Wayfair Inc. (W) Earnings Call Transcript & Summary

Hello, everyone. Welcome to day 1 of the Global Consumer and Retail Conference. I am Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. And it is our pleasure to welcome Wayfair here, Niraj Shah, CEO, Co-Founder, Co-Chairman; and Kate Gulliver, CFO and CAO. I'm going to read a quick disclosure, make a quick intro, ask the first question and sit down. 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. Wayfair has been one of the most successful stocks in consumer in the last 12 months. The premise of market share taking and a coiled up P&L has paid off, and we are seeing that leverage start to come through more meaningfully and I think the premise of investing in the brand, having a scalable model are all coming to fruition.

So my first question, 2025 has been a better year than '24 for the broader home furnishing industry. Looking back at how the year has played out, can you talk about what are some of the biggest surprises versus what you expected? And what could '26 look like?

Simeon, thanks for having us here. And everyone in the room, thank you for joining and your interest in Wayfair. What I'd say about the category is the category had 3 years of relatively significant declines, double-digit type declines for 3 years in a row. So the fact that this year is no longer declining at that rate, say it's flattish year-over-year. I wouldn't say that, that's really a great market, but I'd say it's sort of bottomed out. And why could that be the case? Well, one is the housing market has been anemic since '22. So that's sort of now that's hurt the demand in the space, but it's kind of bottomed out. I think consumers, as the years kind of post-COVID continue to move along. We're a category where people are always buying new things to freshen up their house and they'll have needs. Maybe their child is now at an age where they need a desk or whatnot. So things continue to evolve and change. I will say, a category cyclical and the upturn and sort of the tailwinds, that's still ahead of us. So we're not really seeing the tailwinds. But what we are seeing is that it's a category where it's quite a large category. So our TAM between the 4 countries we're in U.S., Canada, U.K., Ireland is $500 billion. So it's a pretty big category, and it's very fragmented. It's unusually fragmented. And that's just a historical legacy. And what we're seeing is that a lot of the retailers that kind of are smaller and up through the middle they're increasingly distressed going out of business, recoiling and that share comes up for grabs. And there's only a small number of folks who are making the investments like we are in logistics and technology and the brand where you're actually putting forth the consumer proposition where you can take share. So really, the story of Wayfair this year is less about the category having tailwinds and it's more about what we've been doing and what's driving it. But I think the category is a cyclical category. The tailwinds are yet to come.

As you mentioned or as I mentioned, Wayfair has experienced one of the most significant inflections in demand across, call it, discretionary space. Your guidance for the fourth quarter suggests continued improvement. What's your view of that growth into holiday season? And there's this premise that you're going to always grow. We've had it -- I think you've had it that you should grow above the industry. And now you're getting to that mid-single-digit threshold. Is that the right frame of reference that we can compound going forward?

Yes. Let me just make one comment and I'll turn it over to Kate to answer your specific question. So the Wayfair -- if you look at the last few years, the Wayfair history is sort of COVID had an initial bump that was like sort of hard to handle. And as we kind of came out of that bump as the sort of discretionary spend moved to travel, entertainment, leisure, then the ocean freight inflation hit and then housing became more anemic. We basically said, hey, look, we need to get the company back to its roots in terms of being efficient. We've gotten it overbuilt. And we had a big technology replatforming project underway. And so a lot of what we did from '22 through '24 was honing the cost structure, getting the execution back to the place that historically had been and finishing the tech replatforming. So we entered this year back on the front of our feet. And those investments and that effort of what we had done, not only did the cost structure have come down, but just the execution and the operational sort of integrity of the business is back and the technology was now modernized to the point where we could actually move back towards a lot more feature function, a lot more half of our white-collar workforce, so 2,700 or so people roughly out of the 5,500 people are technologists, so software engineers, product managers, data scientists. And this has been a bit competitive advantage of ours historically. We're back to -- on our front feet on that. So our story is a little more about what we've been doing. But in terms of your question, and that's kind of where you're seeing the momentum building. But in terms of guidance, let me turn it over to Kate.

Yes. I think you sort of asked 2 questions like where do we see sort of longer-term growth? And then how do we think about '25 specifically? Obviously, for the quarter, we guided mid-single digits. And I think that really contemplates a few pieces in that guidance. So as we looked at sort of obviously the momentum of the last few quarters, and us really taking share to what you said earlier, we had not really seen a market recovery, we've seen a sort of flat line and then our share gains. And then if we look at it sort of on a year-over-year compared to the fourth quarter of last year, there are 2 pieces that influence that a bit. One, the fourth quarter last year was actually relatively strong compared to the prior quarters. And two, you all may recall that we stepped up advertising significantly in the fourth quarter last year. So we're comping and now we've brought that marketing spend level back down. And that's because as we look at sort of where efficiency lines were and as we thought about the appropriate mix of the marketing, that was where we were testing a number of things. And so we think it's appropriate to have brought it back down. That's helped drive that contribution margin at that sort of 15% level. But obviously, if you have some inefficient spend in the quarter, that may have inflated the quarter last year. So it's important to know that we're comping over that right now. I do think our long-term growth, we've long talked about that getting back to double digits. Now that, of course, is comprised of many things, right? It's the work that we think we've done this year that is on the changes that we've made around Wayfair verified and loyalty and the site experience, huge improvements in the site experience, as Niraj has spoken about, that over time should build on each other, but also some sense of a market recovery, of course, as well.

The home furnishing market, it depends if you add white goods or not something like mid-single-digit growth. You mentioned that there's always people refreshing things at given times. Is there any detection of like replacement cycle beginning? How do you decode that even if it's happening?

Yes. So I don't think that, that is the type of thing where there's a light switch in terms of the effect you'll see. So I do think you said, okay, so the category had like 3 years where it's declining, say, roughly 10% a year, and now we have a category that's more or less bumping along the bottom, call it, flattish. It's still a big category. So you have, call it, round about $500 billion or $450 billion or whatever of spend. Well, what is that? A lot of that is just the ongoing needs customers have. Some of that is going to be project spend. It's going to be comprised of all of this. But what's missing from that is a lot of project spend and a lot of moving related spend that would normally occur if we had $1 million more unit sales on existing home sales. So I think the -- what you're calling the replacement cycle has to be moving along, right, for that spend level to be where it is. But again, it's not like a significant tailwind where you're saying it's taking off, right?

Yes. It's not like we look at a certain category and say, oh, that category is a replacement. You don't see anything noticeable like that.

No. And again, categories like replacement of any given item we sell is a big bell curve distribution, right? It's not really like you will replace it at a specific point in time.

Yes. Tariffs, pricing, elasticity, a couple of things, all in one. First, I remember when we had government data, and we'll get it again, there was a noticeable step-up in home furnishing demand, late spring, and it was a little bit more forceful than other categories. It could have been related to pricing and consumers buying ahead. Not sure that's playing out. Again, you probably look at credit card panels. So what's happening with, I guess, industry demand. Second, as pricing comes through, and again, you're not controlling it, you're just the marketplace in theory at this point. But have we seen the worst or the peak of inflation? And what's happening with like-for-likes? And how much longer can we see that curve persist?

Yes. So in terms of what we saw so far this year, we didn't see any significant pull forward of demand. What we saw a couple of pockets of time, but the pull forward was in very specific categories and just measured in days. It wasn't really it didn't amount to very much at all. So a very de minimis effect of that. So I think tariffs in general have not driven consumer behavior to drive a lot of purchasing earlier. It's just -- it sort of is what it is. I think consumers also didn't necessarily know what to do with that okay, tariff, what does that mean? I don't know. And in terms of the reality of what's happened, a lot of the tariff-related costing has gotten absorbed either by our suppliers because they built in a higher ocean freight price, so they use up some of that or they're willing to take lower margins on their existing line and they're just focusing on new product development to drive new products in at a higher price point or the countries on the other side where maybe they've provided export incentives to help some of these companies or the ultimate producers who have been able to eat some of this. So what we've seen come through in terms of the increases that have come to us, which then have gone to the consumer. It's been relatively muted relative to the kind of spreadsheet math you would do saying what it should be. And what I think again, it is, is that the suppliers are pretty savvy. They know that it's a demand -- lack lesser demand in the market, right? I said the category is anemic. Like if you just kind of take that to heart and you're a supplier of these goods, you know that if you raise your prices, faster than your competitors raise their prices. You already don't have a demand level you like, you're going to lose demand pretty fast to your competitors. And the reality is you need some level of demand for everything to work for you to get the costing you're getting from the factories you buy from or from the factories you operate, and so I would say there's a lot of weariness to be aggressive on passing through costing. So as much as they can eat, they're eating. And again, I think it will really where you're going to see costing slowly trickle in over time is as new products get introduced in the market, new products always start with higher margins. And then as the styles get more competitive with others, the margin rate suppliers get on these items reduces. And that's a normal cycle. I think where generally suppliers are going to look to recoup margin is going to be on this new product development cycle, and that doesn't happen overnight. And so even if they want to be more aggressive, introduced twice as many products in the next years, they would normally they think about things like in the next year, they don't think about doing that in a month or 2 or whatnot. So I think it's playing out, and I just don't think there's going to be a big pricing shock that will have any sort of dramatic impact. I think the big things that are really driving the behavior of the category at a macro level is going to be the issues associated with housing, the overall health of the economy, consumers wage situation, consumer sentiment, these types of things. And then again, the big prize for us is, while we, of course, room for the category to be healthy and have tailwinds, the big price for us is really about how we take market share. And really, the gains we've been putting up and accelerating. We're on the back of just taking more and more market share. And we think we can -- if you look at where can we be in 6 and 12 and 18, 24 months, we think we can really drive the growth rate through that vehicle.

I want to get to AI in a second and thinking about market share. But I guess, fascinated, given the supplier base, and there's been a lot of volatility in where they have to source and how agile moving from China, but now we're getting tariffs in Vietnam and India. Can you talk about like, I guess, what -- how they're faring? And then are they prepared like for a repeal as the supply chain shifted a lot such that there actually could be benefits in the supply chain, even if there's a repeal, like what's the next several months could look like?

Yes. I mean what I would say is like -- so of course, suppliers are going to be cognizant of costs, but also where can they get the quality they need. The costs are not just the tariff-related costs. There's different production costs, different transportation costs tied to raw materials, all this. So they're going to figure out what makes sense. The way we look at it is, I think the thing that's important to appreciate is that we have over 20,000 suppliers on our platform. And so predating this year or the year before or 3 years ago or 5 years ago, we have suppliers who make goods. In China, we have suppliers make goods in Southeast Asia. Suppliers make goods in India. In Turkey, but then places also like Brazil, in Europe, Eastern Europe, we have a lot of production that's domestic in the United States. We have production that's near the U.S. and Mexico and Canada. So we already had this large set of suppliers with all different types of production capacity. So what happens with tariffs is that it may help one group and disadvantage another group. And then each of those groups will then figure out what they're going to do to try to become more competitive. But we're already on the kind of standpoint of we're already working with both of those groups. So unlike a traditional retailer or maybe we put a sourcing office somewhere in particular, and we focus on a particular region. And if that region got advantage, it helped us and it got disadvantaged, it hurt us. The reality is we're already working with all of these groups. And we are facilitating these groups competing with each other on our platform to gain the interest to the end customer. And so this type of volatility, which you don't really root for, the truth is our model is best set up for it versus 1 where you place discrete bets on which region is going to be better or worse?

The other thing I would add on the suppliers that we've spoken about it before, is that these are -- in many cases, these suppliers have been managing some version of tariffs since 2018. So these suppliers have learned to be relatively nimble. This is a category that has had tariffs for years. And I think that has helped with their sort of flexibility. We obviously then combine that with our flexibility in terms of being able to work with suppliers from all over the world. We can bring product in from all over the world. We can source it domestically, et cetera. But I think you have a supplier base that has gotten more agile over time after tariff, COVID, et cetera, a lot of disruptions that have forced them to be more nimble in how they operate.

What is your vision with AI, a digitally native company, kind of a visionary company? What's the use case of it? Are you excited by it? And is there a top line applications, middle of the P&L implications?

So first of all, super excited about it. One statement, and then I'll answer your direct question. I'll just say when we talked about how -- what are our competitive advantages, how do we win? One big source of advantage is the supplier network I just described a second ago, right? We have this large base of suppliers. It gives us a lot of flexibility, access to great selection, it creates great price value for the customer. A second one is around the logistics network we built like over 20 million square feet of logistics space. These are large fulfillment centers. We have a ocean forwarding operation. We have our own final mile delivery for large and bulky things where we have 50-plus delivery centers, we operate our own delivery operations. But as long as one brand would be the fourth. And then the fifth, I would say, is the fact that we've been a technology-focused company. And so I mentioned the 2,700 people a minute ago, well, A lot of where we've got an advantage online is that technology has not been an afterthought, but rather been something that's kind of a native to my background, the background of Steve Conine and the other Co-Founder, Wayfair, the other Co-Chairman, it is as technologists, not as merchants or retailers. Now in our company, we have folks across this whole spectrum of skills, but technology is very much at the core of how we think about things. So what's exciting about the advent of Gen AI is that even though we've been aggressively investing in machine learning for over a decade, the breakthroughs with Gen AI over the last couple of years have facilitated a whole new set of use cases that weren't plausible before. So when we talk about a catalog of 20 million items, how do you make sure the descriptive quality, all the descriptors are there. How do you find dimensional inaccuracies. Are you talking about millions of customer service inquiries, how do you facilitate better, higher-quality answers quicker at a lower cost. If you talk about the marketing creative, we spent over $1 billion a year on marketing, how do we go from having a finite number of creatives made by people to thousands and tens of thousands, hundreds of thousands and have them get better and better at a faster rate. So there's all these things that we've already been doing. So everything I just named or things that we've already been doing. Then you start looking forward and you say, well, what else can we do? Well, if you start looking from a cost focus in the operation, there's a lot of business process and a lot of work involved with running the company at the scale we have with over 12,000 employees that you actually say, well, we can do it very differently at a lower cost, higher quality way. And so we're going to be very ambitious with that. So there's a whole set of initiatives we have underway there. Then if you take the other side and you say, okay, well, there's the cost opportunity. Now what about the revenue opportunity from the customer standpoint or from a supplier standpoint, what could you do to facilitate suppliers being more engaged and doing more on the platform or what can do with the customer giving the customer an experience that's better, easier, more convenient, more engaging, more productive. That's where I think the actual bigger opportunity. So the cost is actually a pretty big opportunity, and that's still going to be playing out. But then the ability to change the experience for a given customer to be seeing imagery that's really generated specifically around everything we know about them versus the product having standard imagery or how you can actually help a customer navigate the large catalog and get an experience that's very tailored to them in a way that helps them discover new items and visualize them in a way that they couldn't before. Or I mean, there's a long list of use cases of what we're doing with suppliers and customers. And I would say most of that is in like what I'd call pilot stage. We have a few of those pilots out where customers are interacting with them. And those are showing actually pretty engaging results with small amounts of traffic. And so I think what you're going to see is over the next stretch of time, the companies that actually have good mastery of the technology are going to be able to pull away from those who do not in the same way that that's been happening for decades. And then folks say, well, okay. And then what about the way discovery works on these LLMs, so whether it's Gemini or ChatGPT or whichever LLM. We think that's just another big opportunity because if you think about the way we've always historically been a great collaborator with Google and Meta and Pinterest and a number of the platforms where Discovery was occurring. The reality is they need content and information, there's ways to optimize yourself on those platforms. And then the truth is there's a degree to which those platforms then need to pass off that traffic to really make the customer experience work well. And we've always been a leader in that. So we feel very good about the setup we have in today's Gen AI world. And we believe that will just be another kind of, if you say, well, in that fourth or fifth bucket of differentiation I talked about technology. Well, does the opportunity differentiate technology next year look higher or lower now that Gen AI exists than you would have known 2 years ago, I would say higher.

The one piece on the cost side, which you said is still relevant. The business has gotten a lot more efficient. Does it help [ Ben or Stymie ] the cost curve already into '26? And then you mentioned something this mastery of the technology where you can extend your competitive event. Can you -- is there an example that you can bring to light like how that specifically can help Wayfair or home furnishing?

Yes. Do you want to talk about the cost side?

Yes. I mean, what we said on the last call was that guide on the SOT -- or on the SOTG&A and sort of [ 360, 370 ] was a pretty good place for us to operate from even as the top line has been growing, obviously. And that, I think, is really driven by a few things. So one, when we took out significant costs over the last years. We had said at the time that we were leaving in teams and head count investment in areas where we were growing. And thus, we believe that even though we were getting leaner and leaner and leaner, we'd be able to grow without adding back headcount. On top of that, you're now seeing an opportunity with AI to continue to grow maybe beyond sort of where it initially would have been on that line and be able to continue to get more efficient. And you see that, I think, in areas, obviously, we've -- I think we're all well versed on the tech space where you see that. But on the commercial side, the example that I frequently talk to is the legal team. So the legal team is a very small team within the company. We have as you hopefully have seen, we are opening up more physical retail stores. So there's been an increase in lease volume. We have one person that helps the leases across the entire network. And even though we have increased -- so she does industrial, retail, et cetera, even though we've increased the lease volume that we're doing and the number that we're having to review, because of different AI tools that, that team is able to leverage, we're able to keep that head count where it is and not add to that. And so I think it's a good example. The work is actually -- the volume of work has increased there, but the efficiency of the individuals have gotten quite a bit better. And so I do think on the commercial operations side, we're going to -- in addition to the tech side, we'll continue to see nice opportunity there.

And the second part of your question, in terms of -- I guess one example I would just give, there's actually quite a few that are underway, but, one example is -- everyone is familiar with how you can use these models to generate imagery. And one of the challenges inherent with these models is that if you generate imagery, you have a set of products, what you get is not always exactly the product specifically that you asked for. So it might add an extra leg to the sofa or something that, in general, wouldn't matter if it's sort of like an inspirational image. But if you're talking about like rendering products that someone's going to buy, it could matter for sure, right, because the customer may focus on certain aspects of it and then it needs to be accurate. So we -- going back probably about 9 months, got a model working well, which is a tuned version of an existing model that was out there, but very specifically modified to be able to take a -- someone can specify a set of items for a catalog, and it could create further realistic imagery of these items that were accurate. And then what we've been able to do over time is then figure out how to get that working at scale where instead of create -- instead of it being a relatively expensive compute process to create these images. We were able to get the compute time down dramatically with quality very high. We are now able to do it rendering it if you just take a photograph of your room, we can now take the space and we can spatially render it in the room. And so we're now taking that. And we have a few things running on our site like [ muse ] and some other things, which allow you to put in prompts and get imagery that's inspirational we're now taking this model and we were using it for ad creatives like creating marketing creative units kind of high-volume, high-quality way. We're now about to roll it out in some consumer-facing use cases where it's really about them now being able to see this in their shopping journey where it's actually helping them with the actual products. And so what we've seen is the conversion when you do this is actually quite high because someone can actually see exactly what they're going to get. We don't have to worry about any of the issues around returns and dissatisfaction and so on and so forth. And so that's just like an example, but it's like the number of internal use cases we have for this is actually quite high. And we believe that we're pretty far ahead in terms of getting this to work.

And what does agentic mean to Wayfair? We're starting to focus on risks for other digital companies in terms of advertising income. For you, there could be some implications there, and there's also implications maybe for advertising spend potentially with an agent. So how do you think about both of those dimensions?

My high-level view is just that, okay, so if you have places out there where folks get upper funnel traffic, they're then going to want to monetize that a few ways. So one way, of course, is if they can have the transaction monetized there, they get some sort of take rate on that. Or if it's more economical and productive for the customer to pass off that traffic, they can effectively get some sort of advertising fee cost per click or whatever it is, right? And if you think about what like Google and Pinterest others have done over the years, they've ended up with a blend of the 2. And the more transactional the category is, the more it's basically a take rate and the more kind of complex less transaction in the category is the more it's basically click-through kind of charge. So my guess is what you're going to see upper funnel happen is things along those lines, where it's going to be very hard, I think, for -- someone is not going to say, okay, I want a gray sofa, just have it arrive next week. That's going to be -- that's not going to -- for most customers, that's going to be an insufficient shopping experience. And what you're going to even find is that the ability for something up funnel to actually help you get to the confidence to make a purchase of a specific item without the additional content that doesn't get presented necessarily in that interface very well is going to be limited. So I think you're going to get a mix, and it might be different than the mix that exists today, but we're going to optimize for both sets of that mix. Then what's going to happen as you come through that funnel traffic on our site, we're increasingly building tools that basically caused you to come to us directly. So if you think about what's happened to our business over time is that we went from being purely transactional. And when we launched Wayfair.com, one of the thesis was that we can build a brand where we can create loyal users who then come directly to us. Then over time, what we've done with the product catalog and with the various things we've done to improve the experience is we've gotten the kind of repeat rate to continue to climb. Well, then what's happened more recently is with the mobile app. So now if someone is loyal to us, we get them to download the app. If they download the app, the odds of them coming directly to us goes up even more dramatically. Well, then we launched last year, the rewards program. The rewards program basically says, well, for a nominal fee, it's $29, you get 5% back on everything you purchase, and you get early access to sales. You have a series of benefits. So some are monetary, some are non-monetary. And the $29 is basically, if you think about it, you spend $600 a year, it's being paid for. If you spend more than $600, you're making money on that. And then, of course, it's the nonmonetary benefits. So we also give you early access to sales members only support line, these things that customers value in different ways. So we've seen really good uptake on this program. Well, if they set up for that program and then if they don't have the app, we say, you should download the app, the odds that they download the app actually jump up dramatically because you'd say, well, hey, I already paid $29, might as well get the app. So now if they get the app and they're in the program and now the experiences we can put through the phone because the phone has a camera in it, the phone has a microphone in it. And so you think about what you can do with AI, agentic AI and you now have a state where the customers logged in much more often than they're logged in on the [ debt ]. So what happens is like the lower funnel use cases of where we're keeping the direct interaction where we can make the experience better and better, and we do it where the traffic is like native traffic to us where we're not paying for the traffic to come in. That's getting dramatically better. So the way we think about it, it's an and, like there's no one strategy. It's like a multifold strategy because there will always be traffic that's economic for us to pay to get that traffic from folks who are starting up for funnel. But then ultimately, for someone who's engaged with us and excited, we want to create a direct relationship, right? And so if you think about the different programs we have and how they fit together, you can kind of see the picture.

And how about retail media? I forget, I'm not trying to have you tell us, but where you sit as a percentage of revenue? We roughly know where that is, but how does this all get worked out because if you have agents directing traffic, maybe you don't capture that revenue?

So the last time we talked about retail media was, I think, in December -- or the November call of last year, so 2024, and it was under 2% still. So to keep it in context, compared to other players, it is a much smaller piece for us. The other thing that we've been saying is we've -- rather than pocket that, right? We've been largely reinvesting in the customer experience with that. So we've been improving price, delivery speed, et cetera. We think that's been the right trade-off. We talk about sort of optimizing this multi-quarter contribution margin dollars, EBITDA dollars, that has been the right investment there. We have in the past spoken about that growing to, say, 3% to 4%. Again, that is a much smaller piece for us because of the nature of the goods. These are unbranded goods. The experience is a little bit different. This is not a grocery category, right, where it's a significant chunk of the piece. So I do think it's important just to put that in context a little bit.

And what I was -- so if you're selling things that are more transactional, say, like a 3 pack of iPhone cables, that both is a transaction that could take place upper funnel, not even on your own site because someone may not care as much about that. Just under $10 having arrived by Friday, highly rated, and it might be good enough, right? Second, if it comes to your site, effectively, you're typically using advertising and making it a reverse auction because you'll show items in more or less whatever order and so the suppliers are bidding on that. So that's where the sites where you find have a much higher percentage of retail media. It's where it's more of a commodity. Because in that sense, you really can effectively use almost all the slots or virtually all the slots on the page. In a category where there's a lot more nuance and kind of customer curiosity engagement around it. What happens is that traffic either originates with us or gets to us earlier in the funnel. And then the customer is still not sold on just buying that item. They want -- there's a lot of product discovery that still happens. So the opportunity for us to continue to deploy retail media the way we are, which allows suppliers to have their items be seen by customers when there's a propensity that this customer might be interested in it, that's still very much there. Because customers -- they want to really make sure that they understand their options before they make a purchase because we're not really -- very little of our business are commodity items like we don't really sell a lot of commodity items. And so customers put more care into the thought process of the purchases that they make with us. So I think we're -- the category we're in is set up well. And I think the approach we're taking is still set up well. So I think the retail media growth we can have continues to be there. And a lot of the growth is not necessarily like the existing types of media units getting more value and volume, which is certainly a piece of it, but it's also us adding additional types of ad units, which we're working on. We have a good product road map there. And those types of ad units, we believe, when we think about how we think things are likely to evolve are still very much there.

You're gradually opening stores. How is retail? How is it in Chicago land, where it's probably your most representative foot forward. It's probably in the comp base by now. And now I'm intrigued by Perigold and what it's doing to the market. And is there any AI piece where people want to actually come in and physically touch and feel market effect?

Yes. So for Wayfair, we have 1 store open. It's in a Wilmette of Chicago. It's 150,000 square feet, and it opened in May of '24. We announced 3 stores will open next year. Early in the year, there's 1 in Atlanta, midyear, there's 1 in Columbus, Ohio. And late in the year, there's 1 in Denver, Colorado. So we're pretty excited about what's happening with the Wayfair store in Chicago, and we're excited to start replicating that success and driving that forward. For Perigold, we opened the first 2 stores this year. So 1 in Houston in Highland Village -- Highland Park -- Highland Village, I think it is and 1 in West Palm Beach, Florida, just about 2 months ago, the 1 in West Palm Beach, and they're off to a great start. And so we now have stores open for all 5 of our brands. We think we're proving out the -- what the right size store, what the model is. The Perigold stores are not 150,000 feet, but they're large. There are 20,000 in Houston, 30,000 square feet in West Palm Beach and the early numbers and reception is great. So we're going to continue to prove it out and then scale -- continue to scale it up. I think there's a very big opportunity where customers -- it's a category where customers don't necessarily feel fully fulfill just interacting online. So depending on the use case, online might be preferable in-store might be preferable, [ IDA ] is the ability to go back and forth in whatever way they see fit. And then if you think about what we've built, where we have a household brand, we have a big customer file. We have a great product assortment, we have good availability of inventory. We have a delivery and fulfillment network. Stores are effectively the front end of all of that, but we don't need to build all these other pieces you would need to build if you were going to build a brick-and-mortar retailer. We already have all those pieces. So we're in quite a good position to actually kind of round out the customer experience by adding physical stores.

Close out on the incremental margins. There was a profound inflection a couple of years ago with how you restructure costs. And we were of the mindset that mid- to high teens EBITDA -- incremental EBITDA margin is the right way to think about the business until you blew past that this year. So thinking about investments that you need to make or scalability of the business going forward, does that framework still apply?

Yes. I think that is overall a good way to look at it. And so I want to talk through a few pieces. So one, we've tried to articulate the contribution margin concept because that is very much how we think about it, which is the gross margin less the CS&M, less the marketing spend, right, the ad cost as a percent of net revenue. that, you've seen a really big step-up this year on that contribution margin. Now some of those year-over-year compares are unique. So I want to make sure that folks are not orienting around some of the year-over-year compares for next year because we did step up marketing spend in '24. So we stepped up marketing spend Q3 and Q4 in '24 and actually been in Q1 of '25 and then that pulled back, right? So I think it's important to be clear that we're sort of comping a unique period there. Then the other piece, but we do think that can sort of stay at the 15-ish level. The other piece is obviously to the point that you made, Simeon, around the cost structure on the team, on the SOTG&A. And again, we have been comping some of those improvements. As I said, we think that can hold in. So if you're growing. So if you keep that sort of flat and you have your contribution margin at 15% and your top line is continuing to grow, then you're obviously growing your EBITDA dollars faster than that rate. And so you're seeing a really nice flow-through to EBITDA, and that is what you saw the last few quarters, and we think that, that construct remains.

And does that support feed into, I think, what's the last time you published the long-term margins of getting to...

North of 10%...

Low double-digit EBITDA margin.

Yes, that would continue to drive that towards the north of 10%.

Sneak in one last 1 on advertising spend because there were moments in the last 12 to 18 months where it looked like there was some deleverage picking up. And it's hard for us to say which period did we get to pay back. Now it's slowing down, leveraging again and it looks like you're getting the payback. Is there an unlock? Or this is just the back and forth, ebb and flow of managing this business?

I mean I think it's important to not look at advertising costs solely in isolation. And so this is why we talk about contribution margin a lot. As you have gross margin, you have ad cost, and there's different things you might do in other words, like rewards when you joined the rewards program...

That's a great example.

You get 5% back. Well, if you think about what we just did is we hurt our gross margin. Because what we know is that you're actually going to buy more than the $600 since breakeven. We actually see a significant step up. So we actually hurt gross margin percentage. But you come back to reps. So they add cost efficiency is dramatically higher. I mentioned you download the app, you come directly, right? And so if you look at it from a profit standpoint, it's an incredibly profitable deal. So you'd be happy to do this all day long. But you'd say, oh, well, your course margin isn't going up. But your ad cost is going down. But that's really good. And then at the same time, there's things like a TikTok as an advertising channel is 1 that we arguably were late to, but as we figured out a set of things there, it's growing nicely. That's a good place to spend advertising we're keeping on a very tight payback constraint, but we're happy to scale that. So you say, that's causing your advertising to go up, up, but when I look at it over a multi-quarter basis, it's a highly profitable thing to do. So each of these things add up to different puts and takes. And so I think the way you need to think about it is, again, to really look at the contribution margin and to say, hey, I want to know what your revenue growth rate is. I want to know what your contribution margin is, and I want to know what your EBITDA dollars are growing at. Because if you're doing those things, should I really care about the trades you're making in each one of these many use cases that then you add together and give the P&L because I kind of want you to make each individual trade as smart as you can, right? And that's what we're focused on.

On that note, congratulations on a great '25. Good luck holiday season and into '26. Thanks for being here.

Thank you for having us. Thank you.

Thank you, Simeon.