Wayfair Inc. (W) Earnings Call Transcript & Summary

I think our second-to-last session of this conference, I'm Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. It is my pleasure to welcome Wayfair represented by Niraj Shah, CEO, Co-Founder and Co-Chairman; and Kate Gulliver, CFO and CAO. I'm going to read a disclosure, and then a quick intro, and then I'll ask the first question and take a seat, and we can have our discussion. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Stock is in the same place it was a year ago, regrettably. We're hoping it would be higher. This is a business -- a disruptive e-commerce platform that had a massive 2020 to '21, and we've been watching it be agile in the last couple of years, demonstrating what we think is its importance both to the consumer and to the supplier. And they've had to demonstrate good execution throughout reaching new milestones such as profitability -- meaningful profitability on an EBITDA basis. And so now it's more about waiting for that turn. And I guess that will be our segue to today's discussion. And thank you very much for attending the conference.

'24 has been a tougher year for the home furnishings industry than we thought -- than the industry thought. Looking back how it's played out, what has surprised you?

All right. Yes. So I would say the depth of sort of the post-COVID kind of a series of events, the kind of move from goods to services, travel, entertainment, leisure, followed by all the supply chain congestions and inflation followed by the higher interest rates and the malaise in the housing market, it's just caused the peak to trough correction in the category to be far more than a traditional business cycle correction. And it's right up there with the great financial crisis. So it's -- so the magnitude surprised us. I will say, we know it's a cyclical category. And our business model allows us to take share in an upmarket and in a down market. So in that sense, we feel good about how we're executing and how we're taking share. But I would just say the magnitude of the swing in the market probably surprised us.

When we were finishing out 2023, either the relative momentum of your business, market share and/or the category felt like we were going to swing a little bit better growth possibly by this point and maybe even a little bit stronger growth by the back half. What the difference was all those factors you mentioned? Was it the industry? Was it market share?

Well, I think the overall economy has done better than I think a lot of folks expected during the course of the last year. But I would say that the housing market and how the housing markets remain stagnated has surprise people with it remaining more stuck and more frozen than people expected. So I think that -- when you think about our category, that has a knock-on effect into our category. The category is quite large, though, and it is sort of -- it's very fragmented. And so I think the real opportunity for us is actually not to worry about the category rebounding, but just it's how do we -- we've been taking share now since late '22 for 9 quarters in a row, which is basically the history of the business over the last 20 years. How do we accelerate the rate of taking share? And that's a set of things that we put in place this year that we're very excited about. So I think we kind of look out forward, and we know it's cyclical, we know the category will recover, we know the housing market will get moving again. But rather than trying to time box that and guess that, our view is we'll do very well when that happens, but we'll do even better the more share we're taking in the meantime, the more momentum we're building. And so our whole strategy is around how do we take share, how do we grow and do it while growing profit dollars. And that's sort of the kind of focus we have. And that's kind of what we've put in place as a framework. That's what we put the pieces in place for, that's what we've been doing, and that's kind of -- that's what we're set up to do, accelerate basically.

And to Wayfair's credit, it's -- the declines have been low single digits at most, which relative to the industry, it looks like you're continuing to take share at a good rate. The guidance for the fourth quarter suggests relatively no change in demand for better or for worse. And the commentary from industry, we follow you to all the trade shows, light environment, no one really seeking any change in demand. It really can't get any worse is what they say. So your view going into holiday and into '25?

Yes. So my view is the category continues to kind of have a malaise. I don't know exactly what that percentage comp number then would be, but it's definitely -- doesn't have a lot of energy behind it. I would say what we're seeing is those idiosyncratic drivers of things we're doing, we're seeing those working well. So we're happy with how we're doing. I don't think the category has a tremendous amount of energy in it, nor do I see it going off a cliff either. So it's kind of like bumping along would be the macro.

I was going to ask what you think the drivers of share gains are. And then you said -- idiosyncratic things Wayfair is doing? Or idiosyncratic things that the industry is doing?

No. They're basically asymmetric. They're basically things Wayfair is doing. So in other words, I'll rattle off just a list to give you just some examples, so you can get a feel for what they are. So for example, we talked about in October, we launched a nontender-based loyalty program called Wayfair Rewards. And it's set up very well to take the bulk of our active customers and offer them tremendous value if they were to sign up, and it basically offers them a set up where they're going to -- it benefits them to give us a much larger share of wallet. So that's off to the races. Earlier this year, we started rolling out a program called Wayfair Verified, and this is our merchants picking a cohort of our items. So we have 20 million items, but picking kind of a small subset of them, tens of thousands of items, testing them, auditing them physically and creating kind of like -- I'm old enough to remember consumer reports back in the day where you got true editorial reviews of products so you can kind of know what they were. Looking at the room, maybe half the people know what I'm talking about. And the problem with online today is you can't really tell what you're going to get when you get an item at home. You just don't know what the relative quality will be. So these merchant-based reviews and editorial content called Wayfair Verified, we think, is a real driver of customer satisfaction. We see it lift conversion. That's something that's rolling out. We have a set of delivery program enhancements, consolidated delivery, I've talked about a few times on stage. That's continuing to scale nationally. There's a bunch of marketing channels, which we either are small in, but we think we can be bigger in, things like influencers and certain aspects of social media. And then there's a lot we're doing with kind of creative optimization of our creative ad units that we think can be a driver of us taking share. So we can go down through the list, we have a Wayfair professional B2B business that we think there's a lot we can do there to drive a lot more productivity of all our account managers, our sales force there. So there's a long list of things. We're kind of working our way through them. And basically, we spent a lot of the last 3 years working on replatforming a lot of our core technology systems. So as we go through that, we were able to prioritize a lot of the software development bandwidth that's now become available for future function onto these priorities, these things that are kind of product-led growth. So that's both kind of how you organize and design and navigate the website or the app and how suppliers do that on the portal, they have to do all the things they do, but it also allows us to roll out programs like what I described. And so these things are sort of adding up, and we feel like we're building a lot of momentum. And again, these are things in our control. So our view is the macro is not in our control. These things are in our control. Even with the market in a malaise, it's still a very large market, there's a lot of share to be had. You see there's a lot of retailers out there struggling. I mean, you don't need to go more than a month before you see a given retailer either go out of business or close stores, whether that be more recently Conn's or Badcock or Big Lots or American Freight. There's a long list. And Kirkland's and the Container Store, the different folks who talk about different degrees of duress. And so the question is like, it doesn't mean all those customers stop buying goods, so where are they going? Well, you have independent folks owning individual home stores in various neighborhoods around the U.S., that's a base of folks that are doing fine. Then you have a ton of folks to the middle, which represents a very large number of doors. And then you have a small number of large folks, us, Walmart, Target, Amazon, Home Depot, Lowe's, who compete online, but a lot of that share in the middle as it gets hollowed out are going to one of those big folks. And we're the only one who focuses on home. So how do we take more and more share. And that is what we've been doing. That's what the list of things is about.

We were just having a discussion that it became a little more event-y in this year. You also launched a Rewards card this year, right, to get the consumer's attention. Advertising also as an instrument you have, but you've been careful not to overuse it. So can you talk about, was the industry more promotional? And could it get, I guess, relative degrees of promotionality in '24 versus what you could have expected?

Well, what we've always seen is in the economic cycle, when the -- there's always promotions, the big holidays, President's Day, Labor Day, holiday, there's always big promotions. What you see in times where the economy is tougher, there's more promotional events that are running the category. And so we just play the same cadence as the category plays to maximize our position in it. It runs on a cycle. So kind of -- it kind of travels in a band. It goes to one end, it goes back to the other end, back and forth. I would say it's playing out as you would expect. A lot of the value customers are getting is because all the inflation that came in with the ocean freight a couple of years ago came out. And then obviously, suppliers, given that the low demand environment that's out there, they're leaning in with the best prices they can offer. We're then making sure customers are seeing that, and we're helping optimize things that we can control like the logistics cost to make sure customers get great deals. But you can see that our gross margin has basically stayed 30%. So it's not so much that we are discounting, it's more that we're making sure we're doing everything to help the customers get value based on what suppliers can do and based on us optimizing a lot of the other costs like logistics that are resident in the chain. And then what we're doing is we're making sure we're getting this in front of our customers. So we have a house list of 90 million folks. We have over 20 million active customers. We have, as you mentioned, an advertising spend and reach that lets us get in front of these folks. So we're telling them what we're doing. We're getting them in. Because we're offering them something compelling, they're buying from us, and that's why we're able to take share.

Well, I was just going to add that on the promotional piece, we've really seen it as a marketing tool. And I've shared this stat before, but during promotional events, 30% of the revenue is on promoted items, the remaining revenue is on the rest of the catalog. And it's really a great strategy to get the consumer in while the category is out of favor and then have her shopping the whole catalog. And so we have been more promotional, yes, as everyone has been. But I think we've been able to do that in a thoughtful way that is helping to sort of drive better engagement versus only forced to low price.

But what about the story of the consumer through the lens of the website, both in terms of higher-end product, lower end product? And were there any moments of green shoots in the last 1 to 2 years that have ebbed and flowed?

Yes. Well, so I would say when you see these economic cycles, the higher-end customer generally still has money even in a tougher economy. So like our Perigold platform, which is a luxury platform, it's been growing nicely. It's doing quite well. That is a customer that's not under the same degree of economic duress as when you get to the lower end of mass, kind of where we start, which would be the lower end of the Wayfair kind of audience. Wayfair runs all the way through the middle. We service all of these different tranches of customers, so we can kind of see the different sort of strains that they're under. But because we have such a breadth of a catalog, we still have something to offer to them, and they can move up or they can move down, as they're -- depending on what they want to buy. And so that's a big advantage we have. They're not required to kind of stay in a very narrow band. They can explore and buy what they want. But you said are there any kind of signs of life or any green shoots in the last couple of years. The last couple of years, I would say, it's a typical -- it's a cyclical category, right? So there's definitely a business cycle to it. I would say while the severity of the downturn and the duration of it is maybe deeper and longer than people expected, it is a cyclical category. And I think in there is where a lot of the opportunity is. Because what you find is that market share changes hands even more in the down cycle than it does in the up cycle. We've obviously taken a lot of share in both, if you look back through our history, but it presents a lot of opportunity. Because what you find is that in the down cycle, a lot of folks who just don't have a differentiated assortment or offering in any kind of major way from a customer standpoint, they just have a harder time attracting the business. And they eventually -- you see that in their financial results or in the fact that they closed their doors. So that is what's happening, and that's kind of the -- that's quite a large opportunity. All the folks I mentioned, a lot of them have hundreds of stores. These are retailers, hundreds of millions or billions of dollars in revenue. So the changing of share is meaningful. And it's not just from the folks who go away. You have a lot of folks who've shrunk by 20% or 30%, well, the market may not have shrunk by that much in that period where they shrunk by that much. So that's share that moved to other folks.

You think share gains are balanced across the consumer cohorts, meaning upper-income consumers plus middle -- do you have any way to even figure that out?

The share numbers are tough to even figure out in aggregate, never mind as you get it narrower and narrower. But I would say, just based on -- we track cohorts of competitors for each of our brands, and I'd say we're seeing share move in all segments of the market for sure.

I want to ask about the holiday, I'll give it a shot here, about seasonal categories, about pull-forward of demand since consumers are rushing to buy things before the tariffs. Leading up to that, if that's a behavior that you can talk to?

I mean, we don't -- the concept that consumers are going to pull forward demand before tariffs, I don't know if I -- there's nothing -- we don't see anything that would support that consumers think about the tariffs in a way that causes them to pull forward demand. So I don't know if we see that. What we do see is customers as they have been for the last couple of years. they're paid -- they're looking for value. They know when major sales are. They pay attention to the sales, you get a lot of traffic during those events. Holiday, we've been happy with how the holiday has played out so far. So it's still early because even though some of the more notable days are behind us, there's still quite a lot of revenue to come in December, but we've been happy with how things are going.

Okay. Back to tariffs. I probably don't need to -- I can just say the word tariff and we can talk for 20 minutes. Percentage of exposure, we've talked about now, what, 25% from Mexico, Canada, maybe potentially less from China. Maybe talk about the past experience. We've spoken to investors last time. Remember, the conference calls we did during the prior regime. You said customers basically got sticker shock, margins really never changed, demand dipped for a quarter or 2, and then we were kind of back rolling again.

Well, if anything, I'd say the category is more ready if things were to change this time than it was last time. So last time when the tariffs happened, they happened fairly quickly. During the first Trump administration, our categories, had a 10%, which grew to a 25% tariff on all our goods. And that happened relatively quickly. The industry was not necessarily expecting this to happen. So the existing supply chains then all of a sudden have a lot of disruption. What's happened over the years since as you've seen suppliers basically be quite savvy about where production is. And so a lot of other parts of Southeast Asia, Indonesia, Cambodia, Malaysia, Vietnam, you've seen a lot of production move to other countries as well as other parts of the world, Brazil, for example. And so suppliers are well aware that something could happen and they're also well where that something could happen with limited amount of notice. And so they don't necessarily want to be in a position like they were last time where they were scrambling last minute and kind of trying to figure out how to react after the fact. So I think you mentioned yourself, you said, well, now it might be 25% from China, 25% for Canada, maybe 10% from China. Few days before it was a different set of numbers from different countries, tomorrow might be different. So I wouldn't say anyone knows what's going to happen. And you've even seen subsequent to the comments you just made -- being announced, you said that there's been a lot of activity around different negotiating postures and stance. So I think what you have is -- we have an industry where suppliers are keenly aware that something could happen. And so they've tried to get ahead of it and plan with a lot of flexibility. And then I think there's a wide range of things that can still happen. And what we've done is we have a base of 20,000 suppliers. So those 20 million items come from a very broad range of suppliers. So certain folks may get their upholstery from China and other folks may say, "My low-cost upholstery, I've moved it to Vietnam." And other folks will say, "Well, I'm still sticking with a couple of low-cost upholstery manufacturers I have in the Southern United States who are still very good on cost when you net in transportation." Well, the truth is we're working with all those folks. So we have an inherent flexibility in our model that's an advantage of kind of the marketplace format we have than I think it's tougher if you're a traditional retailer where you're picking which person you're sourcing from and then you're either getting the benefit or the detriment of that decision later when something else changes.

To that point, one of the retailers yesterday said, "Hey, look, there are some items that are single origin that we're all going to be competing on, prices are going to go up for everyone." So take a table that is being manufactured in China. Now there's a substitute that could be coming out of Southeast Asia someplace else, but it may not be that exact table, but that table appears in everyone's marketplace. In theory, the price is still going to be the marketplace and no one should have a different pricing architecture unless they decide to do something on their own.

I think that's right. I do think one of the things we've done is we've tried to work with suppliers increasingly to have a collection of items that are not offered necessarily on every other platform. So we have increasingly a set of items that are only offered us, but we still do try to make sure we have the right sort of supply chain benefits on that. But to your point, yes, I think in general, the thing about tariffs are they'll generally just be inflationary because a lot of the goods that haven't moved, haven't moved because even with the types of tariffs you're talking about, because the tariff is on the very first cost, which is then not the price that we're paying and definitely not the price that we're selling it for. And in there, you have freight costs as well, which wouldn't have the tariff cost. It ends up being a small enough piece of the cost that it's still not economically sensible to move it in a lot of cases. So you have this dynamic where in a lot of cases, it's just a little bit of inflation that's going to get passed through.

And that is what we saw in 2018, 2019, some of that.

Flipping to the inside of the P&L, gross margin profound change on the gross margin line. And in a way, you can look back at Wayfair's first 10 to 15 years of founding as the 25% and below era. Now we're in the 25% to 30% and maybe eventually 30% to 35%...

I'd just move it to below 25% era to the 30% era. There was no 25% to 30% era.

Fair enough. You moved quick. But let's talk about how we got from 25% to 30%. Let's build up the 25% to 30%, the mechanics and what it meant for the business, and then we'll go there and then we'll go from 30% to plus.

Yes. So one of the things, like when we were much smaller, right, you have -- your listing items, you don't have a lot of scale. So you're basically listing items that suppliers have. You don't have enough volume for them to want to do proprietary items for you, right? So you have the same items as everyone else. You then, from a logistics standpoint, you don't really have a logistics infrastructure. So you're shipping it from wherever they're located to wherever the customer is. You don't have the scale, so you're just using third-party carriers. So you're kind of doing everything kind of the base way that everyone else could do it. Now what's happened over time as we've gotten scale, one of the things we started doing about 10 years ago is building our own logistics infrastructure. So we have 25 million square feet of logistics. So 20 million square feet of that roughly is fulfillment centers, large million square foot buildings. We have just under 100 delivery operations. These are where trucks just with Wayfair orders, these are our folks in the building, are doing the large deliveries. There are 2 people delivering an item into your room or into your backyard or wherever the item is going to go. And so as you take control of logistics, you're able to unlock some of the margin benefit. And we're able to do that because shipping things to California via ocean freight and then trucking them across the country is very expensive versus putting them in the right geography to begin with. When you have an infrastructure, you can put them in the right geography, you can then deliver them economically, you can then get density, you can then make sure they're not damaged, you can take out the cost of damage, you can do all these things. That's a big driver. So our gross margin over time grew as we were able to get exclusive items, as we were able to optimize the logistics and also as we were able to get smarter and smarter on the data science side around what margin rate we should take for which pieces of the catalog. Because as our catalog got bigger and bigger and we had more and more selection, we were able to sort of identify what portion -- if this item went up in price, what portion would we lose as Wayfair versus what portion of the demand would move to this other item that we're selling because it's just a better relative value now. And so we're able to price in a way that obviously is focused on what the net benefit is to Wayfair versus the item level benefits. And so a lot of the advances we've made over time sort of is how we've gotten to the 30 level we are now. What's interesting about the 30 level we are now is we talk about -- and we provided a bridge 1.5 years ago at an Investor Day we had in the summer of '23, where we talked about, hey, that's actually -- there's a runway, and we talked about getting to mid-30s. If you add up all the pieces of the bridge, it gets you into the upper 30s because the logistics benefits still have a lot of room to go. The benefits of proprietary items still has a lot of room to go. And Wayfair Verified, which I just mentioned, the consumer reviews type thing, for example, which drives conversion is an example of what you can do in that world. We've been building a supplier advertising business that's growing very nicely. That's a gross margin driver. And then our fixed costs or our overhead that we call it SOTG&A is the line in our P&L, sales, operations, technology, general and administrative. But basically, it's corporate headcount, other corporate overhead costs. We've actually been bringing that cost line down for about 9 quarters. And we said that's actually going to drift down. And we said that as we grow, we don't necessarily see that, that needs to grow at anything like the rate we'll grow at. So there's a lot of leverage to be had in how the EBITDA can grow a lot, both because the gross margin grows and because we have leverage lower in the P&L. So we're set up well for that journey. Some of those are things we're working on that are just the product road map and some of those are things that benefit as volume grows.

Yes. And I'd just add that throughout this year, we obviously -- actually, last year, the gross margin crested over 31% and the movement from sort of the 27%, 28% that it was running at like 22% to that was really that supply chain piece, as Niraj spoke about. And as the supplier ads has grown, that's become a nice contributor. And we've made some choices to reinvest some of that, right? So we talked 2 calls ago about some selective investment in take rates in certain classes based on as we update data science models and a better understanding of demand facts. And we do that because we want to generate this gross profit dollars on a multi-quarter basis. So we actually think could you operate a little bit higher than where we are right now? Yes, I mean we showed that last year. But do we think it's a prudent thing right now to be investing in sort of keeping that in the low part of the 30% to 31% range? Yes. And so as we go forward, based on the growth of supplier advertising, based on what we see in the logistics network, we do have a high degree of conviction of that ability to get to that 35% that we've talked about.

In the investment story, there's been a couple of milestones with gross margin, and you keep passing them, holding the post-COVID 30% was one of them, "Hey, how will we see this business behave?" And then this year, as promotions came back in the last quarter or so, demonstrating that even with lower pricing in some places, that it's not coming at your expense. Can we talk about that? Because that's -- to me, that was the story of the prior quarter, of the third quarter, where you're showing that it's not...

Yes, even with the price investments, we could keep it in. Yes, I think we went out on the 2Q call and spoke about those price investments that we were going to make and that we were selective about that, that they were on a class basis based on Niraj spoke to the data science modeling that we use to understand demand elasticity in different classes. And then in aggregate, that should have a sort of tens of basis points impact. And I think what we saw is gross margin came in actually the same as the prior quarter. So we're able to balance that out and mitigate that. Maybe it moves around a little bit quarter-on-quarter. I'm not trying to imply it's going to be exactly the 30.3% by any means. But I think what we saw is we have an ability to invest and still maintain that 30% threshold, if you will.

Yes. It's hypothetical, if the sales base is 50% higher -- and that's not a super dreamy scenario, but if it's 50% higher, why can't -- why wouldn't the fixed cost leverage of the supply chain get that 30% to 35% alone even without advertising? Is that feasible? Or you'd have to reinvest back into the fixed cost?

We haven't stated how much -- we said there's excess capacity in the supply chain. We have not stated how much excess capacity there is in the supply chain. Certainly, as revenue grows, you will get nice leverage on that fixed cost. The stat that I would give to frame that up a little bit is this -- during Q2 of 2020, which is our biggest run rate quarter, we did $18 billion in revenue. And our U.S. network is that size plus a little bit as we added a few fulfillment centers from that. So we were operating at extreme capacity then. But we obviously have room for some nice growth in the -- in the sort of supply chain network that we have today.

The degrees of confidence in the 30% to 35% and the duration to get there. And then I don't know if there's any sprinkle of should we focus on advertising as the unlock within that bucket?

So confidence, high. Duration, I'm going to let Kate give you an answer. And then on the unlock, what I would say is think of it as an and. So we showed kind of a relative size in the bridge of the different numbers. They are all things that are happening. So in other words, the advertising is continuing to happen over time. What we can do with curation and verified is happening over time. So those 2 are kind of underway. Logistics happens over time, but a lot of it also happens with scale. And so I think the pieces of the puzzle are all underway. It's not that one is like 90% of the value. It's not really that type of thing. So I'll let Kate give you the timing.

Yes. I mean the single biggest bucket in that sort of walk that we did was the ads and after that was the logistics piece and then after that was the merch margin. But to Niraj's point, those are all -- the ads and the merch margin are both moving even while the category is down, right? And so there are things that we think we can unlock irrespective of volume, and then there's other pieces that are aided by volume, mostly being the logistics piece. So if you think about sort of time frame to get there, we're pushing forward nicely on the supplier ads piece, we're pushing forward nicely on some of these things like Wayfair Verified to get increased volume in the logistics network, you ought to see some volume on the top line. So it really will come down to how quickly do you think some of that materializes.

I want to turn to incremental margins preparing for a recovery. By the way, we're 10 minutes left. If the audience has questions, you can ask. So just start getting ready and waving us down, and we'll get you the mic. The incremental margin framework for '24 or even for '25, mid-teens is what I think most people have penciled in their model. Does that happen in any -- I mean, not any, but in a flat revenue environment, I think, was the framework, is that right? Is that the right way to think about it?

So the way to think about what we're focused on, so we're focused on profitable growth. So what does that mean? We want to take market share and grow while growing profit dollars. So the EBITDA dollars, really trying to really grow that and maximize that over time. And we think we can do that by taking share. So those 2 things we see consistent with each other. In terms of how the flow-through works, let me turn it over to Kate to...

Yes. I mean we spoke at the beginning of the year about sort of a mid-teens flow-through margin. We obviously did operate at that for a few quarters this year. So you've seen us be able to do that. On the other hand, we've talked about some investments that we think are the right thing to do to achieve this goal of growing adjusted EBITDA dollars. And so if you think about that, we said we're going to invest a little bit in price. We said we're going to invest -- we stepped up the range on the ACNR, we said we're going to invest there. We also, though, said on the other hand, that we're going to take some dollars out of the OpEx expense and that we're committed to doing that throughout '25. So you have a few puts and takes on that. I think I'd speak to us sort of committing to overall improving the EBITDA dollars and doing that in a thoughtful long-term way.

Okay. I want to ask about the store in Chicago and then go back to Wayfair Rewards. So first, the store. I think it's a different concept, and it is definitely reimagined from what we see in home furnishing and for e-tailers that dream up of what their store would look like. Can you talk about the lift or your satisfaction with the lift that you're seeing in Chicago land market? And then I'm trying to extrapolate what that means for the footprint.

Yes. Just for folks who don't know, so we've been working on it for a couple of years, but we launched the first store for the Wayfair -- first large-format store for the Wayfair brand just before Memorial Day in Wilmette, which is a northern suburb of Chicago. It's a 150,000 square foot store, so it's a relatively large store. It's a destination for basically all things home. So if you think about the breadth of categories we carry on Wayfair, not just furniture and decor, but all the home improvement categories, all the housewares categories, large appliances, it covers all the categories. And our theory is that it would be a beneficial way to attract new customers. It would allow us to grow share of wallet with existing customers. It will create a halo for customers in that geography. So we had a bunch of ideas of what we could do with the store. There's also a lot of categories we're not as well known for. So if you think about large appliances or kitchen cabinetry or cookware and tabletop, it's also a good way to build awareness for those categories and sell those categories. And what's happened so far, and the store has only been opened 6 months, but it's really -- it's been quite fantastic on those dimensions. So the bulk of -- the majority of new customers we've gotten at the store are actually new to file. This is despite having a 90 million customer file, we've been able to get new-to-file customers. And it just shows you, there are some customers where the store is a very comfortable way to engage with a new brand they don't know. The second thing we've seen is in the store, we don't necessarily try to get you to just buy right there. Obviously, you can buy right there. But all the associates have iPads, they can work with you to create a list of things you're interested in and e-mail you a quote. We encourage you to use your phone, use the app on your phone to scan items and just create your own basket in the cart on your app. So our view is that not everyone's decision cycle is going to be immediate during the visit. So rather than take kind of the high-pressured sales tactics that a lot of furniture stores, for example, would do, we took a different view of like, let's just invest in the customer. So what we've done to measure success past just the 4-wall economics is we measure the halo that the store has created a few different ways. One way is we have the folks who we recognize in the store because they use the app in the store or they gave an associate their e-mail address, so that's going to be a narrower set than everyone who came in the store because it's only the folks who did that. But then we track what they do over 5 and over 30 days, and we use a data science model to then net out the cannibalization of what we think they would have done if we didn't have the store. That's one version of halo we calculate. Second version is we take the geographic area around the store, so a certain mile radius around the store, that kind of the trade area. And we have like synthetic twin markets of other places in the U.S. that are very similar geography distributions to that. And we sort of track the pre versus post and how this geography diverges from these other synthetic twins. That's the second version of halo. And the third version is a really crude version, which is we basically look at the state of Illinois going back 2 years before the store opened, the store opens, what's the state of Illinois, what's the state of Illinois without the store and what's the rest of the country? And what you see is those lines basically are very tight until the store opens, and you see them diverge and you basically get a view of -- you know what the store did in the 4-wall, right? And so you get a different version of the halo. And we do multiple versions to try and triangulate. And what we've seen is the halo has been quite -- it's been quite strong. So we've been really happy in that we've seen the store out of the gates with still a lot of room, we think, to optimize how it performs is actually doing very well. Financially, it's doing very well and also strategically for the goals we want to achieve, it's doing quite well. So we've been really excited about it. We're working on a location for a forthcoming Wayfair store. We haven't announced it yet, but we're working on that. We're pretty excited about the impact we can have over time because, again, when you think about the logistics network I described, we have all these goods located in the right locations around the U.S. So for example, one of these 1 million square foot fulfillment centers I described is in Romeoville, Illinois, which is about 40, 50 miles south of Chicago. And so the goods that we're selling in the store, not necessarily in the store, the small items are, right, if you want to walk out with candles or cookware set, that's in the store, you're going to walk out with it. But the bulk of the revenue is not things that you walk out with, there are things that you're going to have delivered because it's just the nature of what we sell. And those items, there's no new inventory pool. There's no inventory pool we have to buy. The inventory in our entire business is owned by our suppliers. These inventory pools sit in our suppliers' fulfillment centers or in our fulfillment centers where suppliers forward position the goods that are the popular items. And then we have delivery operations delivering these items all day long, all over the country. And so we deliver them to the customers. So it's a very efficient model, and it's doing great. So we're pretty excited with what we've proven so far.

So it sounds like whatever assumption you had for this business long term on market share, unless you thought about having stores in the first place, which I don't know if that's right or wrong, it should be greater than whatever that outcome is.

I think in this -- the business is now 20 years old. And I would say every 5 or 10 years, if you look forward at the potential of the business, it seems bigger than it did 5 years before or what have you because you learn new things and you embark on some new things. So we launched -- we started the company in 2002. We didn't launch the Wayfair brand until 2011. As we started to build that into a brand starting in 2013 and by 2017, it was a household brand, it being a household brand changed our view of what it could be. Then in 2015, 2016, we started building out logistics. And then over 6, 8 years, we build out a logistics footprint. We start seeing the power of that, the potential of that, the financial benefits of that, the customer convenience of that. That changes our view of what it can be. So each time you sort of embark on one of these things that changes the value proposition to customers and suppliers, you're able to kind of broaden your -- the potential piece of the market you can have.

Yes. Two minutes, does anyone have a -- feel free, sure. It's coming.

How about -- you didn't mention anything on the international front. So maybe you can talk a little -- you've got Germany, you've got the U.K. Are you going to be all over the world? What do you see now?

Yes. So today, we -- in terms of retailing goods, we deliver -- we sell and deliver goods in 5 countries, the U.S., Canada, the U.K., Ireland and Germany. And in the U.S., Canada and the U.K., we've built up Wayfair to being a household brand. We have kind of significant brand awareness and significant sized customer base and momentum. In Germany, we're quite small. So that's not a market that we've really become a major player in. And Ireland, we launched because of sort of -- it's like a Canada, it's just underserved on its own. And because of what we have in the U.K., it's a market -- it's a natural extension, and that's doing quite well because, again, it's quite underserved. So I would say our view is the markets we're in are quite large. So even at $12 billion in revenue, we're very small relative to the size of the markets we're in. So we're not necessarily focused on expanding the markets we're in, but we're focused on getting deeper in those. So when we think about Wayfair Verified, Wayfair Rewards, physical retail stores, these are things that can really move the needle, we think, for us. Those, for example, are early in the U.S., not even in Canada, for example, yet or in the U.K. yet. Wayfair Professional, our B2B business is really small outside of the U.S. So we think there's a lot of potential for what we can do in the geographies we're in. So we're very focused on the geographies where we already have leverage, we have infrastructure, we have a delivery capability. How do we become a much bigger player in those using the full playbook?

And going back to what Simeon asked about the stores. Now you have a couple, I think it was 4, right, you have there...

Well we have 1 store for the Wayfair brand. We have some stores for all modern Birch Lane -- those are smaller format stores. And we announced that next year, we're going to open 2 stores for our Perigold, our luxury platform.

Right. So now if I look beyond next year and think into the future, you have different concepts that you can really test throughout the country for sure. So was that something that's in your playbook going forward? I mean you also did at one point, little spaces in malls where you -- so you must have a lot going on in your mind here.

Yes. So the pop-ups in the malls is what eventually informed kind of what we're now doing with physical stores. And so we like what we're doing in physical stores. And as we continue to progress that agenda, you'll see us scale -- you'll see us scale that. And we're just going to do it very methodically, basically prove out that the economics work, then we'll open up some more, prove out that they work, keep improving the performance, then we'll open up more. We're just going to -- it's what I said earlier. We want to grow revenue and take market share while growing profit dollars. And we talk about EBITDA dollars, but we also think about owners' earnings, which is basically if you take EBITDA less CapEx, less stock-based comp, that's really the true profitability of the business. And so that's the way we think about it. We want to grow that profitability while we're taking share. We think we can do that. And we think that set of things we're working on is the way to do it.

And the other thing I have -- one more, Simeon?

Better be quick.

On the customer, okay? You guys always had an attitude, customer is king. I know people like bought rooms for their dorms and whatnot and something came in damaged, you told them, throw it out, we're going to send you another one. They got it. So what's the situation there, the scores you're getting from customers, the feedback?

Yes. We focus on having very high customer satisfaction at the same time as you want to have policies that don't allow folks who are like fraudulent or who are going to scam you to take advantage, right? So there's a fine line, but you basically do that with policies, you do that with data science models that help customer service agents make good decisions. But yes, we want to certainly be a well-loved brand that customers know is a very reliable place to buy goods that are generally challenging items. Getting a furniture item and it being damaged is not a super rare occurrence, right? So how do we make sure that we not only have the lowest damage rate in the industry, but that we'll take care of you if something goes wrong and that you know that so that you have confidence to buy from us, right? That's a big piece of what we think the brand stands for.

That's why when I talk to furniture supply -- with you than with Amazon.

Well, I think furniture supply, I think what you find is like Amazon's -- the way they work with suppliers, it's challenging in categories like this that are like big and bulky and have complexity. Amazon, kind of like -- whether you're selling paper towels or you're selling furniture, they kind of have one way that they want that things work. And in categories like this, it can be a challenge.

With that, thank you. Niraj, Kate, thank you so much for being here.

Thank you.

Thank you, Simeon.

All the best. Thank you.

Thanks, everybody.