Wayfair Inc Q4 2024 Earnings Call Transcript

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

Question: Ygal Arounian - Citi - Analyst : Maybe just first on, I guess, the relative outperformance in 4Q on the top line, what the biggest drivers of that were for you guys? I mean -- on our numbers, the AOV was better than expected and customer count and orders were a little bit worse, but it sounds like that was in line with your expectations. Was it still predominantly pricing and discount driven, just how to think about what happened in the fourth quarter? And then thanks for all the color on the letter and in the presentation as we look forward to 2025. Share gain seems to be a big factor here. What do you think drives that the most this year? And how much share gain is contemplated in the comments around the profitability of EBITDA growth -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 20, 2025 / 1:00PM, W.N - Q4 2024 Wayfair Inc Earnings Call Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Thanks for your question. All right. Let me start by answering some of this and then I'm going to pass it off to Kate to try to answer some of the last bit about guidance kind of contemplation. In terms of the fourth quarter, so we were happy with how the fourth quarter came out. The way to think about it is you're obviously describing kind of the revenue came in well, but you're talking about kind of orders, AOV. I guess the way to think about that is -- the main thing you think about is sort of what's the right offering for the customer, what's the right marketing, the right event cadence, it's holiday, how are you sorting the seasonal goods. Are you sorting sort of kind of doorbusters and other items. And then how are you just -- like in our business, it's not just -- it's not like gifting, where it's a rush right before Christmas, it's sort preparing to host at Thanksgiving and it's getting your house ready for the holiday -- festive holiday season. It's been hosting again for Christmas. So there's all these things outside of just getting a guest for yourself or for someone else. And so I feel like we did a good job with that. And I will just say, we're now in -- finished the third year where the market was comping significantly negative. And our strategy has been how do we deliver the experience that allows us to take share. So the gains are coming out of successfully taking share by the customers choosing to shop with us even though maybe they're not shopping the category that much. So that's sort of like the way I would kind of frame what we saw with holiday and while we're happy with it and kind of the fact that it was a solid holiday season and how it played out. Now you had a question about kind of now looking forward, share gain has been a big piece of the story, which I totally would agree with. And I think a very -- I would point to that as a very important piece of the story, as you see in the shareholder letter that we released today. I talk a lot about that. As we look forward, and I'd say super high level, and you can see this in the shareholder letter when I talk about the coming year. I'd say that we underwrite a base case that the market does not get that much better, then it's a tough market. And why do I say that? Well, housing is in a tough place, the 30-year mortgage rate's in a high number. It doesn't make sense for a lot of folks to move. And so rather than underwrite, hey, this is going to get a lot better. We say, well, let's make the base case that it's not. Now it's a cyclical category, and there's no question that we're down, we've kind of gone through the down cycle, and we must be near the bottom. But rather than try to call the bottom, we'd say, "Hey, we're going to be a big beneficiary now and later and during an up cycle if we focus on just executing well and what are the things we can do this year that are in our control that let us take market share. And it's a very big and fragmented market. We talked about it being over $0.5 trillion, and it's very fragmented. $12 million, we're one of the largest players in it. But there's a lot of areas in our business where we say, hey, there are specific things that we think we can do that would let us take share. And when you make a list of these and you say, okay, these are ones we could do, who could own each one or does own each one? What are the metrics? What do we need to accelerate them? And you add up what do we think these can do there? It could be substantial. So that's the plan we have, and it is based around taking share off the market being tough. And we have one big advantage as we go into this year that we didn't have in past years, which is just that we have a large technology organization, but we focused -- over the last few years, I've talked about this going back three years ago in the shareholder letter, that we are putting our technology resource very focused on replatforming our systems. We have put that off for a long time. But we've gotten to a point where development velocity was very slow, and it was very hard to have stable systems and introduce new feature function into them. And so we made the right, I think, but tough decision to really focus the technology resource on that. So we've had multiple years where we've not been able to drive future function. And this whole type of product-led growth has historically been a big piece of how we've grown. We now have those resources back as the vector platforming has gotten to this advanced stage. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 20, 2025 / 1:00PM, W.N - Q4 2024 Wayfair Inc Earnings Call So a lot of the things we talk about, and I've mentioned a number in the letter, are ones that we can now do this year that we couldn't do in the past year. So there's a in our mind, there's a lot of opportunity that's entirely in our control that's low-hanging fruit. Now in terms of how we think about guidance, let me turn it over to Kate.

Question: Maria Ripps - Canaccord Genuity Inc. - Analyst : First, can you maybe expand on how you're thinking strategically about pricing investments, especially in the context of tariffs? And then secondly, one of the focus areas you highlighted in your shareholder letter was going after the low-hanging fruit. Can you maybe expand on two initiatives that you sort of mentioned there? One is -- sorry, modernizing your merchandising platform and the other one is developing kind of (inaudible) promotions capabilities. I guess, what are some sort of aspects of functionality that you feel like you need to add on those two fronts to compete sort of more effectively? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder All right. Thanks, Maria. So let me go through questions one at a time. So on the first question around price investments and tariffs. So on tariffs, let's just take a step back and I just want to provide a little bit of background for those maybe who haven't followed us for five, six years now. If you go back to the -- during the first Trump administration, the tariffs in our category, it went from really no tariffs on our goods coming out of China, through a couple of different iterations up to 25% of tariffs on goods coming out of our category. And that happened -- it was I would say a surprise to most folks, and so it happened fairly quickly. That, of course, then caused our suppliers to make decisions that their supply chains that would then optimize the cost of their goods because they want to make sure that they're as cost competitive as they can be. Otherwise, obviously, it's hard for them to grow their business and succeed. But then what's happened since then is that, that understanding that, hey, these tariffs, they may change, they may continue to evolve. That was then kind of firmly set in folks' mind. So what you've really seen happen is that there's sources inside Asia, so places like Cambodia, Indonesia, Thailand, Philippines and Vietnam for sure, that have grown as places where folks have factories and where our goods are coming from. And that's been a growing trend. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 20, 2025 / 1:00PM, W.N - Q4 2024 Wayfair Inc Earnings Call And in addition to that, there are places like India, Brazil, Turkey, that have really been growing as a source of goods. And so the supply chain has been diversifying. And then obviously, there's production in the US, in Mexico and Canada. And we as a platform, because we have 20,000-plus suppliers, we work with all of these folks. So we haven't like made a bet, hey, we're buying from these Chinese factories. So we want to change our mind. We need to build a sourcing operation in Mexico, and we want to now buy from Mexico. Instead, we're working with everybody. And so our different suppliers may get advantaged or disadvantaged as different things happen. That could be something like global trade policy, but it also could be something like ocean freight pricing, right? It could be there's a variety of things. And our suppliers are doing what they can to optimize their business so that they can provide that price value to customers. Otherwise, they don't win. And then we are basically taking a margin on these goods. So meaning if you have opening price point parcels, we have a certain margin, we take on opening price point parcel. So anyone who's selling us opening price point parcels are competing against one another. But mid-priced wooden parcels, we may have a different margin we've decided to take. But again, anyone providing those, regardless of their sourcing and their location, their cost structure, we're taking the same margin. So different folks could win or lose if they end up advantaged or disadvantaged depending on the setup they have. As you can imagine, they want to make sure they're advantaged. So they've been making changes to try to advantage themselves. We try to help them by providing advice and guidance on what we're seeing, what we think is happening. As you know, on ocean freight and shipping costs, we try to help them by being a provider of those services. We moved tens and tens of thousands of containers on our in the [OOC] as one of our logistics services we provide. So we're trying to help them. But ultimately, they need to optimize their outcome, and you see them being pretty smart about that. So the price actions we make are around price elasticity, what we think optimizes the outcomes for us, not about what the cost inputs are to our suppliers. So they're sort of like obviously related in the sense that you're talking about a retail price at the end of the day, but they are two very different dynamics. But before I go on to the two things for the shareholder, let me - I don't know if Kate may want to add anything on that first part?

Question: Eric Sheridan - Goldman Sachs - Analyst : I'll echo the thanks for all the detail in the letter is really, really, really helpful. In terms of the part of the letter where you talked about advertising, both from a stimulative growth and then the rate of pace of cost reduction. I wanted to know if I could follow up there with maybe just a few questions. One, what were the key learnings about channel mix from 2024 that inform the way you want to (inaudible) spend your advertising dollars in '25 and beyond? And could you talk a little bit about evolution of direct traffic and rewards and how that could offset advertising and actually create some leverage on that line item over the longer term? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Thanks, Eric. Yes, so we'll talk a little bit about advertising. So the first part of your question was about like learnings from channel mix. And so what I would say there is kind of a few thoughts. So one, there's the concept of channel mix in terms of upper funnel, mid-funnel lower funnel. And so if you think about the total top of upper funnel, it might be something like our television advertising. Obviously, the Wayborhood campaign was a big launch last year. We're very excited with how that's going. We have the new set of that campaign that will launch shortly in the spring. And obviously, there's the holiday phase and then there's mid-funnel. I would say the thing is on channel mix. One, we do a lot to try to measure mix and the mix effects. The mix effects are hard to measure, so you have a kind of margin on error on that. But what you do find is like the basic premise that you want to be wherever customers are, is obviously very important. And so what I would highlight there is I think when we look back over the last few years, we'd probably say that we're probably a little slow to experiment and optimize for some of the more emerging channels. And so to give some context, one that merged a handful of years ago, that's grown quite large would be what happens with influencers or creators when you think about some of the social media channels, whether it be on TikTok or Instagram or YouTube shorts. And how do you interact with those in a way that both from a brand standpoint, provides some upper funnel benefit, but frankly, is really also driving that lower funnel sales transaction and so that you're monetizing it on the payback you want. And so I would say what we believe is that there are certain channels, which we do a very good job in, we're getting kind of our share, we're learning how to kind of keep increasing that cost effectively through increased targeting, better creative, et cetera. And then there's channels where we don't yet have the recipe correct, but we think they're important places to be. And so I mentioned creators. But then similarly, if you look at YouTube, full length or whether you look at (inaudible), there's a number where we care a lot about being a leader in that channel and getting our share, but then making sure we measure the interaction effects that we're only -- we're setting the payback tight enough so that we're getting the benefit, both in the channel but overall because of the interaction effect. And I would say that one of the things we're focused on doing is catching up in the channels we're not yet at the scale in. But we don't want that sort of experimentation cost to be a big source of deleverage. So the way we think about it is, hey, there's some upfront cost when you're in channels that you borrow a pay back end, but you're not maximizing that, hey, you want to spend up to that payback and then you get revenue that quarter and the next quarter, the quarter after, and you know your money good there. So we're doing that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 20, 2025 / 1:00PM, W.N - Q4 2024 Wayfair Inc Earnings Call But then the second thing we're doing, which really gets to the channel mix, is experimenting in the channels that we think are important ones, but where we don't yet have the share and we don't yet have the recipe correct. And there, what we're doing is we basically have -- I think in the fourth quarter, we sort of did a lot of both of what I mentioned. But what we've done is we really fix that budget to where we're going to be able to continue to experience the channels we care about, but in a way that our overall ad cost is going to be very kind of effective and efficient. So that's kind of the way I would talk about the channel mix. But -- before I go to the second part about the direct traffic, Kate, anything you want to add to the first part?

Question: Jolie Wasserman - JPMorgan - Analyst : This is Jolie Wasserman on for Chris. I was hoping you could talk to the cadence in terms of what you saw that was more post-holiday low, especially in January, versus what the impact was from wildfires and weather? And also on the weather portion, was weather a good thing for you or a bad thing? Because I know last year, Wayfair, you talked about the polar vortex being a headwind. But this year, I saw the app usage was up, which is probably more of a cold weather, people not going to brick-and-mortar stores as much benefit. So also speaking to whether polar vortex part two, that reaction differed from last year. Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yes. So thanks for your question. So a couple of thoughts. So I would say the cadence -- when we think about the holiday and entering the new year, the biggest thing I would say there is if you ignore the holiday period itself, which was, I think, strong, basically, what you've seen is you've seen a relatively weak market. And January was weak, and I'd say February has been a little weaker than January, but that's not really very much off of the trend it had been on outside of holiday. And also, when you look at holiday, I think it's important to balance November and December because certain peak days slid from November into December. And I think the way some folks looked at it is November was down, but December was up a lot. And they're really excited about that. I think you sort of need to add the two together to get the kind of which days fell and which month effect out and still see a good holiday, but it wouldn't be quite as stark. And so our view is that the market has not dramatically changed. It's been a weak market. It's still a weak market. We're probably approaching the bottom. Impossible to say exactly where that is. No immediate catalyst that's going to like shoot it upward right away. There is pent-up desire from customers to engage in the category, but no immediate catalyst to cause that to happen. So hey, what makes sense? Well, our strategy around taking market share through our own actions, we think, makes perfect sense. We happen to have a set of levers to do that. We're very excited about that. And again, the replatforming sort of the position we've gotten to is a very idiosyncratic lever for us, but it's one that's actually very powerful for us. So we're sort of excited about that. Weather, as you mentioned, there's different weather kind of the spikes that happen. This year, it's been a little less, it's a little bit more puts and takes. I don't know that there's a specific weather pattern in the early part of this year, I would point out. But Kate, anything you want to --

Question: Jolie Wasserman - JPMorgan - Analyst : That makes sense. And just a follow-up on your February comment. I know La-Z-Boy earlier this week said that President's Day was just not as robust as some other recent holidays, and following up on your comment about February being -- I think you said February being slightly weaker than January overall. So just wondering if you could speak to that and whether you observed the same trends of that holiday being weaker. And then just another order-to-date question would be how later Easter is affecting the 1Q outlook and what the expected shift would be? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yes, sure. So again, I did try to comment on President's earlier. I have seen a number of people comment about President's Day at being -- I don't know, I think in general, just the market has remained weak. I think it's probably the main punchline I would put through that. And then Easter is a little later, Easter doesn't drive a huge lot of change in sales for us or we think the category. So we're not -- that Easter moving, we don't think is a big driver.

Question: Simeon Gutman - Morgan Stanley - Analyst : I wanted to ask if you can parse out the guidance for the Q1? And if I caught it, it was revenue flat to down slightly, how it breaks between the US and international? I caught some of the quarter-to-date commentary in there. And then how the first quarter guide dovetails with some of the bump in advertising you did in 4Q? And I know Niraj, it's not a perfect science in terms of timing, but I'm curious if one and the other are hand-in-hand? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yes. Thanks, Simeon. So I'm going to let Kate really answer the bulk of this question. But I think just to talk about advertising, there's definitely a tail in future quarters, and that is a factor, but I think most of the guide probably has more to do with a lot of other drivers of what's happening, but Kate can kind of parse that apart for you. What I would say is it's kind of like the main point, I guess, is what we were talking about a minute ago, which is just more that we think we're going to be able to still nicely take market share. We've been doing that since the fourth quarter of 2022. We obviously did it for 20 years pre-COVID. And we think that we actually have some ways that we can do it this year that are quite advantaged. So despite the market remaining weak as it has sort of the specific holiday period, and despite the -- obviously, the quarter, we're comping, not having Germany, we're comping, not having the extra day in the quarter from last year. But I think we feel quite good about our position and taking share. But Kate, maybe you can answer the question about guidance.

Question: Simeon Gutman - Morgan Stanley - Analyst : Can I sneak in a quick follow-up? We had a little bit of a bump in industry demand in late last year. I don't know if it was post election or not. Is there anything in your visibility, whether it's big item furniture, household items, did it feel like this was an end of a reversionary cycle? Like how did -- what did you attribute -- and if you're seeing what we are in terms of industry picking up a little bit into the end of last year, how do you assess that? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yes. It's less clear to me that there's really much of an industry bump in demand that stands out. I think some folks looked at imports. But again, I think the timing of the Lunar holiday in February, I think what we saw was a buildup of shipping ahead of it, and then there's generally a lull, which we're now in, and then there's a buildup after it. So I think that's a factor that I think maybe folks were looking at demand. So again, I think the other thing is some folks remember, some days moved from November to December calendar-wise. I saw a number of folks -- November was low, but then they talked about how high November December was, but again, I think you got to add the two together. So my general view is that holiday was good, but if you zoom out, the trend overall, has not really changed. It's been a weaker trend. And holiday, if you add up all of it together and look at it, it wasn't quite as good as the folks who just looked at December alone.

Question: Steven Forbes - Guggenheim Securities - Analyst : Niraj, I wanted to focus on the CastleGate fulfillment network. I appreciate the color as others did, delivery time, return incident rates. But curious if you could help frame up for us capacity utilization today? And how do you expect the vendors based on your discussions to engage with that network right as we move throughout 2025? Anything to note right from your discussions today? Niraj Shah - Wayfair Inc - Co-Chairman of the Board, President, Chief Executive Officer, Co-Founder Yes. Sure. So in the shareholder letter, I actually talk about what could drive gross margin. One of the things I talk about is utilization of our fulfillment network, utilization of CastleGate, as that rises, that's a big driver of gain for us in the sense that it offers real leverage. So one of the things we focused on with our suppliers are like how do we help them do things that are good for them, good for us and good for the customer. And obviously, our goal, as we've talked a lot about, like, so we're being very ROI focused. We're focused on how do we grow revenue, really focused through the back of taking market share. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 20, 2025 / 1:00PM, W.N - Q4 2024 Wayfair Inc Earnings Call So we're not underwriting the market getting better, but do so while growing profit dollars. So that's the framing, right? So just think about that as we want to grow revenue. We think we can. We think that's going to be through market share growing, but while we grow the EBITDA dollars. And so one of the benefits there is where when we can grow the CastleGate fulfillment utilization, in a way that's taking out cost for suppliers, allows the retailers to get sharper for customers to speed, to get faster for customers in a way where we're getting leverage through utilization of the network, that's a big benefit. And so that is something that we've kind of worked on honing kind of the cost structure of CastleGate in the way that benefits sort of everyone involved. We've seen good reaction on that. And then we focused on some of the operations capabilities we have in our network. And one of the things we can do that is easier for our suppliers to use our network in a way that's beneficial for everyone and technology that adds efficiency. And the way to think about it is for our business, as we grow, there's a lot of profit leverage in the business. So for example, revenue. When revenue grows [1%], EBITDA grows a few percent. So there's real leverage there. But then similarly on the cost side, there are certain things that are fixed cost. So one, we kind of think about corporate overhead as a fixed cost. So obviously, there's leverage there, whether that be that some costs are no longer needed, and we saved some money like we've done, or whether revenue grows. Well, CastleGate is an example of a fixed cost, where utilization of that network will drive real profit. So we can get profit -- again, revenue grows 1%, we get a few percent growth in EBITDA, but also leverage through some of these other things, as you mentioned. So we do think this is a real driver.