Wayfair Inc. (W) Earnings Call Transcript & Summary

We're going to get going with our next session with the clock on. For those who don't know me, my name is Eric Sheridan, I'm Managing Director at Goldman Sachs Investment Research and the lead of our U.S. Internet and interactive entertainment franchise within the research department, and it's my pleasure to have the team from Wayfair. Here today, we've got the CEO, Niraj Shah, and we've got Kate Gulliver, CFO and Chief Administrative Officer. It's great to have this conversation with the team. And I think we've got 35 minutes, we'll get going. But I think when I do these, I always love to start by taking a step back before we talk about the present and taking a step forward. So as you founded -- the co-founded the company in 2002, I think for those who are less familiar with the story, maybe take a step back and give us a little bit of the origin story of Wayfair and the journey you've been on since the founding of the company.

Okay. Absolutely. I'll try to keep the succinct. It's kind of like we got started in 2002, and there's sort of like three time periods in the company to kind of make the story relatively simple. First decade, 2002 to 2011, the company was called CSN stores. And Steven Conine and I, we went to Cornell together, we graduated in '95. The first company we started was involved in the Internet space. We had experience there. We thought there was an opportunity in e-commerce. And what we did from 2002 to 2011 is we basically put up websites for these very narrow categories. So the first website was called racksandstands.com, TV stands, speaker stands. And one by one, we worked our way through all of home goods, so bedroomfurnituredirect.com, [ allbarcelds.com, ] et cetera. And we did strap the business. So we were profitable that decade. We just grew it out of cash flow and we grew it to $500 million in sales by 2011. One of the things we started working on in 2008 was really how do we drive up the repeat rate. And we were able to grow the repeat rate to 20% from 10%. But what we found is that there's basically a ceiling. And we basically saw a ceiling around 40% where this kind of concept of all these different stores, not having a household brand, there's just an upper limit on how much you can get customers to know who you were, the fact that you had a broad selection outside of whatever they bought. So we embarked on building a brand. So 2011, for the first time, we raised outside capital because even though we've grown it out of cash flow, we didn't have the kind of cash generative kind of levels that we thought it would take to build a brand. And so we took an outside capital. We renamed the company Wayfair and we launched wayfair.com in 2011. So sort of the next period is sort of 2011 to 2019. And so we entered that period $500 million in sales. We've raised outside capital. We've just launched the brand. What we do over that period is we get the site working well. 2013, we start advertising the brand on television. 2013 to 2017 Wayfair goes from sort of being made-up name, no one's ever heard of to being a household brand name. So we do that over about 4 years. Along that way, we figure out that there's an opportunity in logistics. Home goods are big and bulky, prone to damage, expensive to deliver. And so we started building our proprietary logistics in 2015. And between 2015 and 2019, we really -- we build out this network of warehouses, this last mile transportation capability for big bulky things, ocean forwarding business, these goods, again, big and bulky, so ocean freight matters, et cetera. So when you optimize the logistics end and you take out a lot of costs. So we built the logistics network. And we started working a lot on merchandising. So rather than it just sort of being a little bit of a free for all, we started creating our own collections, adding merchandising content, helping folks navigate the selection better and better. What this allowed us to do from 2011, I mentioned we were $500 million in sales. We went public in 2014. We were $1 billion roughly in sales. By 2019, we were $9 billion. So we grew tremendously through this period, $500 million, 2011, $1 billion or so in 2014, $9 billion in 2019. And the reason I sort of stopped at 2019 for the second period is, the next 5 years are really marked by COVID and by some of the excesses and issues that came up tied to COVID and the resulting actions we've taken. So then you then enter this 5-year period, so take it 2020 to now. And what you have with COVID is you have an initial boom of demand. So our $9 billion we did in 2019, like in April of 2020, we were doing an $18 billion run rate. So you can imagine even though you've built infrastructure, it's hard to keep up with that type of surge of demand. Now what happened is demand obviously waned, and the kind of COVID area is like a brief period of huge demand, longer period of winning demand because it has sub parts to it. The first subpart is basically a pivot first brick-and-mortar reopens, but then really a pivot to entertainment, leisure travel spend. So like the last 2/3 of COVID, the boom was kind of associated with travel entertainment leisure spend. And then that rolls into basically high inflation. There's a time where the supply chain for our goods was also scarce, that really made it kind of drove the inflation in our category. And the high inflation resulted in high interest rates, which then kills the housing market and really suppresses demand for our goods kind of all around, which then rolls into sort of a recessionary environment. So you basically have a 5-year period where we did about $14 billion in the entire year 2020 because, again, April was like the big surge, right? It comes down. So we went from $9 billion to $14 billion. And then what it's done, it's settled into around $12 billion. So we've been $12 billion now for over a couple of years. So we went from $9 billion pre-COVID to about $12 billion. One of the excesses that happened during that time when demand boomed, whatever we ended up over hiring and so on and so forth. We've got inefficiency working from home. So we sort of corrected all that starting in 2022. So what you basically have now is for 2 years, we basically -- we've taken out a tremendous amount of cost, about $2 billion of cost. We -- a year ago said we become adjusted EBITDA profitable, then we get to mid-single-digit EBITDA and then we'll be up over 10. We finished those first 2 milestones. We're at mid-single-digit EBITDA now. Costs continue to drift down. The execution on the things we've been working on. It's been quite good. We've been taking market share consistently for 8 quarters now. And what we've had though is an ongoing malaise in the home goods category. So we're taking market share in what is a shrinking market. But it's a cyclical market. And so we think we're nearing the end of that. And so depending on what you believe about interest rates and the housing cycle, that is one catalyst. Another catalyst is that boom in the beginning of COVID, followed by that bigger bus. The bus is bigger than the boom. So the market right now is below 2019 in nominal terms and well below 2019 in real terms. And so what you see in this market in these periods of dislocation is typically catches up to trend. And so -- because there's a replacement cycle of goods, you bought all these goods, but x years ago, you eventually need new goods. And so kind of where the company is now, we're very well positioned from a cost structure standpoint. We're very well positioned from what we're executing on. We've continued to execute on kind of our investments in our long-cycle initiatives. So these are things like we just opened up our first large format physical retail store north of Chicago in Wilmette. We launched a new brand campaign earlier this year. We have a loyalty program that's rolling out very shortly. We've been advancing our logistics network with things like consolidated delivery, which no one else offers a low cost, you can offer and deliver all the items the customer wants on the same day, whether they're big or small items. And so we're advancing that agenda in all our business lines. We have 3 specialty retail brands, a luxury platform called Perigold. We have an international business outside the U.S. So we feel really good about where we're situated. But in the last 5 years, been a bit of a roller coaster.

Understood. Okay. There's a lot in there I want to mine as we talk over the next 25 to 30 minutes.

I'm watching the clock.

That's about a 30-minute history of the company.

Before we get into diving into all those various aspects, I want to give you a chance to give your perspective of the journey you've been on inside the company and how sort of element of the business model and the financial profile have changed from your perspective from the IPO to now. And then maybe we'll dive a little bit deeper in some of the category and competition and all that stuff.

Yes. I mean Niraj spoke to so much of the transition that the company has gone through. I guess the thing that I'd just highlight on the sort of financial model is IPO to sort of pandemic time was all about rapid growth. And we really engineered the business for significant growth. Cash was largely free to the extent that we did need to do things like build out our logistics network, we were able to do that. And I think in e-commerce, where there's significant first mover advantage and an advantage to gaining rapid scale that served us well. In the sort of post-COVID period to now, our focus has really been on improving our profitability, and we've gone to a place where our flow through now as we return to growth is -- we've talked about this mid-teens quite good, quite strong. It's a very different position than what we were in, in sort of the 2018, 2019 time frame. And so when I look at the business, I'm very excited by the progress that we've made and the efficiency that we've shown that we can get to.

Okay. Great. I do want to come back to the category [ writ large. ] You talked a lot about the volatility from 2019 to today. Maybe just put a finer point on where you think we are in the cycle that the category it's facing. And I think probably the #1 big picture question we get from investors is what are the unlocks that improves the category? It feels like there's a lot of debate around duration, time, interest rates, things like that. But how do you think about where we are in that cycle that you mention for the category? And how are you thinking about what the inflection points might be looking forward?

Well, I think the category recovery is a little bit tied to just time, right? So when you think about things having a regular replacement cycle time kind of forces that recovery. Then if you think about housing recovery, so the year you move, you spend 6x to 10x what you spend in the regular year on our types of goods. So you think about existing home sales picking back up to what people think is like a regular water level from where it is now, that's a big catalyst. So I think there's kind of a number of catalysts that will drive the category demand up substantially from where it is. And then we're focused on sort of Wayfair specific things we can do to take market share, which don't require the market to recover for us to drive our success.

Well, let's stick with that last point because you guys have been taking share irrespective of the landscape that you find yourself in. How would you characterize the current competitive landscape that you're operating in? And what would you highlight as some of the things you think you're doing to put yourself in that position to be a share taker inside this environment?

So home goods is a super fragmented market right? So you think about the local furniture stores near you. They're generally not national chains, right? And you think about you go through every subcategory, plumbing showrooms, near you, et cetera, et cetera. But who we really compete with on the online piece is really the biggest players around. So it's Amazon, it's Walmart and Target, it's Home Depot and Lowe's. It's folks who have the sort of customer reach and the online presence. Now that said, none of them really focus on our category. So even Home Depot, who would say, half their business is decor really what they're focused on is the pro customer, what they're really focused on is the building materials, anchor their store experience, anchors their logistics capability. So we compete with these folks for sure, but we are very clearly the home specialist. And so for our core customer, we give her an experience that's very aligned with what she wants. We give her access to that broad selection. We make it easier for her to find the things she wants, to make delivery very convenient and easy. So there's -- so yes, we compete with all these folks. But really, we do it in a way that is not aligned what they're focused on, Walmart, Amazon, Target, they're selling commodity goods, consumables, general merchandise, home is just treated as another category there. I already touched on what Home Depot and Lowe's would be very similar to how they think about things. So we're quite unique in that regard. So then it allows us to, whether it be the visual imagery and how people shop visually and how we curate for style or how we do the logistics and the in-home delivery and make it really convenient. I mentioned consolidated earlier. Or you could go on and on, but it basically talks about style trends and how to set yourself up for the season. These are things that generally the other folks are just not -- it's not their primary business so they don't focus on it the same way.

Maybe sticking on that theme. You referenced in your first answer the role that logistics has played inside the organization. And when you think about differentiating yourself compared to the competition, maybe talk a little bit, Niraj, about the investment journey you've been on with logistics, where you think it leaves you competitively today and how investors should think about the return profile of some of those logistics investments longer term?

Sure. So what we have today for logistics assets. So we have over 20 million square feet, what is kind of a -- we have these large million square foot warehouses. So we have 15 to 20 of those. Then we've got about 50 delivery terminals. These are 50,000 to 100,000 square foot type buildings, where the things that you need 2 people to deliver, bring it into the room, set up the bid or set up patio, set up in the backyard, what we deliver those from these terminals. So for example, New York City, if you order something that's a larger item from us, we would deliver that from our terminal in Linden, New Jersey. These would be Wayfair branded trucks. There would be folks who are just doing Wayfair deliveries all day long. And then we have, I mentioned the ocean forwarding business, that's a non-asset-based operation, right? But we can basically help our suppliers move their goods from where they're made to be forward positioned in our network so that the last mile cost comes down, the quality of the delivery experience goes up and the speed of the delivery goes up. And so I guess the way to think about it is $0.20 of every revenue dollar is tied up in some form of logistics costs somewhere in the chain, whether it's borne by us or our supplier. We've set up a lot of services that allow our suppliers to buy these services from us to basically lower their costs. We make a margin on that. We can then also provide the customer with a better experience because of what I just described and the way we operate it. And today, the network we've built is at a relatively low utilization relative to what it can handle. So we're in a period of time that next period of fairly meaningful growth as the logistics network has more and more volume, and it creates a pretty nice flow-through margin. So one of the things we talked about is how our flow-through margin is much -- how do we get to this 10-plus points of EBITDA, right? And we have this bridge that we released when we did our Investor Day a year ago, and we showed sort of how you can get from so we're at 5.2% last quarter, right? So from a like kind of mid-single digit, if you look at the bridge of how do you get to significantly over 10%, what you see is that it comes from a number of things. One is our supplier advertising business, that's ramping. One is different -- the overhead we have, the corporate overhead is actually going down in dollars. So think about the percentage of leverage you get is the revenue rise. But one of the things on the bridge is the logistics cost and basically how that unlocks profit.

Okay. Understood. Kate, I want to bring you into the conversation, probably one of the most dominant teams in all consumer earnings and definitely at the conference the last couple of days is just the pricing environment, the promotional environment. How do you guys as an organization think about pricing levels, promotion levels and the countervailing factors of trying to stimulate demand, but also continue on this margin journey that you're going on?

Yes. So yes, we spoke about this a little bit on our last call, so I'll circle back to those comments in a minute. But I think a few things we're seeing play out at once right now. One, and we've spoken about this for some time, promotions are really outpunching every day. So promotional activity is quite important to stimulate demand in the category given the category somewhat out of favor. Interestingly, when we want a promotion, most of what's bought is actually not promoted items, only about 1/3 of the items bought are promoted item. So it's really [indiscernible] tools to get folks in. Promotions are largely funded by suppliers in our case. Our business, we don't take any inventory. We work with the suppliers on those promotional events. And that's why we've been able to maintain this 30% to 31% gross margin even with a significant promotional environment right now. The other piece that we're seeing that we spoke to specifically on the call is opportunity to -- for us to selectively lean in on pricing based on what we're seeing in our own elasticity curves. And so that's us really changing the take rate on a sort of sub-category level. And what we're seeing there, and we do -- we run this data all the time. We have a very big data science machine learning models around this is a little bit of price sensitivity may be driven by the macro and an opportunity for us to be a little bit tighter on the curve and hopefully drive to your point, more volume and stimulate demand. And that's why when we said on the call, we're going to be in that 30% to 31% range, we're going to be sort of closer to the 30% than the 31% over the next few quarters as we make that investment. We had spoken last year when we were doing the cost takeout on the logistics side, and we're moving that gross margin up to sustainably get in that 30% to 31% range. We've said that we, over time, may choose to reinvest that in the customer experience if we saw the right trade-off based on the idea that we were trying to maximize gross profit dollars on this multi-quarter basis. And that is what you're seeing us do right now is make that investment. We think that's prudent in this environment.

Maybe just one follow-up there on the supplier side. So you referenced that suppliers obviously bear the responsibility for a lot of the promotional activity. When you compare the industry environment that we're talking about right now, how is that relationship evolve? Are suppliers more open to promotional activity? Is it relatively stable? Like how does that dialogue evolving between you guys as a platform versus the suppliers on how much promotion might be needed in this environment?

Yes. So first, we have a very deep relationship with our suppliers, many of them we've been working with for quite some time. We're a good partner for them. We aim to be a good partner for them. And we're always having sort of a multivariable discussion with them, right, around promotions, everyday wholesale, supplier advertising, capturing engagement, really trying to help them figure out what is right for their business. And suppliers understand that right now, promotions are valuable and that that's something that they need to be leaning into to stimulate demand. So I would say that it is a very reasonable and rational conversation. And we're not seeing suppliers do things that are really economic to them, and it's a sustainable cadence right now.

One thing I would just point out, so from a customer standpoint, they would think of this as a traditional retailer. So you're buying it from Wayfair, you want to return it, you return it to Wayfair, if there's a problem, you call and you talk to a Wayfair customer service person. We really focus on them being well taken care of. But on the supplier side, they feel a lot of the dynamic of what a traditional marketplace, a third-party marketplace would have because we don't buy inventory. So the inventory is owned by the supplier. And we work with thousands of suppliers. So they do feel that they're in competition with one another, right? So we have 30,000 bar stools. And so if you're a supplier selling bar stools, we don't have a merchant who's decided that we're going to buy these 200 from you and now we need to sell the 200 million we have category managers who are advising you on what we think you should do on the platform. But in truth, you're competing against these other folks, who make bar stools and have an assortment. And so when you see that promotions are punching well because the economy is the way it is. It's kind of a cycle we've seen before. You advise suppliers. Now they want to get volume. Their business doesn't work without volume because not only do they need to sell the inventory, but they need volume in order to keep their cost price low for the business to be efficient and what they're seeing in other platforms or places they're having trouble getting volume. So they want to lean in. So again, that's what we've been seeing is that Black Friday, July, Labor Day, these played out as we expected, which is they were strong events, and because what we see is through these recession periods, it's not that everything is during promotions, but it's just a percentage of your promotions ticks up, and the percentage of that every day ticks down a little. But that spread, suppliers want to take advantage of that spread and a lot of the incremental volume, they're not necessarily worried on having incremental profit for themselves. They want to just keep their volumes high so that they can flow inventory economically. And so this dynamic where they feel like they're in competition with others, but we're helping them with advice and then it's their decision on what to do, makes it a lot easier for our interest to actually get aligned.

Got it. Okay. And I do want to follow up with one last one on suppliers. Obviously, you referenced earlier about advertising and what you're building there and how that obviously plays a role in margin bridge that you introduced at the Analyst Day. When you think about the promotional environment and wanting to be there for sellers and sellers wanting to maintain volumes. How does the evolution of your company as an advertising platform and a retail media network continue to play a role in that as the supplier relationship of evolves? Which is what you're building.

Well, think of it as another lever, we're giving our suppliers for them to be able to manage their business on our platform. So we just talked about price and promotion is one lever they have. Optimizing logistics is another lever they have. Well, think of supplier advertising as a third lever. There's a number of levers they have, but a third lever which allows them to, again, control their destiny and drive demand, whether they want to try to sell something that they're overstocked on, but they can get more -- they discount it and then with the advertising, they can get more volume at a better price on our platform than some of the discount channels that they otherwise would sell it is a way that they can lean in on a new product that they're very keen to get going a little faster. They get it as a way that they can maximize a good seller being a great seller. So we're giving them a vehicle, a lever but then, of course, the way the auction works and the way you place it makes sure that the items are going to be items that customers are interested in. So it's not simply that we're going to show every customer, an item that's unpopular very high just because someone bids enough. And so it keeps -- we're always worried about keeping -- we want to give suppliers levers that work for them. We also want to make sure Wayfair makes margin, but we also work very hard. We need to make sure that the customer experience is always getting better, not worse. And that's -- and these levers sort of -- we align the interest on these levers to do that, whether you're thinking about a promotion, you're thinking about the advertiser, you're thinking about logistics.

Okay. Understood. Maybe two more for you on topics you introduced earlier in our conversation. One is you have multiple brands. I think a lot of people think of you as Wayfair.com, but you have a brand portfolio. How do you think about the array of brands you have today in managing that brand portfolio for outcomes for the platform in terms of volume and sort of customer activity?

Sure. So Wayfair is a mass brand, right? So it starts low and it goes all the way up through the middle. And so what are other mass brands like Target would be a mass brand. Well, they would play a little higher than Walmart, which is a mass brand, right? But Wayfair is not meant to be a premium brand. So the upper end of where Wayfair plays, we have 3 specialty retail brands, all modern Joss & Main, Birch Lane. Think of them as competing with people like Pottery Barn and Crate & Barrel and these types of specialty brands that are out there. And that's the high end of where Wayfair would play. So we run them on Wayfair's kind of the premium assortment on Wayfair, but they have their own separate websites because what they really are a curated assortment of 8,000 to 10,000 items on a very focused style and lifestyle that they're targeting. And so by marking them separately for the customer who really wants that experience, which is very curated, you give them a place where they can go. But on Wayfair, what you're doing is for the folks buying at the higher end, you're making it easy for them to shop on Wayfair as well for that. Then we have a luxury platform similar to Wayfair being a mass platform called Perigold. But with the goods on Perigold, they're from the 600 brands you would find in kind of the D&D building the designer buildings, which are generally sold to the trade to interior designers. This is -- for most of those brands, Perigold is the only platform where it's available direct-to-consumer. But what was happening is these brands, which offer great selection, great price value, they were losing the opportunity by not having a direct vehicle access end customers to folks like Restoration Hardware, which is basically just a direct business. And so what we provide them with is a way to reach that end customer. So the overlap of items on Perigold versus Wayfair is like very thin because the brand -- it's a very different position in the market. And so what we feel like we're doing is through these different brands, we're effectively targeting what's a very large TAM in the different segments of how customers shop and we're giving them a way to shop in a way that's very intuitive and comfortable for them and access the types of goods they want.

Understood. Okay. Maybe one last one for you before I turn it back to Kate. You talked about the decision to build a physical store and have that presence in the market. Talk to us a little bit about that decision and learnings from the physical store even though it's still early days.

Yes. So there's 150,000 square foot store that we opened in Wilmette. So it's a large-format store. And we got the potential for it to both drive and trends amount of sales in the 4 walls, create a very strong halo and increase the brand awareness of all the categories we're in and the kind of understanding of what Wayfair can provide and access new customers who have not previously shopped because we're online only. Those theses have all played out well. So it's off to a great start. It's only been open 2.5 months. So I'd say it's early. But the -- it's been very strong, not just the opening and opening week, et cetera, but it's continued to stay very strong. And we're seeing kind of these things all play out where the majority of the customers we're getting are actually new to file, which is pretty hard, given our scale. We're seeing that categories that we're not known for are actually gaining traction because customers are being exposed to them. We're seeing the gross aggregate sales to be a very high number. So we're very excited about how it's going, and we have a long list of things we want to iterate that we think we'll improve in. And so that's why we're taking a very measured approach. We're planning to open one store next year for Wayfair. So we ultimately envision having a number of them, but we're going to do in a very pragmatic and prudent way to make sure that we're not making a mistake that we then regret later in terms of opening too many while we haven't maybe optimized the square footage or the department sizes or some of the decisions that you might make that are hard to change.

Okay. Understood. Kate, I wanted to ask you about the international business. Obviously, that's a long-term initiative for the company. How do you think about balancing growth and margins when you think about what the company wants to achieve internationally in the coming years?

Yes. So first, our international business, just to level set is Canada, the U.K. and Germany. We've spoken about Canada and the U.K. on some recent calls and we're pleased with the progress of those businesses. Germany obviously is in a very challenging macro right now, but we do believe that business can ultimately perform similarly. When we talk about this $800 billion TAM, about $400 billion of that is in the International segment. So we think it's a very important area for us to continue to pursue. And we don't see a reason why the margins on that business can ultimately look like the margins on our U.S. business. That said, what we're focused on is targeting this overall EBITDA number and driving to this adjusted EBITDA dollars growth over time, right? So we're very focused on that at the Wayfair Inc. level. And as we've taken cost actions across the business, those have therefore impacted the international business as well. And we've improved that margin profile as a result.

Okay. Understood. And sticking with U.K., you guys have been on a cost efficiency journey over the last couple of years. And then you obviously talked about a margin target at your Investor Day. Maybe tie together the cost structure journey you've been on as a company and some of those efforts and how they balance against driving towards some of your longer-term goals with respect to margin for the business long term?

Yes. So it's interesting. I would say our heritage had always been as a very cost-conscious retailer. I joined the company a little over a decade ago, the company has largely been self-financed by the working capital candidly up until 2011, when they took on outside financing, you were profitable for many, many years. And so the DNA of the company was to be quite cost conscious and we did sort of lose our way a little bit there during COVID because of just that astronomical growth. And new run rate from $9 billion to $18 billion overnight, that is a challenging environment to operate in. And so the walk of the last few years has really been really getting us back to that DNA of being a very cost-conscious retailer. We are a mass market retailer basis points matter, right? So we have to be very, very focused on that. And I think we're pleased with the progress that the company has made. Our restructuring efforts has been designed to actually preserve to your point, the growth initiative. So as we look at a number of initiatives that Niraj mentioned, our Perigold business, the SRBs or B2B business or international segments, we've actually kept the teams on those businesses. We've gotten the entire business, I think, structured in a much better way. We've been focused on sort of we did a very clean org design modeling exercise that led to the restructuring in January. And so the work has been around removing where we thought we had excess or where we thought we could be more efficient in the structuring, but preserving the growth drivers.

Okay. So we've talked earlier about the building blocks to get to the long-term margin target. Kate, you just talked about some of the efficiency, focus and historical context around the company. How does marketing in the current environment fit into all of that? I would love to understand how your marketing strategy continues to evolve given both the competitive landscape you find yourself in, but also some of the longer-term goals you're going after on the margin side.

I can start and you can jump in. So on the marketing front, when we look at marketing, we look at it channel by channel, and we have a specific payback that we are targeting within each channel. And we -- that's based on our history, but we know work in each channel, what we expect the ROI to be. And so we are usually comfortable spending into that channel to ensure that we're getting to the right ROI that we want, and then we pull back when we see that starting to flip. One change that we did make over the last 18 months as we were going through the cost efforts is in addition to channels where we have a lot of history and we know how they work, we always have a testing agenda to make sure that we're understanding new channels and that we're unlocking new ways to acquire customers. We did make sure that testing agenda was as tight as possible over the last few years as we were focused on hitting these margin targets. And you've seen the ACNR, the ad cost as a percent of net revenue to be relatively consistent within that. Over time, what helps drive leverage there is as we get more of what we call direct traffic, so people direct nav into the website or the app. Obviously, that's paid for in some way, right? Overall brand work pays for that. But more of that direct traffic ultimately does provide some leverage on that line over time.

Okay. Maybe I'll try to squeeze one more in for each of you. Kate, last one for you on capital allocation. When you think about what you laid out at the Investor Day, you think about the margin goals, how should investors be thinking about the priorities for capital allocation for the business, the right levels in the capital structure, things you're aiming for and targeting on the capital side going out over the next couple of years?

Yes. So a few pieces to unpack there in a minute or 2. So one, just from an overall capital structure perspective, we've spoken before about wanting to delever over time. And we were quite focused on getting the business to a point where our adjusted EBITDA and free cash flow was healthy enough as we look at our upcoming convertible maturities, we would be able to manage that through cash, through potentially regular weighed debt or through some combination of the two, depending on what was most prudent in the market. And we've done that. We've continued to increase that optionality. And so we're quite focused on manning those maturities. So that is a primary focus for us is managing those maturities in a thoughtful way. We've obviously maintained our CapEx spending throughout this period, although we've moderated that a bit. But we think we have the right levels to be able to continue to invest in physical retail. As Niraj spoke to, the logistics network at this point is largely built. So that's largely maintenance right now.

And to your point on that, Kate, the -- so obviously, we've done a lot to get to where our adjusted EBITDA and our free cash flow is nicely positive but next year, even if we didn't grow revenue, our adjusted EBITDA, dollars would be higher...

Our intent is to continue to grow the adjusted EBITDA dollars by continuing to manage that cost structure effectively, particularly around the SOTG&A line.

So that ties back into the balance between efficiencies also expanding margins irrespective of the environment. Got it. Understood. All right. So we'll end on this. Whenever I get the chance to talk to someone who founded a business and run the business day to day. I'd just like to start with looking backwards and then end with looking forward. So what are you most excited about when you look out over the next 3 to 5 years for this business?

Yes. So what I'm most excited about is, like I mentioned the last 5 was a bit of a roller coaster, quite a roller coaster, right? But where we are now, I'd say we've got our -- we're financially -- our cost structure is back on track, but more exciting than that is the team that we've got in place, the initiatives that we're actually executing on and investing in, the way we progress the technology, we have over 2,000 people building world-class software where we progress things has set us up to, I think, be even stronger and do even better than we were doing before the roller coaster. So that's what I'm particularly excited about is just what we are working on and how it's been playing out and what we have rolling out. So I'm quite excited to see that play out. .

Okay. Great stuff. Please join me in taking the team from Wayfair for being part of the conference this year.

Thank you.