Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to the Wayfair quarter, one 2020, <unk> earnings release conference call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone keypad. We do you ask that you limit yourself to one question and one follow up question.
Please be advised today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to enhance the conference over to Jane Gelson head of Investor Relations. Please go ahead.
Good morning, and thank you for joining us.
Today, We will review our first quarter Twentytwenty result.
With me are nearing shop, co founder Chief Executive Officer, and co chairman.
He Cowen <unk> co founder and co Chairman, Michael Fleisher, Chief Financial Officer, and Thomas Napster, Chief operating Officer.
We will all be available for couponing following todays prepared remarks.
I would like to remind you that we will make forward looking statements. During this call regarding future events and financial performance.
Putting guidance for the second quarter of Twentytwenty.
We cannot guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions.
Our 10-K for 2019, our 10-Q for this quarter in or subsequent SEC filings identifies certain factors that caused the companys actual results to differ materially from those projected in any forward looking statements made yet.
Except as required by law, we undertake no obligation to publicly update or revise these statements whether as a result of any new information future events or otherwise.
Also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance.
These non-GAAP financial measures should not be considered replacement for and shouldn't be read together with GAAP result.
Please refer to the Investor Relations section of our website seen a copy of our earnings release.
Which contains descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures the near its comparable GAAP measures.
This call is being recorded in a webcast will be available for replay on our IR website I.
I would now like the turn the call over 10 years.
Thanks, Jane and good morning, everyone, we hope you're all safe and healthy.
So much is clearly changed since we spoke with you as.
The world's response to the threat of Cobot 19, as United as hole in our humanity and yet has presented each best would unique challenges to continue.
I'm, particularly proud of how wayfair and our 16000 employees mobilize to keep our customers or communities and each other as safe as possible.
We are working relentlessly to continue to serve our customers across two continents as they navigate their you realities.
While managing a global complex supply chain and doing whatever is in our power to support government and community effort just like the bars.
So we're all eager for returned to normal we do believe that this unprecedented situation as highlighted the many differentiating advantages we have built.
Commerce leader over.
Over the last two decades.
First I want to briefly update you on the status of our operations.
Thomas Nuts are our Chief operating officer, who also joins US on this call today, well discuss the practical steps, we have implemented within our logistics operations to keep them safe and efficient.
Second I will share with you what we saw transpire during the first quarter as it relates to revenue and customer behavior.
I will also update you on the progress we're making against the plants, we put in place late last year, and which we spoke to you about last quarter to deliver profitability.
And finally, we will discuss our efforts to reinforce our strong liquidity position and talk through some exciting leadership inboard Phil.
Our corporate offices in Boston Berlin in London transition to a work from home model in mid March.
We continue to operate like this today.
It's governmental line on what a gradual reopening it looks like we're preparing for how we transition back to an interactive collaborative work space would enhance safety distancing standards.
The good news is that most of us move seamlessly to a remote set up in our productivity remains strong.
With technology at the core of our corporate DNA or workforce as long braced many of the virtual tools that became essential when working from home.
And customer service, where we are ready ran a hybrid model our physical call centers closed and we transition to 100% work from home model.
At this time customer service levels upstate Hot.
Critically our fulfillment centers cross docks and last mile delivery locations remain open and have continued to operate throughout.
This is thanks to the tireless work or frontline employees quickly adjusted to a number of new processes and procedures to ensure we continue to serve our customers while keeping our people healthy.
We've also been leveraging our logistics infrastructure in a couple key additional ways.
Most importantly, we've been able to deliver much needed supplies to field hospitals quarantined sites and other community locations affected by the virus.
And secondly, we're working even more closely with our suppliers to forward position additional inventory better castlegate locations. So that it can quickly reach our customers.
As we all rallied as an organization to adjust and keep internal initiatives on track.
Revenue trajectory that weaker was on in the first quarter accelerate.
From January through mid March our gross revenue growth year over year was tracking in the high teens with healthy consistent trends for traffic and conversion.
Both you and repeat customer activity was trending as expected and its typically the case repeat order growth was outpacing you work.
Starting in mid March we saw a pickup in both traffic and conversion, but increasingly strong repeat behavior, coupled with an acceleration in new customer orders.
This period coincided with customers beginning to shelter in place at home.
Which led to a new needs for central products, like cookware, and kitchen appliances home office products and children's furniture and play items and also brought to light ongoing renovation and decoration projects that customers are now taking off.
The competitive landscape also shifted as many physical retail stores close temporarily leading customers to move increasingly towards shopping online across all categories.
Polluting home.
This pickup in demand, it's continued to gain momentum and in the U.S. The rollout of stimulus monies in mid April served as an add an acceleration of new and repeat customers coming to wayfair.
As a result, we've seen gross sales momentum build across almost all classes of goods across mobile and desktop platforms and across all regions in the U.S., Canada, UK and Germany.
As Michael will detail later in the call is very strong momentum has continued thus far into Q2.
We can all debate how long current dynamics will persist to be clear, we're not orienting internally around these revenue run rate, but this does create a unique opportunity to serve our returning and new customers and to accelerate the shift online in our category.
We believe there are clearly definable long term advantages accruing to wayfair in this period.
It is likely and E commerce adoption is going to step change across a wide swath of categories.
And our case millions of new customer shopped at Wayfair over the last several weeks.
In the process they discovered the unparalleled benefits of our years of strategic investments to serve our core customer.
It's like our best product selection.
Rich merchandising and visualization capabilities.
Robust customer reviews.
Reliable visible and fast delivery afforded by Castlegate and the wafer delivery network.
And of course are high quality customer service.
We're seeing proof of these customers positive experiences in strong NPS scores and repeat purchasing behavior from new customers that is consistent with or better than previous customer cohorts and we expect further brand benefits as word of mouth recommendations drive other friends and family two ways.
I will tell how economic conditions affect future purchasing behavior and the sides. The overall home market.
But there's little doubt that the quality of experience, we can offer to you and returning customers during the challenging time.
Well surface wells in the future.
I will remind you that wafers revenue grew through the financial crisis in 2007, eight and nine.
Even as the total addressable market decline some 30% in more than 10000 brick and mortar stores went out of business.
Ecommerce adoption accelerated over this time as consumers saw the best possible selection and deals and ecommerce platforms like ours benefited quickly from lower wholesale costs.
So we're shipping costs and lower advertising costs against a recessionary backdrop.
Well our business is a much larger size and scale today. We also have huge advantages that we did not enjoy back then but.
Such as a well recognized household brand.
A large loyal customer base deepened strategic supplier relationships, a broader home offering with sales spread across various categories <unk>.
Proprietary flexible and resilient logistics network in a world class technology backbone.
Even as the operating environment grows more dynamic around us our internal focus remains the same.
Back in February we spoke to you about having now reached the stage, we're investing against priority long term initiatives such as Europe.
Building or logistics operations and building teams to fully penetrate the market.
Can be coupled with adjusted EBITDA profitability and free cash flow positive status.
We embarked on this plan starting in late 2019, and we're excited by our quick progress.
You will have seen the early benefits of the various underlying workstreams again to benefit the Q1 piano and we now expect positive consolidated adjusted EBITDA margin in Q2.
To be clear.
This is not driven by the incremental revenue, we are seeing but by the aggressive implementation of the plans. We set late last year to deliver profitability at our then current growth rate of about 20%.
All incremental revenue will be additive and we would expect it to create significant additional profitability this quarter.
While this is exciting where most enthusiastic about our internal plans and the statements we made back in February.
We are large enough and strong enough to both be adjusted EBITDA profitable and to invest with a long term horizon.
Our plan focuses on driving gross margin expansion.
Increasing marketing efficiencies and gaining leverage on operating expenses, well still aggressively investing into the future.
Let me quickly remind you of the primary drivers behind each by walking down the piano.
And in doing so also provide some incremental color as to the variable or fixed nature of each of these line items.
Starting with cost of goods sold which are largely variable expenses.
Several key leavers here are beginning to add to gross margins.
First we are experiencing improving scale benefits across many of our emerging categories and across geographies.
In February we talked about how variable contribution margins in vanities had expanded by more than 500 basis points over two years.
There are many more such examples and we're managing each of these to incremental profitability.
We're also seeing unit economics improve in the UK and Germany.
Second greater efficiencies are accruing from our logistics operations as we drive higher throughput improve delivery speeds and incidence rates and lower cost in the process Thomas will detail. Many of these initiatives later in the call. So I will not go into more debt now.
Third we've invested heavily in our house brands in a few ways, including Red carpet merchandising and a growing base of unique brought us our house brands now represent more than 75% of our sales.
These merchandising investments for allowing us to unlock incremental margin opportunity.
And finally, our supplier facing service it starting with Castlegate and sponsored product listings are growing.
Now moving onto marketing.
As we mentioned on the Q4 earnings call, we've raised the bar unexpected efficiency across all marketing channels.
This was enabled by more sophisticated attribution technology, which facilitated a set of refined targets as well as a top down commitment to drive leverage as appropriate for each geography and brand.
Our work to aggressively move towards these tighter efficiency targets drove AD spend leverage year over year in Q1, and even at normalized revenue growth rates should yield additional leverage in Q2.
Then we'll tediously, we're also seeing lower advertising costs in the market due to cobot.
This will allow us to drive more revenue in our refined efficiency targets and May result in even more leverage during this exceptional period.
As a reminder, roughly three quarters of our marketing mix is deployed everyday across digital channels with another 15% dedicated to television and 10% to direct mail.
We also benefit from having the ability to reach the majority of our customers through email enap notifications with repeat customers, representing 70% of our orders.
Finally on Opex, you'll recall that compensation represents the majority of these costs.
In mid February.
We chose to eliminate approximately 550 roles as we drove out complexity and redundancy from the organization.
And we expect total opex head count to be flat to down for the year.
Importantly, we were able to do this without curtailing our ambitious assessments for the future.
We still have thousands of people working on initiatives that due to their early stage nature show very little gains today compared to their large long term potential.
We continue to closely assess progress against these key work streams via our semi annual strategic review cycle.
We're also closely managing other components of Opex, such as on utilize rent and Google cloud costs.
No. We were initially prudently conservative in talking to you about our path to profitability, we have been aggressively maneuvering the whole business toward sustainable positive adjusted EBITDA.
Importantly, this is not based on today's growth rate, but the plan was and is predicated on topline growth rates in line with the pre cobot 19 period.
Later, Michael will discuss with you what this could look like for Q2.
We hope this color helps you better understand why our recent 535 million dollar capital raise.
It was a welcome event, but not a necessity.
The global economies navigating through largely uncharted territory.
In this environment, our leadership team all share the belief that having more cash to bolster our balance sheet shouldn't maximize our ability to operate from a position of strength through this period.
We're fortunate to have the support of leading growth equity players like Great Hill and Charlesbank in the latest convert and no we will benefit from both of their perspectives that the board level.
Fact, my Cumin of Great Hill has already been a valuable source of advice and counsel over his almost 10 years on airport.
Another exciting organizational update is that Jim Miller with served in the interim CTO capacity since last summer has officially joined Wayfair as our permanent Chief Technology Officer.
After an extensive global search for a pedigree technology leader with experience in fast growing companies operating a tremendous scale, we came back to what we knew all along.
That's kinda it was already in house, we're very excited to have Jim join US full time and thank him for his years of service as a board member before this.
Stephen I look forward to having Jim join a future earnings call to speak with all of you.
Lastly, I want to highlight that well, making sure that our employees are safe and healthy and that our customers are well taking care of we're also working to support our local communities.
They've been hit hard and we feel fortunate to be in a position to help.
Among the long list of things we've done thus far it's helping set up field hospitals in emergency housing in locations, including Boston, You Orleans and the UK.
We donated $250000 to charities selected by our employees that are helping those impacted by the Coca 19 crisis.
And the recent save Big give back event in late April raised approximately $3 million.
For the feeding America Kobin 19 response fund and the you ends Cobot 19 Solidarity response fund.
We are proud of our team of 16000 people and everything we've been able to do to help.
We're all hopeful that his global pandemic is resolved and behind us.
I'll now turn it over to our Chief operating Officer, Thomas Netzer Who's the first of the leaders we will be inviting to join US on these calls over the coming quarters.
Thanks, Millage today, because of course on our proprietary operations, including supply chain and customer service.
Yeah, well be dogs in let me share a bit of course moved back loans.
I joined we've had two years ago, Chief operating officer and couldn't go fuel and took over the Google Yahoo, almost a year ago.
Prior to joining Wayfair I spent 22 years that Mckenzie.
Both global supply chain Swift equal most clients across you open easy.
Cool that the global logistics leadership team.
Let me quickly about localization by outlining our operations and hope Fabio I'm already.
After which I want to share with you the future vision that we are working towards.
I will wrap up with a description of all it was plans to go get 19.
Our supply chain combines two distinct elements.
The boss product selection available inventory life model, that's right, both cost and reduce with benefits to Wayfair, that's who don't Owen Douglas.
The levy manage those what's in the world class week to maximize supply and customer satisfaction.
The combination of the two is what makes our supply chain management, both particularly challenging and an opportunity could differentiate ship.
I will not go Cubs evolved over the past decade from appeal Dropship model to one that allows us significantly.
Well you have control of the physical and completion crew up equipped to me so.
Let's walk through a quick examples to describe the advantages of our population for the supplier the customer EMCORE Wayfair blueberry time give away.
Hey, good coffee table journey.
First the supplier since the table.
From a facility an easy a report these consolidations and though we are we makes this product with many other items can barely supplier you caught up to do the food contain alone.
By a this step will be optimize the mix of products had a two hour Bellisio foods women sandals and also leverage I want to negotiate scaled the meat ocean carrier to unlock whose economics of called cloudy.
We've done sceptical until you know with the coffee table Auto Asia.
As it does it look like cold water.
The company notice them deliver come to domestic <unk>, whom itself.
This stuff is called bleach again, continuing playoffs.
You strategically positioned the product and the kumon something no one that works the other quantity, but satisfied to reach a movie month.
Next the item I'm loaded into the whom incentive.
It would probably be warehousing agent well supplier.
And also allow upscale reliable and puff Hooman services.
Well I'm from auto the could table is placed by a customer me take when crude over the last mile delivery, if it qualifies as a large called <unk>.
In this case it was handled through our own Wayfair I'm going to believe that book and by our own wake up blended team.
Which is fine she went to drive for what demonstrate congrats on good times and high customer satisfaction.
If the shipment qualifies as a small part two deliveries you integrate the though when that grew up with common carrier. That's what you call last mile injection, resulting in reduced rates with third parties and all pulling us more flexibility and lead to a couple of times when they see a two day delivery.
By playing an active grew throughout the product you want me Wayfair unlocks huge benefit cost efficiency speed and quality Sq top else. This the traveled from the manufacturing facility to the customer school.
And could lose touch points to prevent damage.
Yeah, not just doing this for a few items or fewer shipments, but rather hundreds of thousands of I couldn't millions of shipments.
To do so effectively and efficiently need to ensure that because we couldn't completion crews are all they simply cooperation or feeling and customer communication.
This explains why im our supply chain, who do not just use third party software, but boot I want one platforms.
At the Tech company it isn't I would be an eight to Skype strong technology enablement cross I won't population and to capture the potential of goods.
With our current operations, we already have <unk> set up in place that provides a strong value proposition for our suppliers and customers.
<unk> low cost an incident highly liability and speed and end to end visibility.
Going club walk people cope with some further improving the execution across four dimensions of our existing models.
We aim for what we call constitution perfect all the upscale who continue to increase customer satisfaction growth and margin.
Let's take a each part of cost efficient Coca Cola, that's appealing and what it actually me.
Perfect order is one where a customer purchases the product who sees the exact item all that good we expect the timeframe incident free and without having to complex off.
More plus like autos food being able to enhance the playa integration improve goes all the communication and fewer incident.
We are developing new technology platforms to reinforce our already strong connectivity with our supply up popping up and to elevate the quality up I won't be takes changes such as real time inventor Wifi and predictive lead times.
This level of visibility should lead to greater precision and truly product availability anencephaly deliberately beat expectations.
Our pool sort of communication, good even easier to understand what's it speeds across the various meets we reached a customer MBU cocos more on delivering the right message at the right type.
Cost officially broke like autos or perhaps that up put more cross the fishing focus autos it'd be driven by a comprehensive roadmap.
Let me share three components.
Chris This who do the best in class bought in the local to them and census.
This includes improved labor planning and optimize operations of course, if he used to reduce non value added books, but also to improve safety.
In addition, we are increasing the level of automation to drive our phone queued up to the tea and improving kumon template capacity you to higher utilization of our existing footprint.
As a result, any incremental square footage investing so oh I positive you can call. So.
Second is improving availability, especially you beat you know in stock levels.
This will lead to cost to order pretty liberal lead times, and who use outbound shipping costs.
Improving core constant currency and growing our Sheldon <unk> multiple hooman sent the injection a key enabler.
Could you will introduce more self service option for customers as well that's enhances the ones.
For instance offerings like self managed deliberately scheduling will give the customer more kung fu by reducing complexity, what's sort of his team.
Finally, let's talk about delivering cost efficient broken or does it scale.
Kayla, we for us to supporting our significant growth from that really through standardization and technology, which will help to strengthen our existing processes and also enable new services them feature.
For instance, we are working tweaks pounds at Casa de itself, so, but hopefully well what's supplier and on developing proprietary technology, such a five fail.
Demand planning a call what positioning and Jim which Steve talk to you about a couple of quarters ago.
You should now have a better sense of some of the elements. We have in mind as we scale operations to support Wayfair spend it many times the size is today.
Now I would like to ship, that's going to future state to today's reality.
Responding to the threat, who get my team has cost company every way up who operate in place.
I would like to briefly discuss the resilience of how long durations and I want to use during these times.
Multiple precautionary measures have now been implemented that every facility to ensure our employees they cost almost I see which remains our top priority.
You're rolling out temperatures at the start of Egypt, and I would put the each facility with sanitized those masks and other safety your color employees.
We also adjusted system. So there's no contracts outside of the employees in the given shift in place ability just easier.
Additional safety measures to good books employees and our customers include concrete delivery and the temporary holds two assembly service and remote choice the Liberty.
Yes, supporting our onsite onetime teams by paying a recognition going was doing this time lifting the hourly wage by approximately 25% <unk> dollars per hour.
I'm through more paid time off.
We are also now legs and providing looks for all of.
This has the added benefit of supporting many of the hotspots restrooms and small businesses and to me.
In the event they are chromebooks expect case, it's almost infection.
Well I was illegal this protocol to mitigate any lift to our employees the networks.
We evaluate the need to shut the only impacted facility temporarily be canceling ship and running that eating quota.
The Middle teens me you was closed circuit video footage for the effect the building to identify any employees, who may be up lift even despite standards socially this the thing protocols.
These cases, we allowed them to take the appropriate steps to sub con team and protect themselves families.
You need flexibility our portfolio of boxes loosely footprint, particularly the ability to reroute autos leap kumon, some goes well I'll watch supply over the holidays. So the two maybe getting through this environment.
It also equips us about who is going to any people trade disruption as they were life.
To what's going to the surge in volume that you have seen we I'm not going to pool was this a hiring more than that so it wasn't just from Oakland Glenbrook us.
This is not a new undertaking for us as we are quite used to scaling teams up and down to MPT Montpelier like fiber five and way that.
Who out I was so what she's working closely with our supply of sharing learnings and best practices with them to reinforce them. After Brooks, we do in tea.
This close collaboration strengthens our partnership model, even corridor and strengthens the whom glip supply chain Oh.
Hi, I'm by saying that as the various members of his leadership team and I have visited field locations all across our network over the past couple of weeks.
We are unique blessedly impressed by the determination and screw it up by one employees.
And we are all very great cool off their hard work.
With that I would like to turn the call what to Mike.
Thank you Thomas and good morning, everyone.
Well first briefly discuss our Q1 2020 results.
As you know our gross sales momentum accelerated in the last two weeks of March.
Please recall that we only book net revenue and the border is delivered but much of this momentum will benefit Q2.
Therefore, as you think about our financial progress in Q1, it's important to keep in mind.
Opened 19 related changes are minimal in the just reported quarter and will be much more impactful in Q2.
Have you saw in our press release and IR presentation. Our Q1 total net revenue grew approximately 20% year over year with net revenues in the U.S. up 19% and international up 24%.
International net revenue growth in constant currency was higher at 26% year over year.
Last 12 months active customers surpassed 21 million this quarter like 29% increase year over year.
With the ship <unk> nearly 70% of the total mix.
Other KPN metrics, such as border frequency and net revenue per active customer.
As it moves down the P. now please note that I will be referencing the remaining financials funny non gafisa.
Gross margins expanded approximately 70 basis points year over year, and 200 basis points sequentially to 24.9%.
Reflecting the early cumulative benefits of the multiple initiatives. The urged described both last quarter.
Earlier on this call.
We also saw 70 basis points of leverage year over year 40 basis points of leverage sequentially in advertising as a percentage of net revenue.
Thanks to our efforts to drive more efficiency in our spend.
In line with our original expectations for all of this work continues in Q2.
Our selling operations technology and GSK for Opex expenses came in at $412 million, excluding severance costs related to the February reduction enforce.
This was consistent with our expectations for sequentially steady dollar spend versus the fourth quarter.
We are keenly focused on controlling each component of Opex and you are seeing that begin to play out.
You'll recall that the primary driver about sort of TG anyway, you've compensation expense and we'll note that we ended Q1 was approximately 600 fewer affects employees.
One thing in large parts the reduction in force, we undertook as part of the plans put in place late last year.
Adjusted EBITDA for Q1 was a negative $127 million or negative 5.5% of net revenue progress in driving a lower rate of losses.
Segments.
Adjusted EBITDA margins in the U.S. Nick.
In a roughly 82 million dollar laws.
In international.
We ended the quarter with approximately $891 million in cash cash equivalents and short term investments.
Including $100 million that we drew from our revolving credit life.
We made the draw down as a precautionary measure as market volatility spike in mid March and it seems payback the revolver balance.
At March 31st Salads does not include the proceeds from our recent convert financing.
Our current cash and cash equivalent balance is approximately $1.5 billion.
Non-GAAP free cash flow for the quarter was negative $355 million.
As we mentioned back in February this is consistent with the typical seasonality in our cash flows.
During which first quarter outflows tend to be our largest and was made even more pronounced this year due to late cyber five timing and 29 team.
This is also consistent with our operating cash flow seasonality with Q1, ending cash typically the low point in the year.
We believe we have an extremely strong balance sheet and can weather various forward economic scenarios.
This is further bolstered fire execution, which is quickly driving companywide profitability.
Now turning to guidance.
I want a first acknowledge that establishing guidance is never easy feat.
Even against the comments of macroeconomic backdrops.
As I say you every quarter our business is a highly dynamic one where are predominantly mass market customer has to show up every day.
This is especially true as we all navigate through todays unchartered waters.
So what we think is most prudent to offer you at this point is twofold.
First I will offer full transparency on our gross revenue performance quarter to date.
I will not however, speculate further by providing specific guidance ranges for Q2.
Second I want to provide a framework for how to think about the progress we're making on adjusted EBITDA profitability as we execute against the plans we set in motion late last year.
To be clear this is not guidance, but instead is intended to give you a directional sense for our unit economics as they evolve outside of any covert 19 related factors.
Let's start with what we've seen thus far in Q2, and some additional color to help frame out things might evolve.
Quarter to date or gross revenue growth year over year is trending at roughly 90%.
Translating to over $800 million added year over year on a constant currency basis.
This momentum is widespread across almost all categories and includes Comping overweight day last year, which we deferred until later this year.
Well, we do not know how long these trends will persist and thus will not provide these specific revenue forecast for the whole of Q2.
We believe this period has certainly and permanently accelerated E commerce adoption in our category.
We are seeing not just robust new customer acquisition.
But also strong repeat trends from both long term loyal and recently added new customers.
You customer behavior and their direct feedback suggested these customers experienced with Wayfair is leaving them very satisfied and motivated to shop again, both extraordinary times when they are corn seed.
And down the road when we will all be less restrictive.
Shifting gears to how we are executing against our internal profitability plans, which are formulated late last year free co bed and are predicated on 20% revenue growth rates.
Our progress to date puts us on a trajectory to achieving positive consolidated adjusted EBITDA margin in Q2.
Without considering the revenue acceleration we're currently experiencing.
As our various internal work streams continued to gain traction we would expect approximately another 100 basis points of sequential leverage on gross margin to roughly 26%.
As we continue to re baseline and tightened our marketing efficiency targets. Our plan calls for approximately more than 100 basis points of additional advertising leverage sequentially to roughly 10.5%.
Finally, we would expect opex spend to be somewhat below 400 million in Q2.
Including depreciation and amortization.
This is slightly lower relative to the first quarter.
Continuing to reflect the tighter controls we have implemented here.
This is all progress that we would expect to be sustainable on a go forward basis at 20% revenue growth rates.
From a segment perspective, given the relative maturity and size of the U.S. versus international I'm sure you'll recognize that it is the U.S. business that will be the primary driver of delivering the profitability of the whole business.
That said in international we're also seeing the benefits of scale and good execution against various plants to drive games in gross margin.
I'd spend leverage and affects.
We will not be providing more specific EBITDA guidance this quarter as near intervention.
Any revenue upside in the quarter relative to how our internal plans are calibrated should flow through to the bottom line.
With some additional leverage on opex as a percent of sales.
Given the more fixed nature of these expenses.
Additionally, we could see more leverage <unk> advertising.
As a percent of net revenue in Q2.
Because of competitive changes in the market due to cobot 19.
To help you update your models on a few housekeeping items. These assume equity based compensation related tax expense of approximately $70 million to $72 million depreciation and amortization of approximately $80 million and 95 million in average weighted shares outstanding you too.
Capital expenditures are expected to be roughly flat in dollar terms with Q1.
We live in a moment in time, where there are too many variables to offer more specific guidance and frankly specific current period of guidance as always seems counter to our long term aspirations to serve our customers communities and employees, while delivering sustainable growth.
Profitability and free cash flow.
Increasingly profitably as well.
Certainly we all know we will see more macro change in the months and quarters ahead.
Competitive dynamics will change, we likely will deal with a recessionary environment and there will continue to be global and domestic turmoil.
But we believe we are now well positioned to thrive regardless.
We are rapidly executing on our plans to run the business profitably, while still investing for growth and serving our customers over the long term.
We have incredible brand awareness with very satisfied and engaged customers.
Dedicated and focus team of employees around the world.
We have a deep partnership with our suppliers.
And we have a very solid balance sheet.
Also.
I'd be experience of our business in the last recession.
When you were able to grow each year.
Even as the home market declines.
Well, we do not know exactly how the world will play out.
We know that times have massive change class customers to seek new ways to purchase.
Like have been in 2008 and is happening now.
Celebrating the movement online in many categories, including home.
I now like to turn the call back to your before we take your questions.
Thanks, Michael.
I conclude I want to speak for both to even myself and once again think we fair employees around the world for their hard work and dedication in the midst of trying it on certain personal times.
Countless ways in which you have risen to the challenge is supported each other and our many local communities make us both exceptionally proud and speak volumes the strength of Wayfairs culture.
Now, Steve Thomas Michael and I would be happy to take any questions.
We're doing this remotely so bear with us if there any coaches.
Thank you [laughter], ladies and gentlemen, if he would like to ask a question.
Just press Star then one on your telephone Keypad Telecom question press the pound key again, we do ask that you limit yourself to one question N. one follow up question.
Thank you.
[noise] and our first question is going to come from the line as Peter keep Piper sampler.
Hey, good morning, everyone and thanks for all the details on today's call.
Obviously would would everything is going on it's fairly exciting what you're seeing and your business. One one question I've had is just on constraints to the gross we have heard from the channel that there's out of stock issues, even maybe some capacity constraints, but your third party.
Delivers of a small personal so 90 per cent gross obviously quarter date impressive, but it but is that being hindered at all by the any inventory or or delivery constraints, but certainly that's not a number that you guys had planned for two months ago.
<unk>, it's a snare actual thank you. Thank you for the comments and then the question.
To answer them so.
In terms of constraints to the growth the way I would describe it is.
We were actually incredibly well positioned to handle this type of unanticipated search and the reason is a few full first your first question about him and tore it.
If you think about our platform we work with 10000, plus suppliers, who are all listing the wide range of products. They had any him and toy they have available. So in this particular situation you could have a small number of them Hooper have to specialize in E. commerce, you see unprecedented volume and maps and shortages, but they'll be quite a few who work across.
Multiple different channels and they'll see their brick and mortar business be slow and there are other channels, perhaps not moving it's bad so their inventory availability will flex up in a way that they didn't anticipate.
And it could be in you know puts and takes countries of origin. So and so forth. The net is we have availability across all of that enjoy it. So we're a beneficiary were able to keep items broadly in stock and just remember we have 10000, plus table lamps, and so inventory on a particular individual one might get hampered but overall the breath of availability we have right now is better.
Normally would be simply because what's happening is demands and a lot of channels is off.
On the second question about logistics capacity.
There's no question that this type of surge, which is a kind of Pete holiday search that is still on a beat it that's continuing day after day and we have to week is not something that you know just you can just turn on we're seeing the carriers, we work with doing a incredible things to flex up their capacity, but again, we're advantage because if you think of our 15 million square feet logistics <unk>.
The across 65 buildings.
Lot of that capacity, we're not just storing goods and 10 bring them to a small partial carrier for their local sort. We also do a lot of sortation in our buildings, allowing us to run direct injection lanes and as we get more volume we can dynamically turn on additional lanes. What this does it obviate some of the constraints spots and the carrier networks, allowing us to take advantage of these.
To inject volume that they couldn't otherwise have and so long story short, it's it's not easy to necessarily handle a surgeon your plus 90 per cent. When you didn't plan for it but our operation team have done an incredible job of of bobbing and flexing our suppliers have done an incredible job the way in which our team who run all our buildings have done done just an incredible job on safety as well.
L. as handling the capacity as a result, we have not been constraints.
Okay. That's very interesting it helpful like I could ask a bunch different questions, but maybe focusing on gross margin because it was impressive in Q1.
More impressive included two can you maybe just highlights some of the key drivers that you're seeing right now for that year in your improvement.
Yeah. So I think the most important thing to just remember about gross margins because we've been talking about this for years.
The range, we've been in for a long time, which was about 300 basis points away from the range that we've got a twin or long term model. We've always cited multiple leavers that close the entire gap, we said that suppliers flexing into our platform closed the entire gap, we said that logistics efficiencies based on the logistics network were building or what.
Using damage, reducing shipping costs to close the entire gaps and we said that what we were doing on merchandising investments with the red carpet merchandising in the house brands and a growing percentage of these items being exclusive a decent be some of our competitors close the entire gap and then we added a fourth pillar, which is supplier services. So that's castle.
And wait for it sponsored products and that's early on but that's an other very large one and so we have multiple leavers that could each close a few hundred point gap, yeah, and so if you think about that you know if the gap is 300 pages points in your most believers that you're talking about a thousand based points a theoretical potential we've been investing against that and years and so we're now with a point, where we can start.
To harness some of those games and so what you're seeing with the step up in this past quarter and the guidance. Michael gave you just see a starting to harness the games and some of these are short cycle games, and then there'll be additional ones long cycle and so the gross margin trajectory, which we've talked about your just seeing it start to manifest in the P.N.L. and so this is again this is not really covert related.
This is more a part of that multi year strategy, we've had investing into these things that.
Will manifest discourse, marking gains are announcing a show up.
Great. Thank you very much and good luck.
[laughter]. Thank you My next question well come from the line of check Grom Gordon House Cat.
Hi, Thanks are good morning hope everyone stone well just one of you guys could speak to how your basket composition cause evolved over the past six weeks in terms of exactly what consumers having a person Crumb you and then Michael is is there a way to think about the flow through on the better correct revenue trends you've stated that.
You expect positive <unk>, even with pre code itself levels quarter to date up 90%, but just as there are a way to think about the the flow through right here.
<unk>, Let me let me answer the first question then I'll turn it over to Michael on the first question in terms of basket composition, what I would say is if you think about this seven week period now the first couple of weeks in kind of mid to late March there were certain categories that accelerated first and these are ones you to associate with stay.
At home and working at home and the kids being at home home office and cooking at home home office kitchen, large appliances small electrics, George and organization children's Playroom children's furniture outdoor recreation, but what we saw during that period. As we saw then it starts to spread pretty widely so the outdoor category started to take off the.
Decor category started to take off the renovation category started tick off so really the concentration in growth is not anywhere specific in fact, it is very broad based on that that that's what we're seeing so I wouldn't if you. If you look at what's happening right now there there is no concentration in certain categories and frankly, you don't really see categories being left behind either.
I'm Gonna, let Michael answer.
Your question I'm closer, but the one point I would just want to make on that before I turn over to Michael is just we we're running a business around a plan to be sustainably profitable and a growth rate we were already at free to cope with crisis and so if you just think about the investments Caesar been multiple year investments and if you think about the parts that we accelerated they go back.
Two a plan that we honed in November of last year six months ago, and that's why you've seen step up since you one and different actions, we took and she won and you're seeing additional into guides for too too, it's not really a specific to to cope it but in terms or flow through all that Michael answer how how that can manifest.
[noise], thank near <unk>, Thanks truck for the question.
What we are trying to highlight in the prepared remarks is you can think about affects cost for the quarter as basically fixed right. So incremental flowed through that completely I think from a gross margin. Yeah. It's been perspective, we noted that adds that the <unk> situation made.
Drive incremental leverage on ads band, but we'll see how the rest of the quarter plays out.
And I think the gross margin you can think about as the gross margin is near just mention that we've been sort of making all these investments in for a long time and starting to see the flow through her of that and so I think there should be able to continue to see these kind of gross margin levels that I that I noted on the call the 26% that's sort of flowed through from but incremental revenue as well.
Okay. That's <unk> and then just as a follow up when you look at the for costs components in your <unk> gross margin advertising affects how would you for strength to the greatest areas of opportunity.
Get to that 8% to 10% long term target that you guys are talking to for a number of years.
Oh. This is near so let me just may come up with time isn't that Michael can chime in anything he has his additional on.
I think the key thing if they think of it as an hand, so we we and you know in the long term modified we try to highlight that but basically.
But going from the bottom up up X. is you know we already have any affects cost number a huge amount of investments into the future. So we we're not doing anything around cutting or long term investments, but rather than thousands of people. We added they're working on those things. We just don't need to add additional weight to actually drive significant progress. So that's just as revenue grows U.C.B. optics lever.
And that's where we are right now add cost we talked a lot about her attributes in technology in ways for driving efficiency, there that that gets benefit as repeat grows as a percentage of the total to repeat revenue is actually runs at a very low add costs and then gross margin I just talked about that a minute ago.
Obviously, it's huge runway there, so you're saying, which one is the largest of of the three and you know it would it would be gross margin. It's also the biggest number of the three and has the most believers of the three so rather than focus on that being the biggest I just think of this isn't and where you should see gains are everywhere.
Michael <unk> anything you wanted to add Michael.
No I think you're covered it well.
[laughter]. Thank you are next question, what kind of <unk>, John Black legs Karen.
Thank you on the demand in environment, <unk> I recognize the situations fluid, but as we round towards second half.
Maybe near Mike how are you thinking about kind of the person picks up the demand environment just given the current demand syringe and then you know U.S. slowly reopening coupled with a looming that macro given a job losses, and then maybe alongside potential fears of people have going into the retail stores. So just.
Just any I, it's like kind of Crystal mall, but any there's a lot of Clinton takes just curious how you guys are thinking about it and then I I just have a I'm. The gross margin. My other question would be you guys have said 25 to 27 longer term, but I think you're edge site is a lot of lovers. So it's like when we think longer term.
B.
Even above that 25 27, thank you.
Thanks, <unk> I'm just to do them in reverse order l. at Michael Chime in at the end <unk> Martin just keep in mind as we unlock benefits and gross margin we have a choice with what to do with those gains we can take it into profit, which then gives us cash flow that we can invest in the future or whether we return it to shareholders are we buy back the stock or we invest in or something.
You are what at him and.
And if we invested into customers. We can lower retail prices are we can make service quality better or we can do things that cause us to get more lifetime value at improving unit economics that create future cash flows and so they're different things you can do is you unlock these leavers in some way to grow the gross margin percentage in some ways, but all of which would actually a crew to our financial benefit long term.
But I'll, let Michael comment on that in a second but let me go back to your macro question. So I.
I think you either since you said in their sums it up the best which is there a lot of puts and takes but I guess, what I would leave you with as a few key things.
One is what what we're seeing right now is not really that competition has been dating we actually see the online competition remaining significant but what we are seeing is a huge sex and there's no question part of it is temporary but we do that part of it is permanent.
Temporary obviously stores will not remain closed but as stores reopen for some period.
Frankly, even.
When they're not hesitant to go well, we've seen as millions of customers, who would not been previous online shoppers in the category come on line and by and what we're seeing from their net promoter scores in the repeat behavior. We didn't have been very pleasantly surprised with a selection and the convenience and we think that a portion of their spend in the future will will remain online. We we don't we don't.
But this is going to revert back to the the secular transition that was under way before but we think it's accelerated it to some degree so.
That's a significant beneficiary yeah. The thing I would say you know it is.
Discretionary money can be spent and number of areas and home goods is certainly one area.
Fashion would be another area, but there's other areas as well taking a trip you know an airplane ticket in a hotel room or going out to eat are going to a concert or sports games and so what I think is happening right. Now is you're seeing a few different things there's not just to shift on line that it's going to be accelerated through this even if the absolutely.
<unk> online drops back a little.
Yeah.
But you're also seeing that home is becoming a area that customers are disproportionately investing into right now and I would expect that to persist for awhile and you know after 911, which was I would say you know not it's.
[laughter].
[laughter].
The only thing I'd add John on the long term targets obviously.
We set those long term targets are in place five plus years ago and since then we've made a huge set of investments.
Around some initiatives you think about what weve built and logistics as an example that are going to drive that have the potential to drive huge.
Huge opportunity and unlocking gross margin.
And.
Obviously, what we set those those targets five years ago and put them in place. We Didnt know would the investments we're going to look like or what the world is going to look like today. So I do think Theres I think theres upside throughout the piano as we sort of start to see all the investments we've made over the last few years bear fruit over the coming years.
And our next question is going to come from the line of Jeff can post the bank of America Merrill Lynch.
Great. Thanks for taking my question.
Interesting the 90% surge can you just tell us how the warehouses are holding up with that kind of surgeon and how you possibly be prepared for that kind of volume uptick impressive to be able to handle that and then secondly.
I think your number one on my competitor Amazon might be focusing more on consumables right. Now can you talk about progress you might be making in the category with your suppliers right now and and how you can kind of maintain.
Those relationships and really help help you over the long term. Thank you.
Okay. Thanks, Thanks, Justin let me on.
Hi answer the two so in terms of the warehouses one of the things Thats important remembers our network or some other E commerce optimize networks first of all there's only a few large scale ecommerce optimize networks ours is defined as a huge selection peritoneal and there is clearly items that ship.
And then there items that we shipped from our suppliers because there's quite a long tail. Unlike double a. batteries, where everyone's buying the same exact items as each other's duracell or energizer. The nine Packer, the 18 pack or maybe there how spread here, there's actually 10000 table lampson, there's quite a spread so what we do.
We have a portion of the volume that comes out of our buildings and Thats round about 30% of the volume and then we have a portion about 70% of volume that ships from the suppliers warehouse and 10000 plus suppliers have.
Hi, there all shipping and as you can imagine your volumes in aggregate for Oh, the other channels.
I have slowed down so they have capacity and what we've done as we flex that capacity Thomas mentioned, we added over 1000 people, we've moved to multiple shifts and so we've done a bunch of things that allow us to take on more volume and then frankly a lot of what we do is sortation. There's other things we do that benefit so while we couldn't anticipate the surge I think.
Our model and the flexible nature of our model, let us lead and.
And in terms of other question about competition Amazon you think Amazon's pricing a spike in consumables you know they certainly oriented around that.
And they are one of our competitors for sure I'll just remind you we do have quite a few competitors, though that we compete with an eye I've just seen some of the reports about some of the brick and mortar stores that they've been doubling their ecommerce business I mean, we're going from 10% of their volume to 20, and what have you, but if there's a lot of different competition out there. So we.
We're pretty happy with our performance, but it is a competitive landscape. That's that's what your point about suppliers is an important point I think weve long since had some of the strongest apply relationships out there and what we're seeing is that this is only having suppliers lean and even more because they believe that ecommerce was really fundamentally they're only growing.
Channel and then a lot of their other channels, we're gonna slow overtime, but this is sort of putting putting the point on it and we're seeing them flex in and I think they view our platform as an ideal one for home because their goal is not to monetize their offering their goal really is to have that breadth and habit well merchandising reached the customers with a home type focus and were able.
To provide that and so we've had gaining momentum with suppliers as the years gone by and we've certainly seen this kind of continue to further accelerate that.
Great. Thank you.
Yeah, Thanks, Justin and Thomas you know I just didn't know if you wanted to add anything about any of the logistics operations have been able to flex up because I question came up a couple of times I thought maybe do anything you want to that.
No I can only echo what you said, which I think.
I'm thinking that you benefit from its obviously our unique set up if you like you laid out given that we can pull through April my we their houses and be rather, which all dropship suppliers, but I think the other thing which is important to note is that when you think about the Golden Globe, an idea, but it is massive metal ups, while that you know all their houses is much more model throughput.
Full scale. It you have to actually made significant investments over the last year. So thats why we have more than 10 million of square footage available and then it comes to its report you have the ability at all to each ceiling.
Up and down.
Our workforce and then it's lumpy I couldn't be doing just put more people into all of their holdings, which then happened its we put capacity for the coming both and therefore, a young let's see I believe you right now, we're not going to very comfortably positions and food the others the casino place.
Thank you [laughter] that concludes the Q and a portion of today's conference call I'll turn the call over to marriage Shah for closing comments.
Hey, everybody I, we just want to thank you for dialing in today and we just you know the 16000 people here at Wayfair or I'm really proud of how we've been able to help the community help each other and take care of our customers and couldn't be more proud of how things are developing and thank you for your interest in the company.
Thank you once again, we back the thank you for participating on today's conference call. You May now disconnect your lines. Thank you.
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