, Europe. So all of those growth drivers, even with all of this cost takeout, we've maintained our teams that are invested on those growth drivers, and we're continuing to invest in them and see those as ongoing levers for us.

Okay. Maybe we could stick on some of those for a second. I don't know, international. International had a much better quarter last quarter. It's often been a topic of discussion from investors. Underperformance, the margins are lower there. How do you envision that? What's happening in international? I think generally, international is still in a tough environment, but kind of for you guys, how do you envision that?

Yes. Well, so I'll say the macroeconomic climate in the countries we're in outside the U.S. is worse in all those countries than it is in the U.S. So the degree to which the category is challenged in the U.S. is still less of a challenge than it is any other countries. What I will say though is part of what we did from kind of summer of '22 through the end of '23 or through January [indiscernible] and when we took out the kind of $2 billion out cost is we did basically get every business line, every activity kind of rightsized from a team standpoint, focus on the priorities that matter. We make sure that the advertising spend that's in kind of the R&D bucket of new things we're trying to figure out is kind of capped to a certain size portion of the ad spend. We didn't let it sort of -- it expanded, we kind of cut it back, et cetera, et cetera. So some of the improvements you see in various parts of our business now is when you anniversary changes that were made a year ago. And so that's sort of been kind of the story for a number of quarters now where you sort of see something. But it's not like the thing that was done now. It's -- you're seeing it now comping over. So in other words, in international, some of the ad spend which was nonproductive, we kind of limited that down. We take that ad spend, you take out some revenue, but it was not economic. So you say, oh, well, so then revenue looks bad for a period of time. But then when you comp the kind of new setup, you actually see how the business is improving and performing. So there's kind of a set of things that you'll see as time passes. The second thing is the international P&L does -- we have certain -- we have quite a lot of corporate costs. And so then we have to have an allocation methodology of how we assign these to the different segments, SEC segments. And so there are certain costs in our business, whether it's our technology team or some of our corporate executives, what have you, that get allocated out. So some of that, you see kind of -- obviously, we've reduced the cost of some of those things. So then obviously, the cost overall go down. But then the allocations hitting the different segments, you see that kind of that happens. But then what happens on the international, it's much smaller than the U.S. segment. So the revenue side is not able to carry a certain amount of cost load as well. So as that segment grows in size, what you'll see is that the economic benefit might look disproportionate because it will be able to cover that overhead cost much more easily.

Got it. Okay. And then on the physical storage strategy and the halo effect. So on one hand, you're building up stores, but you're doing it kind of a slow measured pace. The halo effect would kind of be localized, right? So how do you think about that? I was in the store in Chicago. I was really impressed by it and certainly saw a lot of things that you don't normally register with Wayfair. So how can that -- how do you tie those 2 things together, the kind of measured approach and then that halo effect actually driving an impact to the business?

Well, actually, the measured approach helps you measure the halo effect, right? Because you know the trade area for that store. The store is in -- the Wayfair stores in Wilmette, just north of Chicago in kind of a good suburban dense suburban area that kind of would fit our demographic. And so customers -- majority of customers -- certainly if you buy something, we know exactly who you are because it's tied to your account. But if not -- even if you don't, if you just visit -- customers tend to use -- we encourage them to use the app in the store so we can basically know the trade area through kind of the same thing in traditional retail, we do know the trade area. We then obviously can measure the impact on that trade area. We can also just look at what happened in the broader kind of Chicago area. And we can look at other sets of cities, twin cities that behave similarly where we don't have a store. And we can kind of see what's happening. We can also look at more direct halo effects. Someone who came to the store but didn't buy in the store, what did they buy in 5 days and 30 days. And so there's a series of ways we can triangulate it on the halo. And that's important because that's, again, 1 of the goals we have. So obviously, the 4-wall economics of the store matter, but the total economics, including the halo also matter. So we want to know what that is. The other thing is it's a 150,000 square foot store. And you have to make decisions on the size of departments, how you set it up, how you organize it. And we try to set up flexibly so we can change those things, but certain things are harder to change or more expensive to change. So what you want to do is be able to iterate in that store before you have then your next 1, where you're going to have a set of decisions that would be expensive if you made it 10x and you want to change it 10x more expensive than if you're iterating as you go. So -- so we're excited about the store in Chicago. We are intending to open 1 next year. And so the measured approach is to enable us to kind of get to a position where we can then be very confident in the economics, know exactly what it's providing and we can go at a faster pace down the road.

Okay. Have you seen the halo effect? Has it been measurable yet? Is it [ influencing ] any of your decisions?

We said on the last call that we're seeing nice benefits there.

Okay. And you haven't said where the next location is going to be?

No.

You don't want to today?

Nice ask.

Okay. Let's shift to cost and margins. One of the big things this year has been, at a minimum, 50% more in EBITDA dollars no matter what the environment is. So let's talk about that. And then the other big 1 has been if you've got flat top line -- it was -- what was -- came out $600 million, which is a 5% EBITDA margin. So can you talk about those 2 things, how confident you are in that for? And what else to think about in that kind of flat to 5% margin framework that you put out?

I'll just throw 1 thing and I'll let Kate really take it through the detail. But I'll just point out, we talked about at the Investor Day we had last summer, so about a year ago, August of last year. We said, hey, we have these 3 milestones. We're going to become -- adjusted EBITDA profitable quickly. We're then going to ramp quite quickly to mid-single-digit EBITDA. And then we're going to ramp to 10-plus percent EBITDA. And we showed a bridge of how you get there to a number that gets you to higher than 10, depending on how you add up the different bars. What we've done in that year is we got to adjusted EBITDA profitability very quickly. And then like last quarter, it was 5.2% adjusted EBITDA profitability. So the way to think about it is kind of we're on the track -- the trajectory we talked about. And I don't know if we've really detailed it, but 1 of the things we're on track for is next year, regardless of what the macroeconomic environment is, we expect that the EBITDA dollars will continue to grow. And we have plans underway that will continue to drive that. And so the way we're thinking about it is, obviously, as the environment recovers, we think the growth opportunities are fairly substantial given the kind of depths of the categories of lows right now. But we're not sort of waiting for the EBITDA dollar ramp for some indeterminate point in the future, right? Through kind of things we can drive ourselves. But I'll let Kate kind of answer your question. In terms of -- I'm not allowed to talk about guidance.

I'd love to hear things that you haven't talked about before. That's great.

There you go. But I would echo that, right? We're very committed to continuing EBITDA dollar growth. And in a very challenging top line in the macro, I think we've done that quite successfully. We've taken out nearly $2 billion of cost, dollar [ down ] cost avoidance. And if you think about that sort of more than 50% EBITDA growth story that we talked about for 2024, that's really taking all of the cost actions and saying, here's what we expect that impact to be throughout '24. Pretty significantly where you're seeing that right now is on that SOTG&A line, where we had another large cost action in January and then sell Q2, you saw that come in even more, and we're very focused on continuing to control what we can control right now. And we think we've done that in a very prudent and thoughtful way. We've maintained our growth investments while we've been driving that down. And so that's why we have that conviction around even if the top line is soft that more than 50% adjusted EBITDA growth because it takes those savings and those dollars out that we know we can -- we have driven and can continue to drive and see that continue to flow through.

Okay. I might be getting a little greedy here, but in that next year, EBITDA dollars grow...

Yes. We're not giving '25 guidance. I just want to clarify that at this moment.

That's clear. But that would imply that even in a -- God forbid, we have another no growth or negative growth environment, and that's what the macro is, there's more costs that could come out of the system.

Yes, we're very -- I would focus you on that SOTG&A line, and we're very focused on where can we continue to pull out here. And we want to do that in a way. You saw us do several large cost actions, right, several large restructurings. But even when we've not been doing restructurings, we've brought -- that dollar amount has come in every quarter for the last 8 quarters. So we're -- since we started on the cost actions, we've brought it in every single quarter. And so we're quite disciplined about that and we continue. You take out some cost, you uncover more. You take out more, you see a better way to structure the team. You see some efficiencies in tech. You see opportunity there. You see lower cost options for folks. And as we've done that, we've just continued to uncover. Now it's not to say that it's not incredibly challenging, difficult work. It is, and we want to be thoughtful about how we do it, but we do see ongoing cost efficiency opportunities.

Okay. One of the things you talked about has been the incremental margins on the next $1 billion. So does that change the potential incremental margin profile of the growth? Or is that making a bridge too far?

Yes. So what we've spoken about -- what Niraj and Steve wrote about in their shareholder letter was sort of the mid-teens incremental margins. I think that's a good framework for right now. When we return, obviously, to growth.

Okay. And what about on the advertising side? It's been -- you've been spending on advertising in this environment. Is that an area -- how should we think about advertising to just kind of frame it broadly there?

And you're talking about the supply advertisement [indiscernible]?

Marketing. Marketing dollars.

Yes. So when I was describing pricing and how we do that very scientifically, you just think about the advertising very similarly in the sense that we really try to measure the impact of each of the advertising we do. And so we have, again, data science models and try to attribute any revenue we have back to specifically the advertising that we're doing. Some of it is lower funnel advertising and it's more trackable than some of the upper funnel advertising. Television ads and the like is a little less measurable. But again, there's ways to measure it, and we have a few different models that triangulated on it. So the way we think about it is driving customer traffic and attracting customers is something we're very happy to spend money on as long as the payback remains in a quite a tight manner. And if it's a lower funnel, the payback period is much shorter than it's upper funnel, where it's still relatively short. So everything is less than a year payback. And then we get the lower funnel, it's much faster than that. And that's what lets us have the comfort to continue to spend the money on the advertising. Because if you're sort of cutting on a multiyear payback, you could easily be wrong in your measurement and then it turns out your advertising was uneconomic and then you have kind of a challenge. So the way to think about our advertising is there's channels that we are -- they've been in a long time, very savvy at, whether it be mailing catalogs or Google Search ads or television. And then there's always emerging channels that are growing very quickly, whether that be some of the social media channels or some of the streaming media products. And so we kind of always have a test budget where we're working on the new channels to figure out what sort of targeting and creative and what combination of things get it to be economic inside that payback, and then we'll ramp it but only once it's inside that payback window. And so that's how we develop new methods of advertising.

Right. Okay. I'll stop here and open it up if there's any questions in the audience.

On retail stores, can you talk about -- is there a percentage that the suppliers are helping you pay to open retail stores from an advertiser perspective?

So the main thing about our stores that would be different than I think a traditional retailer is that we don't own any of the inventory, including the inventory in the stores. So they're providing the products when you walk in the store, all those products are provided by the supplier. And then obviously, any sales that are made, the inventory that we're shipping out to them is inventory that's owned by the supplier. So once it's sold, we ship it, then the supplier invoices on the net terms, we then pay them. So typically, 1 of the biggest challenges for brick-and-mortar retailers as they grow stores is the cost of the inventory that they need to continue to add to kind of scale the stores. We don't need to do that. And I guess the way to think about it is like if you think about opening stores, you have the cost of the store itself, obviously, but then you have the cost of the inventory, the supply chain capabilities, the delivery kind of logistics and then the marketing brand, how do you build a customer file. And in our case, those latter 4, we basically have covered between the suppliers handling the inventory, us handling the supply chain delivery and us having the advertising. Because we have 90 million people on file, we have 20 million square feet of logistics. We're delivering all these orders every day. All these store orders are flowing through that same supply chain. So we're basically paying for the cost of the store. Suppliers are paying for the cost of the inventory, and the rest are already some costs in our operations.

Any other cross benefits between your logistics network and having over time, a broader physical retail footprint that can cross kind of -- cross benefits?

Yes. I mean, obviously, in our business, like, if you look at the kind of the bridge to how you get to that kind of more than 10% EBITDA over time, you'll see there's kind of like different buckets. And one of them is like ramping supplier advertising. You say, well, that really is unrelated to the store. But there's also a piece around logistics, for example. And logistics, some of it is continued innovation on the technology front, but some of that comes with volume. So there's things on that bridge. In some of the SOTG&A leverage. As Kate mentioned, we've been very disciplined about taking out cost. In addition to that, there'll be a lot of leverage from a margin standpoint when there's revenue growth, right, in volume. So there's a volume benefit to a bunch of pieces of what we're doing. And you could say stores add volume both in terms of what comes out of the store but also what the halo creates. And then it creates it in a dense geographic area, which then makes the logistics much more efficient, right? Because we have a warehouse in Romeoville, Illinois. You can imagine the inventory that we know when people are in the store, these items are very likely to sell. We're not storing that inventory all over the U.S. We're going to concentrate in Romeoville. And the delivery cost can be very efficient, low delivery cost because we're only moving at modest distance, right? Because those customers live in that sort of north of Chicago area, et cetera, et cetera.

And the speed can be quite good relative to other furniture retailers where you go in and you buy the product and it gets delivered to you. And you may also be thinking about sort of buy online, pick up in store and return to store. Obviously, once you have a denser network, those kinds of things become interesting for the consumer from a value prop.

Right. Maybe 1 more on the halo effect. I think this is really interesting right now. So you go in the store, connected to your app pretty easily, scan the barcode and put it into your shopping cart. How much are you seeing people do that and then go home and maybe buy what they saw in the store plus something versus pick the item and pay in the store?

I mean this is where we're talking about the halo. It's been a significant, significant impact.

Okay. Great. I have a few minutes left. If anyone has more questions, just raise your hands. I've got more. 2 different ones. Let's start with the tariffs. And so come up more close election cycle here. It's top of mind for a lot of people. This has come up from you in the past with the previous Trump administration. How have you kind of manage that? How is your risk to China tariffs changed? How are you positioned around that now?

So what I'll say is, so 1 of the benefits we have, I mentioned on the kind of supplier side, we're more of a marketplace. So we've got these thousands of suppliers that have -- that basically create this product catalog, 20 million-plus items. And so as you can imagine, there's a benefit when you have upholstery suppliers out of China, but also upholstery suppliers out of other parts of Southeast Asia and upholstery suppliers are domestic U.S. manufacturers. Then you have this benefit where if something happens, that advantage is 1 relative to the other. We're already working with all of them, right? And so we have a much easier way to respond than if we're directly sourcing goods and we've picked 1 of these suppliers and that happens to be one that then gets disadvantaged, we then have a bigger problem. What you've seen, the trends since the tariffs that were put in during the Trump administration is the percentage of goods sourced from China has been trending down. And the reason is suppliers are increasingly seeing that, hey, it's less risky for me to have goods manufacturing in other locations. And so you've seen a lot of rise of manufacturing in other parts of Southeast Asia. And some other locations, a little bit in Mexico or Brazil or India, there's a bunch of areas that have been growing.

Okay. Is it still -- like what's the impact if we kind of get that scenario kicking in again?

What you saw when the tariffs went from 0% to 25% is that there was -- there is an impact, but that upheaval was relatively temporary because folks were sort of started responding very quickly. And that time, there was very limited advance notice. The 10% happened more or less overnight, and then went from 10% to 25% fairly shortly thereafter. This time, I would say it's a much more top of mind activity. So most folks -- you talk to suppliers, they are very cognizant of the potential impact and so if they're still continuing to source certain categories from China, they're doing it because it's still very economic to do it. But they sort of -- I wouldn't say that they've already been thinking through what they would do, I guess, is something.

Great. And the last 20 seconds, Kate, I imagine your favorite question just on -- so free cash flow conversion and then with the convertibles coming due over the next couple of years that you've talked about switching to more traditional debt, but just how do you push that?

8 seconds on capital structure.

I'll give you an...

Yes. I think it's actually what you've heard from us before, which is our focus has really been on increasing our optionality. And the first step in that is improving adjusted EBITDA and free cash flow, such that our financial metrics are better so that we had an option to use cash pay as part of the management of the '25. And then also that we'd be accessible to sort of get regular way debt and use that potentially as an option for the '25. And so that's really been our focus. I think we've done that. I think we've increased optionality. And so our expectation is that we'll be thoughtful and prudent about how we manage that within the macro construct that we're operating in. I would -- as you've heard us say before, we're focused on options beyond the convertibles because we are quite cognizant of managing that dilution and really focusing on trying to maximize free cash flow per share. So we're very thoughtful about how do we want to solve the converts and not using convertible debt as an ongoing financing source.

Great. Thanks for squeezing that one in. Thanks for the time, guys. Thanks everyone for joining. Enjoy the day.

Thank you.

Thank you.