Wayfair Inc Q3 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Ygal Arounian - Citi - Analyst : Hey, good morning, guys. Maybe just first on the share gain that you're seeing. If you can, I don't know, quantify or qualify that a little bit more? Is it -- do you see it all coming from the pricing that you can deliver the other factors that you're seeing? And how do we think about that as the market gets better as you're positioning for that? And then on the 2025 EBITDA commentary, any more color we can get around that, the level of confidence you talked about the mid-teens incremental EBITDA margins? Just how do we think about that in a category that maybe doesn't improve as we work our way through the beginning of next year, at least? Thank you. Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. Thanks for the questions, Ygal. I mean, let me run through them, and then Kate, if there's anything you want to add, Kate, you can jump in. So on the first one around the share gain we're seeing. So I would say since the end of 2022, since the fourth quarter of 2022, we've kind of consistently seen ourselves gaining market share every quarter, hitting all-time highs in the credit card panels that we get on market share. And in terms of how we're doing it, you mentioned pricing, and I'd say, optimizing our pricing to maximize our profit dollars is certainly one thing. Again, we didn't really change pricing that much, so I just want to quantify that, right? That was low-tens of basis points. But that's just the kind of an ongoing optimization we do on the demand elasticity to maximize our position there. But that's just one of many things. So we talked about pricing, but for example, we can talk about improvements we've made in our logistics network. Like, for example, on our prior calls, we talked about consolidated delivery, which is right now live in Houston, Las Vegas. We're rolling that out nationally or we've done a whole series of kind of logistics features and functionality that increases speed, increases customer service levels. That grows the business. So on our website, our apps, what we call our storefront experience. That's a team that had spent a lot of the last couple of years working on replatforming big pieces of the technology. But as they've done that now, the developer [boss] sees much faster, the feature function we can roll out and optimize is back to a very high rate, and we're seeing gains from that. So the way we can kind of take market share is actually through a long list of things we can do to improve the customer experience, drive up conversion, gain customer reach, optimize the outcomes we're getting. And so when we look to 2025, we see a lot of ways to continue to grow market share regardless of whether the macroeconomy in this category is something that's getting better or not. So we're not counting on that. We know it's a cyclical category. We know that consumer discretionary durables are under a lot REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call of pressure now. That is where we play. Despite that, we see a pretty good outlook for how we're going to grow on the back of taking market share. And then for the 2025 EBITDA, the way to think about the 2025 EBITDA is what we said is, we see 2025 EBITDA dollars being higher than 2024 EBITDA dollars because of the ongoing road map we have around what we can do around market share as I just described and kind of scale our business that way, while we also continue to have a good cost road map. And as you've seen on that SOTG&A line, for example, I don't know if -- I forgot the number, is eight or nine quarters in a row, you've seen that come down in dollars. And that's just us being very smart about how we're spending money and continue to find ways to optimize that. But Kate, let me just turn it over to you.

Question: Ygal Arounian - Citi - Analyst : All right. I appreciate it. Thank you.

Question: Christopher Horvers - JPMorgan - Analyst : Thanks. Good morning. So my first question is you're -- in the fourth-quarter revenue guide, you're assuming some modest slowdown in revenue growth in the balance of the quarter, parsing a little bit here, but flat to low-single digits quarter to date, versus down low-single digits. You also mentioned pre-election deferrals. So can you bring that all together for us why wouldn't trends get better if consumers are slowing into election and pushing the holiday sales later into the quarter? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah, Chris. So I think on that, you've got -- you got the election coming up. That's something that may or may not really be determined in one day. That could take a little bit of time. We've got a calendar or the number of days that you're talking about kind of in the holiday season is a little shorter and you have what's been a challenging macro. So you have a bunch of uncertainty. So we feel very good about how we can continue to take share. But you're kind of looking forward to the quarter and you still have a lot of the revenue yet to come and you have some of these uncertainties, you're trying to like figure out where you think you're going to be. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call

Question: Christopher Horvers - JPMorgan - Analyst : Got it. That makes sense. And then on the operating margin forecast for the fourth quarter, Kate, you talked about we're hitting our goal of mid-single digits. You did 4.1% in the third quarter, but at the same time, the midpoint of the fourth quarter guide is not mid-single digits. So I guess, to what extent does that sort of undermine the view of hitting that goal that you've sort of said you would get to and have said that you've achieved that? And then is any of that just seasonality from a mix perspective versus timing of spending?

Question: Christopher Horvers - JPMorgan - Analyst : Thanks very much.

Question: Peter Keith - Piper Sandler - Analyst : Thanks. Good morning, everyone. So just sticking on some of the advertising and election dynamics. So you're highlighting the elevated ad spend from the stepped-up influencer marketing. But we're also hearing that ad rates are very high right now around the election season. So how do you think about the ad spend going forward? Do you think the overall costs are going to come down as we get in further into November, December and going forward? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. Thanks, Peter. So the way to think about it is, certain parts of the ad market will definitely have elevated rates pre-election. So think about this as like local television, think of this as some of the upper funnel channels which you could use for any variety of messaging. And we -- just to remind you, we're very quantitative in how we spend the money. So in other words, we won't chase that spend. So if it's not economic, someone else can buy that media. And of course, if it becomes economic again, and it makes sense to us, we would buy that medium. And so that's sort of one thing. Think of that as like whether you think about influencers or separately, we're talking about some lower funnel, fast payback channels. Those are channels that are very narrow and specific to different types of advertising. And so those aren't ones where you'd find political ads. And so that's sort of a different segment of the advertising market. But I think the main thing to just to kind of keep in mind is that we're just very quantitative in when we're talking about the ad spend. So we're not -- we don't really participate in anything that's not economic. And yes, those channels like local television do get much cheaper after the election, but we don't really do that much in local television, for example.

Question: Peter Keith - Piper Sandler - Analyst : Very good. Thank you so much.

Question: Simeon Gutman - Morgan Stanley - Analyst : Hi, good morning, everyone. A couple of questions first. On the category, home furnishings, if turnover or housing turnover picks up, I think the category would rebound. If it doesn't, curious, what you think about pent-up demand to drive -- is that going to drive some life in the category? Where do you think we are in that continuum? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. So I think you kind of -- you're phrasing it well in the sense that obviously, if housing demand and existing home sales picks up, that's obviously highly stimulative to the category. We are seeing signs that there is pent-up demand, but how much time needs to elapse before that becomes top of mind enough to be stimulative on its own is less clear, I would say. This is why -- just thinking about our strategy we've had for two years during which the market has gone down, what, 25%, but we've basically been able to take significant market share. And so we are doing far better than that. I think our strategy is really not counting on a rebound in the category, but it's actually calling out the fact that use rough numbers. The category was whatever, a little over $400 billion in North America, and now, it's whatever, over $300 billion in North America, it's still $300, whatever, plus billion of spend that's out there. And we think that there's a lot of argument on why we can take share very nicely with all the things we're doing. And if you kind of think about that as being a long tail, very fragmented and you're increasingly seeing players who are having a harder time being differentiated in the middle, sort of losing share or going away. You've kind of seen that from major players where REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call they're declining a lot or there've been a handful -- most recently what (inaudible) that got more going out of business. And so there's definitely things that are changing. And I think this is the real opportunity for us. And yeah, of course, when the category turns, there's going to be tremendous amount of growth, too. But it's sort of like timing that I don't think it's very easy to do, and I don't think it's really pertinent with given the strategy we have.

Question: Simeon Gutman - Morgan Stanley - Analyst : Okay. Thank you. Good luck. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call

Question: Brian Nagel - Oppenheimer - Analyst : Hi, good morning. So I have a couple of questions. My first question on market share. So I know this has been a big topic, and you've highlighted consistently the numbers show that clearly, Wayfair in a tough environment is taking market share broadly. The question I have is, as you look at that -- the data you have maybe closer, is there any indication that some of these more mass merchant, more value-oriented retailers or sites that are performing well in this environment, were they actually -- you're having a more difficult time taking market share there or are they potentially taking market share back from Wayfair? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. I guess just to clarify what I would say, so it's a large and fragmented market. There's quite a few people losing share. But just to clarify, we're not the only one winning share. And so two other folks have highlighted, who I think have done a very good job also over the last few years. One is Amazon. Now, they played at the kind of opening price point commodity items is really where they specialize, but they've done a good job. Another one is HomeGoods, who's purely brick-and-mortar, and they really play in sort of the decorative accents, the core textile space, lower ticket items, but they've both been taking market share. So there's a handful of folks who are doing well. Much longer list of folks who are not doing well. And that's kind of the landscape. And so I wouldn't say that we expect to be the only winner. But I think there's actually kind of only a handful of winners and quite a few folks who are on the other side.

Question: Brian Nagel - Oppenheimer - Analyst : So it's very helpful. I appreciate it. Thank you.

Question: Curtis Nagle - BofA Global Research - Analyst : Thank you very much for taking the question. I guess the first one just on the AOV came in above expectations, but pointed to high price elasticity and press for small versus large ticket items. So just curious what drove the better expected and higher AOV in 3Q? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. Curtis, I think the way to think about AOV. AOV is really an output metric, right? So if you think about our business, we're doing a lot, for example, to sell lower ticket items. When we talk about like the frequency agenda and what we're doing with housewares item, decorative accents and one of the benefits in Wayfair Rewards, for example, is free shipping on every order. And you'll say, oh, that will decrease AOV. But then we have a luxury platform, Perigold, that's actually growing at a very nice rate and say, oh, that's going to increase AOV. And so we're doing a whole variety of things that -- our real goal is to grow the dollars per customer per year. So the way we think about getting market share as we think about market share as more customers and those customers each spending more with us. And an outcome of that is obviously a number of orders, times AOV is the revenue. But again, because our strategy is not around low kit orders or high ticket orders, AOV is an outcome metric of the combination of things we do. And so I would say AOV is kind of like a pertinent topic when you're talking about inflation of like-for-like items or deflation of like-for-like items, meaning your second quintile price for beds. Is that moving? But that's not really what's happening right now. All that inflation with COVID and the ocean freight rates, then there was a deep cycle of deflation of that coming back out, that's all behind us right now. And so this AOV is more -- these moves are more an output metric of the seasonality and us executing the business on all the dimensions we talked about.

Question: Curtis Nagle - BofA Global Research - Analyst : Okay, got it. Thank you.

Question: Colin Sebastian - Baird - Analyst : Thanks, guys. Good morning. So I know there's a lot of focus here on the category challenges and efforts in pricing and advertising. But Niraj, if we sort of zoom out on broader e-commerce platform and technology trends, I mean, there's a lot of change happening REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call around shopping tools and digital assistance and personalization within apps. And so I wonder how important those initiatives are for Wayfair? And are you seeing any positive impacts perhaps in metrics like just time spent or discovery and browsing even if those aren't converting yet to sales in this environment? Steven Conine - Wayfair Inc - Co-Chairman of the Board, Co-Founder Yeah, thanks for the question. This is Steve again. Let me just kick this off. We have been doing a lot of things internally. Actually, just this morning, I sent out an internal sort of pre-earnings little video, and I did it completely with AI. And I think part of this is -- we're all going through this learning curve together right now of how to best use these new tools. And so when you look out and say if we don't adopt the best practices in the business, we're going to be in trouble. And so it's on us to really push our teams to make sure they're using these new tools and experimenting and trying new things and pushing the cutting-edge so that we can be a leader and not be kind of at risk of the market changing around us without us catching it. So we have a number of initiatives internally that are -- some are very tactical and some have a very direct efficiency paybacks, where teams are using them to improve process flows that they have today. And then some are much more experimental where they're trying to go after things that could be disruptive in the future that could be very exciting for our customers or could change the efficiency curves in different parts of our business. Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. And what you've seen, like, so we've been large adopter of machine learning, data science for a very long time. And that's how we price the catalog, how we do sort or how we do a lot of personalization. But with the kind of more recent advent of GenAI, we've also been an aggressive adopter there where we have a lot of use cases where you can kind of do things and you see the return very quickly. For example, we have a very large catalog, millions, millions, tens of millions of items. And so finding dimension inaccuracies in correcting them, auto tagging a lot of merchandising attributes. Those are things that we've actually put into production. They're driving a lot of value at a very insignificant cost. And similarly, on how we empower our customer service agents to be able to take care of the customer and do a good job. We've been able to create tools there or for our software development teams and kind of the copilot type products out there for increasing productivity of coding. So there's been a bunch of things we've been an aggressive adopter on. On the customer side, I think what you're also getting at is it can change how customers shop. And there, I think we actually do have some kind of pilots and proof of concepts of things that we're trying that we do -- we have one that we're setting a small amount of traffic in, and it actually shows really amazing customer engagement. It's still early. But we're basically -- we're certainly I think we're being prudent about how much we're investing. We're not overinvesting, but I think we're also not ignoring it. And I'd say we definitely are pretty happy with some of the progress we're making. And we're in a good position because it's a category. We're not selling commodity goods. And I think the biggest challenge with agents are if you're a seller of commodity items. Now, you can have an agent say, hey, you know, I want to reorder those bounty paper towels, that dish soap, you know, it's more Dove soap bars. Well, that agent can basically figure out, hey, is it cheaper at Walmart, at Target, Amazon? Oh, does it make sense? So we're ordering from Walmart, automatically sign me up for Walmart Plus or whatever, execute that order. I don't care whose kind of brown cardboard box shows up at my door, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call But if you're selling items that are exclusive, there's a lot of consideration in how you pick the right item. There's a lot of fine distinction between different items. The agent role is going to be a little different. And I think there's things you can do to kind of enhance the customer experience in a way that's really engaging, but it's not, I think the real challenge is if you're more a commodity provider.

Question: Oliver Wintermantel - Evercore ISI - Analyst : Thanks, guys. Kate, I think you mentioned you're looking forward to a healthy free cash flow generation in the fourth quarter. Maybe can you confirm the free cash flow that you guys expect free cash flow to be positive this year? And then maybe the capital allocation into next year. Maybe talk a little bit about how you want to invest and what is driving CapEx next year?

Question: Oliver Wintermantel - Evercore ISI - Analyst : Got it, thanks. And then maybe on international, it looks like that had a nice improvement in EBITDA versus the first half of the year. On your comment about next year's EBITDA dollars to be positive versus 2024, how much of that is international improvement? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 01, 2024 / 12:00PM, W.N - Q3 2024 Wayfair Inc Earnings Call Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yeah. So I'll just make a quick comment and then turn it over to Kate for the details. But I think what you're seeing over time is a lot of the work we did over two years of really kind of streamlining our cost structure, focusing on the key things for each business line that we think are important to drive them forward. And then as time plays out, we're seeing that the business -- we're pretty happy with the progress we're making on the key drivers in each line of business that we want to see progress. I'm not really allowed to give guidance, so I'll turn it over to Kate.