Q2 2020 Wayfair Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to Wayfair Q2, 2020, <unk> earnings release and conference call. At this time participants are in listen only mode. After the speech presentation, there will be a question and answer session.
Good question. During this time, please press star one on your telephone keypad. If you require further assistance. Please press star zero, we ask that all questions be limited to one question and one follow up any assets have time I would now like to turn the conference call over to Jane Gulf said.
<unk> of Investor Relations special projects.
Good morning, and thank you for joining us.
Today, We will review our second quarter Twentytwenty result.
With me are neared Shaw Hope founder Chief Executive Officer, and co Chairman eat Ko nine co founder and co Chairman, Michael Fleisher, Chief Financial Officer.
We will all be available for Kuni following today's prepared remark.
I would like to remind you that we will make forward looking statements. During this call regarding future events and financial performance.
Including guidance for the third 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 and our subsequent SEC filings identifies certain factors.
Differ materially from those projected in any forward looking statements made today.
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 please note that during this call we will discuss certain non-GAAP financial measures as we review the Companys performance.
These are and free cash flow.
These non-GAAP financial measures should not be considered replacements for and shouldn't be.
Please refer to the Investor relief.
Copy of our earnings release, which confused descriptions of our non-GAAP.
Financial measures and reconciliations to comparable GAAP measures.
This call is being recorded in a webcast will be available for replay on our IR website I would now like to turn the call over carriage.
Thanks, Jane and good morning ever.
Okay, and hope that you were safe and well.
You too.
2020 was a very strong quarter for Wayfair is covis demand.
More significant step these circumstances highlighted.
Productiveness wafers value proposition solid foundation, we have built over multiple years.
I mean early fruit.
It's from the plans, we put in motion last year gains.
<unk> demonstrated that weaker.
There's no way meaningful will recognize and trusted household brand.
<unk> and loyal or seeking us out.
They're turning to Wayfair.
Explore how to use their homes in new ways.
Comfort in them during highly uncertain times.
<unk> demonstrated the wisdom of our strategic investments.
Our proprietary logistics network.
Allowed us to effectively meet demand not just for a few days for three week holiday stretch order.
The watch spectrum of product classes, we've seen it over there.
[laughter] last several years positioned us to capture an outsize share of and a robust local operations and all.
Offerings in the UK and Germany in Europe as demand there.
Also shifted online.
Well I went through to demonstrate uniqueness of wafers culture. These persevered despite the challenges.
There's enormous agility productivity.
And stepped up to serve our customers.
When they need us most.
Combined all of these elements led to a turning point in our profitability.
I'm going to gifting normalized demand picture, we fully expected to inflect positively in adjusted EBITDA in Q2.
Well what played out in this quarter was accepted and $40 million in adjusted.
2% margin.
Over $1 billion in free cash flow.
Demonstrate the inherent strong structural profitability of our platform.
Pleased with our financial results since you too.
We're most proud of how we various continued to support our employees.
Our customers and our community.
In the midst of the pandemic impressing social issues.
We remain and continue to build dog and enhance the host of safety measures. We first implemented in March we keep our impossible.
We're me.
Containing our dinner to go program on the front lines, which provides meals twice a week toward logistics employees and local independently owned restaurants.
And we stepped up or.
Several million dollars donated to both open relief and social just.
Just organizations.
Internally as part of our ongoing diversity equity and inclusion work, we watched a companywide disability and understanding to them.
Perspectives of Wayfairs diverse employee base.
Well early in these efforts the discussions or a step in helping us to collectively address the multifaceted intent with every day.
I would now to turn.
And to some observations about customer behavior second quarter.
<unk>.
It's difficult to pinpoint precisely.
We believe the home goods category in total several months.
Tumors de prioritize expenses, such as travel and entertainment and shifted their focus and discretionary spend into their homes.
We sheet.
Demand across nearly all.
Well the product classes, we sell shelter or work from home.
Accelerated ecommerce.
Its adoption was also an important tailwind longer lasting benefits to our business.
What was.
Even before Copel good.
In an extra will shift to E commerce.
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And we believe much of the steps.
Change and online penetration will prove to our view is that E. Commerce adoption is likely to continue to shift faster than it did brito, but.
Just to put the.
We activated nearly 5 million net new customers.
More than the last four quarters combined.
In the U.S.
We also reengaged more than.
Within 12 months.
Well, there b to C or b to B. These customers discovered was shopping at Wayfair can be a superior experience, it's the shopping at brick and mortar.
Merchandising service delivery are constantly.
Proving to make finding the perfect product for your home easier and more enjoyable.
Also unique to this quarter strength, but both new and repeat.
In a typical quarter order growth.
Similarly, outpace our strong order growth from new customers.
Despite the fact that repeat orders more than <unk>.
Customer orders grew even faster.
This is the first quarter that this dynamic has played out since waste.
Yes.
The behavior of these customers activated during the Cobot era continues to suggest that there are a high quality said pools.
As you know weary.
Physicians, so we're keeping a close eye on newly acquired customers.
He Tobin cohorts.
Our observations tell us that this new cohort of customers as reengaging with our platform at higher than usual rates. After their initial purchase and that doesn't gauge what is translating into higher than average repeat order rates.
In Q2, we also saw a slightly different cadence to our customers order patterns with fewer items per order offset by higher purchase frequency.
Shop apps, which saw heavy download activity grew about 600 basis points sequentially in Q2.
There's.
Let me overreaching to predict what it.
Two quarters, there's a tremendous.
And various pressures on the consumer.
This is coupled with clearly changing behavior in terms of.
That said.
What we've seen thus far.
That said, what we've seen thus far would suggest that even as the economy's reopened our customers remain firmly satisfied with wayfair. Thus far have proceeded pretty smooth in our rates of growth relative to Q2.
But even in those instances, we're still experiencing strong momentum well above the top of the start of 2020.
Well cooling related Tailwinds are still force recalled that late last year, we put in place a number of internal changes, which are now translating into tighter execution across the business and an enhanced cuts.
Tumor experience.
We'd be in our topline momentum and should bear long lasting benefits well beyond the kobin period.
Well.
ALJ that herculean task.
The demand has meant to our team.
In a normal year wayfair experiences to seasonal peak.
He's with weighted to five going into the holidays.
Of course, other promotions and events happening all year, but these two major events require months of advanced planning and coordination both crust.
Functionally inside Wayfair partners.
It's a process.
Smitley mid March nearly every day.
Simply put we could not have effectively met over $4 billion of demand as we didn't you.
Roger Technology and relationship we've invested in over many years.
And while not every.
Such extreme conditions are also internalizing, our learnings and adjusting our practice is very quickly.
To address any stress points that reveal themselves.
Let me elaborate.
Across our test what products moved in Q2 nearly doubled year over year.
Recall that over the last two years, we added approximately 40 buildings and more than doubled the square footage across our logistics footprint.
As a result, we're fortunate to have capacity in many places to flex in response to the wave of demand and we saw enhanced efficiencies as a result.
Where capacity was tight we took advantage of the hybrid model, we have in place and leaned on our suppliers would.
Just six solutions when appropriate voted to build additional racking and automation across our Castlegate location has served us well during this period.
And we continue to move quickly.
Against our pre planned capex projects to unlock additional capacity.
We did so well implementing many safety measures to keep our team safe.
And in general we cannot fully avoid the shipping congestion and longer to live.
Three times all carriers faced in Q2.
However, we were it within our own wafer delivery network.
Through which most of our large parcel orders travel.
Within customer service, we're now Onboarding 1000, additional members onto our service team to bolster the customer experience.
We pride ourselves on delivering the highest quality customer service in the home goods space and our employees have worked literally around the clock to satisfy the higher volume of calls and emails during this time.
Customer inquiries are elevated as a function of greater order volume in general and related delays are also contributing satisfaction remains high and Sir.
There was levels are now improving as we bring on.
No where was the strength of our model for evident then and how we worked with our suppliers over the course of the quarter.
We believe that we will emerge from this experience and even stronger and more strategic partner to each of our suppliers.
Instead.
Steve will speak to this in greater detail and just a few minutes.
Hi, working together to navigate quickly changing regulations, we aided suppliers and pivoting hard as to work through nearly constant communication together, we were able to demand plan and optimize the flow of product to the customer.
And the process, we demonstrated once again, how suppliers are truly a part of the wafer family and how differentiated our approach is relative to more traditional supplier retailer relationships.
Shifting gears to profitability I want to go back to a phrase I use last quarter.
Wait.
There is now large enough and strong enough to both be profitable and to continue to invest with a long term horizon.
Yes.
Several years ago, we simultaneously push investments.
Even when we were a much smaller company, we knew that these would together and individually the gauge.
Changers with high ROI, which met plowing back every profit dollar and also leading on external financing tobacco fees.
Today at 11, and a half billion 12 months our conviction in these projects remains as high as ever and we continue to the difference of course is that there.
Many more contribution profit dollars being generated today relative to a few years ago and.
So increasingly they're flowing to the bottom line.
As our strong sales momentum continues the inherent profitability of our platform will become increasingly apparent.
Q2 profitability inflection occur.
First fully in line with what we expected would happen when we started the year.
Well admittedly the strength of the quarter, maybe inflection much more powerful than even our ambitious plans had envisioned.
I want to briefly highlight a few of the many leavers that contributed to the exceptional leverage across the various piano lines in Q2.
Well the magnitude of the benefits we derived from each of these in Q2 and what we had a moderate as revenue momentum normalizes.
The underlying drivers behind the efficiencies remain structurally in place.
To be clear, we expect to continue delivering positive adjusted EBITDA margins on a go forward basis.
Assuming 20% or higher net revenue growth rates.
But then gross margin, we've all often talked about four primary leavers.
One the benefits of scale and how that can drive more robust competition on our platform.
Two logistic savings as their network becomes more fully utilized and as we expand the capabilities within it.
Three merchandising in house brands as a means to drive loyalty and pricing flexibility.
And for the advent and growth of supplier services.
We saw progress on all four dimensions this past quarter.
We drove gains in assortment as many suppliers, we didn't on E commerce in general and our platform in particular, plus and built wider product selection across many classes.
Our partner home platform, we also moved to leverage form supplier decision, making one setting wholesale costs.
This unlocking some benefit in the process.
Of course Castigate W.
Again, we saw a slew of wins as a function of the elevated throughput.
Even while absorbing extra expense to upgrade the safety standards of our logistics operations in light of coated we saw gains via fulfillment labor efficiency within castigate.
Stops for route increases within WGN.
And optimize routing yielding savings, even when drop shipping product.
We made further progress against a body of empirical work, we started last year showing that customers choose and stay with wayfair because of the superior overall experience we offer them.
And not because of any specific product or promotional event.
This is a milestone built on the back of several years, a major investments, particularly in elements like red carpet merchandising and our differentiated house brands.
Findings have also opened the door to more refined promotional and everyday pricing strategies.
Finally, as perhaps not overly surprising that supplier services such as sponsored listings group was quite strongly in this environment for twilios supplier shifting more of their resources away from brick and mortar and traditional trade show formats and focus their attention on winning and ecommerce site.
We believe we have a long runway of gross margin gains ahead of us as we continue to invest and reap the benefits from these efforts Q twos spoke clearly to this potential.
Q2 was also a powerful illustration of our marketing model at work.
During the quarter, we reached the tighter efficiency targets, we established across all of our channels earlier this year.
It was consistent with the timeline, we set for ourselves given moving to these targets is an iterative process and it was in a highly dynamic market.
In Q2 as always we empowered our channel marketers to invest in long term growth and customer acquisition. So long as those decisions met the refined payback targets.
Even as our teams took advantage of unique opportunities across paid channels, which were driven by strong ROI from lower media costs and high customer velocity, we drove significant leverage year over year in advertising as a percentage of sales.
Well, we're pleased with the financial results. We're most excited about the influx of first time online shoppers look forward to building long lasting relationships with many of these new wayfair customers.
Let me now touch upon the corporate head count that as the primary driver of our Opex lines, which also saw meaningful leverage in Q2.
We're nearly six months into having slowed our hiring after an intense two years of growing our ranks and earlier this year, eliminating some roles.
We intend to both of these moves was to strengthen day to day execution by allowing our teams to mature and to accelerate our progress against our most important initiatives.
During our bi annual business review cycle. This spring the executive leadership team was encouraged to see these goals clearly playing out.
Over the last two years, we hired and many people to focus on multiyear initiatives based on our long term orientation.
And I'm excited that we've kept that orientation, even as we have tightened execution.
As a result, we believed that our original plan to keep our Opex head count flat to down for the levels is appropriate despite the exceptional momentum.
Those who have followed weight.
Sure for Awhile and know whats well understand that we do not manage this thing forward 18 years and debt.
Decades.
Terrific into us not because of the strength of this periods financial results.
But instead because of the opportunities that present.
We serve new and existing customers as they face off against precarious circumstances built strong relationships with each of them as well as are many supplier partners.
And then the process, we're leveraging the strategic investments we've made.
Mind.
We didn't know what tomorrow will bring but we're confident that wayfair is stronger today.
Than it has ever been.
And we will incur certain times.
We have from control of our business leavers.
The unique capability to be both they quickly growing at a significantly bolstered balance sheet.
<unk> to assure us through volatile market and what we remain focused on our long term vision and goals we're ready just.
She's whatever opportunities come next.
And with that I'll turn it over to Steve.
Thanks, and Im just curious some insight on how this.
Star already close aligns with our quote.
Celsion plus suppliers.
Sure.
At the onset of the pin debit can the U.S. and across Europe suppliers were faced with a combination of challenges.
They were overwhelmed by quickly changing rules and regulations on how and if they could operate there where the middle of managing inventory tightening is caused by reduced trying to production and they faced the prospect I mean inventory glut as physically.
Chose begin to close and cancel orders.
As we often say our success depends on or supplier success, and we mobilized quickly to help each of them makes sense and our teams kicked off a series.
I've been pins rounds of communication suppliers to remain open and operate.
It's a myriad of safety measures.
We shared these gross practices.
Coupled with the same within their own warehouses and networks.
Where are these protocols were too much to take on for <unk>.
Great and WD and it solutions.
And successfully brought on more partners.
[laughter].
Because it's so communication went home wayfair hazard bead with suppliers sets in particular, we've elevated the frequency and quality of forecasting and supply coordination in a meaningful way.
This includes going deeper understanding the health of everyone supply chain indicates visibility into production pipelines. So that we can better piece together what is needed to fulfill immediate demand.
Such improvements helped give ours.
And if we nervous the confidence to keep ordering it uncertain times and to direct that product our away.
To do so we began to.
Signal to our suppliers what this opportunity would represent for the online channel and why Wayfair was uniquely positioned to take share and to power their growth.
We complemented that by moving to a biweekly forecasting model and through sharing a lot of detail.
We supplied the class and state by state level perspectives, as well as the underlying assumptions behind our forecasts.
It's Michael and I, along with the broader team we're highly the.
Well throughout with regular email uptick as well as via a variety of birch, so meaningful arms.
We remain so today I.
Our suppliers feel supported by our approach and pool.
Reach has been overwhelmingly positive.
Speaking of virtual meetings it has been fascinating to wash our industry's trade show Marlim go digital.
Well the vibrancy of physical trade shows isn't possible replicate and we all look forward to returning to the trade show floors, we have maximize the benefits of virtual events in the interim.
We are maintaining the same cadence and trade shows it.
As usual, even while working from home dedicating more time to one on one meetings without the typical distractions.
We're able to see more suppliers at these events.
Facilitating more high level executive connections and offering more robust data and transparency at an especially dynamic time, we believe wafer has taking greater mindshare into virtual trade show format.
Turning now to the inventory outlook. It is perhaps not surprising that we and the industry operated.
It was higher than usual out of stocks and across a narrow set of categories. In Q2. The out of stocks were most acute in late spring early summer.
The good news today is threefold first we find that substitute ability remains high the benefits of having a vast product assortment as wafer guys have never been more pronounced as a result was lost due to lighter than usual inventory levels.
Second product availability restrictions are easing the combination of covered related shut downs in China early in the year and the elevated demand that began in late March led to undeniable tight supply in Q2.
Some classes in outdoor said to strip liens and products such as freezers were basically out of stock.
But because we engage quickly with our suppliers to build extra confidence in our demand projections. They began reordering in greater numbers as early as April.
This means that new product is now arriving in North America and in Europe. This is obviously key as some geographies are moving backwards on reopening.
It is becoming increasingly clear that we will not be rid of the virus for some time [laughter] finally, even inventory challenges greed interesting opportunities as we work with suppliers to circumvent these issues, we onboarded and forge new relationships increased visibility into our partner supply chains and built more flexibility it kinda.
Revenue between castigate and their respective networks to get product to our customers as quickly as possible.
We've always said that our model should be a win win win for customers suppliers and for Wayfair. This recent period is a clear illustration of this credo <unk> work.
When it comes to suppliers the more sophisticated conversations and practices. We developed during this extraordinary time had made a smarter about each of these businesses in ways that will service well beyond the immediate moment.
I'll now turn the call over the Michael to discuss our Q2 financials and how we're thinking about Q3.
Thank you, Steve and good morning, everyone.
Let's first turn to the substance of the just reported Q2 results.
As you saw in our press release and IR presentation. Our Q2 total net revenue grew approximately 84% or $2 billion year over year.
Net revenues in the U.S. grew 83%.
International grew 91%.
International revenue, Greg on a constant currency basis was higher at 97% year over year.
You might be wondering why our net revenue growth rate in the quarter fell somewhat below 90% plus gross revenue growth rate, we quoted intra quarter investor conversations.
As you know we measure gross revenue on a win ordered basis well net revenue is booked upon quarter delivery.
So the wider than usual gap between gross and net revenue growth rate in the quarter is primarily explained by delivery timing.
With longer lead times in certain classes of goods and shipping congestion still a reality some revenue essentially shifted out of Q2 and into the third quarter.
We expect some of these delivery delays to persist through the third quarter.
Because marriage earlier discussed many of the key T. P ice we track I'll jump directly to gross margin.
As I move down the piano. Please note that I will be referencing the remaining financials on a non-GAAP basis.
Which includes depreciation and amortization, but excludes stock based compensation.
Gross margin came in at 30.7%.
This is a standout result.
You'll recall that well.
Hey, what our margin expansion, 20% growth environment.
The gross margin assumption, having more moderate expansion baked in to get us to approximately 26%.
There were multiple puts and takes that played out in reality in Q2.
We in dollars incremental coogan related expenses, but we also benefited meaningfully from increased volume throughput and related efficiencies across our logistics footprint.
All of which Niraj highlighted earlier.
Also a less intense promotional and.
Environment in Q2.
Promotion and pricing benefits from our merchandising in house brands efforts in a faster than anticipated ramp in supplier services. This period also contributed to the upside versus our X Coogan plans.
Customer service in merchant fees contracted by about 50 basis points as a percentage of net revenue both on a year over year and sequential basis.
Well this is a largely variable line item there is some lag between our ability to flex and appropriately calibrate our customer service levels vis-a-vis the rate of revenue growth.
We expect this to normalize some going forward.
Moving on advertising, we saw 140 basis points of leverage year over year, and 210 basis points of leverage sequentially.
Our plans called for substantial leverage in the second quarter, even in a lower revenue growth environment, reflecting primarily the move to tighter efficiency targets across all channels, which we initiated at the start of the year.
This is played out as expected.
And lower media costs and higher conversion rates, particularly early in the quarter also drove some additional upside.
This happened even as our marketers took full advantage of the attractive customer acquisition opportunities the market presented.
Our selling operations technology, and Gionee or Opex expenses came in at $395 million.
You were journey spend some time talking about the head count considerations that serve as the primary driver to the flying.
So I'll just say that I'm pleased with the discipline, we're demonstrating on this front.
As well as any other elements of Opex and by the strong expense leverage we're seeing as a result.
Adjusted EBITDA for Q2 was $440 million or 10.2% of net revenue.
The confluence of unique topline momentum strong efficiencies linked to this volume growth and our structural work to drive increased profitability contributed to this powerful inflection.
In the U.S. adjusted EBITDA margin equaled 11.9%.
Into the first time, we also saw positive quarterly adjusted EBITDA in the international segment at $5 million.
I want to briefly zoom in on non-GAAP diluted EPS, which was also strongly positive at $3.13.
You'll note that the diluted share count is a different number then the basic share count we typically report.
This change has to do with a slightly nuanced accounting treatment for companies with outstanding converts like Wayfair.
As net income turns positive accounting rules dictate that the diluted share count reflects the potential settlement of the converts via assuming a full equity settlement.
To be clear, we still have the option unsettling each of our three outstanding public convert maturities in either cash or stock or some combination.
The accounting treatment does not indicate that we have made any sort of settlement determination.
Nor does the diluted share count reflect the threed capped call instruments, we have in place.
Together and unwind of our capped calls at their respective kept prices would result in 6.7 million fewer shares being issued and what the diluted share count currently portrays.
All of this is to say that while we're reporting deluded EPS in accordance with the appropriate accounting standards. We view the fully diluted share count that you see in our reported financials as overstated.
It will be lower based on anticipated cap call proceeds as well as any final decisions, we make with respect to the form of convert settlements overtime.
If for example, we settle all the public converts in cash none of the dilution related to these instruments will take place.
Consistent with how Weve always operated we remain extremely sensitive to dilution.
And our keeping all options open.
And you should expect that we will be very thoughtful about managing our capital structure to mitigate dilution.
Free cash flow for the quarter was $1.1 billion and we ended the quarter with approximately $2.4 billion <unk> cash cash equivalents in short term investments.
Clearly we have come a long way in a short amount of time and its significantly reinforced the balance sheet, both through our internal actions and external financing decisions.
This financial flexibility puts us in a very strong position.
Now turning to guidance.
I wish I could say to you that we're back to normal and we are ready to give you relatively accurate ranges, but what might play out in Q3 earnings.
Unfortunately, we recognize that there are too many unknowns in this environment, particularly in the U.S., which is by far our largest market.
We faced a vibrant demand backdrop in Q2, and we have reason to believe that customers will remain focused on their homes in the back after the year.
The unemployment picture is still quite tenuous the competitive landscape is highly dynamic consumers are justifiably nervous and some government support is expiring.
In our business the mass market customer has to show up every day.
So our business model will serve us well relative to other retailers in a recessionary environment.
There is just too much uncertainty right now to try to predict revenue in a highly specific way.
Instead, I will take the same approaches I get back in May.
During a looked at our intra quarter gross revenue trends, but will not go so far as to provide guidance for the third quarter as a whole.
Oh also share with you what we would expect the rest of the Q3 piano to look like if net revenue growth, we're closer to 20% year over year.
While acknowledging that the actual profit results could vary from this you just as they did in Q2.
I will add however that the magnitude of efficiencies and associated margin leverage we experienced in Q2 is unlikely to fully repeat in Q3 to the extent that revenue growth moderates sequentially as it has thus far in the quarter.
Quarter to date, our gross revenue growth is trending at approximately 70%.
We're over year.
While these run rates are still very robust we are seeing more day to day and week to week volatility thus far in Q3.
Compared to what we observed in Q2.
[noise] and expect that the volatility and the revenue growth rate deceleration may continue through the quarter.
You are only offering these insights in the spirit of transparency as you build your models.
Hey, sustainable trend and give specific revenue guidance, particularly as the state of Reopenings around North America and in Europe evolves in real time.
Recognizing that it's challenging to predict the margin benefits related to potentially outsized volume growth and unique market conditions due to co. Good we want to continue to Orient you to the more structural margin improvement we are capturing as part of our internal strategic plans.
On that note, assuming a scenario with only a 20% rate of net revenue growth in Q3.
We would expect gross margins in a 26% to 27% range customer service in merchant fees closer to 4% of net revenue.
Advertising as a percent of that revenue between 10 and 11%.
And so TG a to once again be modestly below $400 million, including depreciation and amortization, but excluding stock based compensation.
All of this has to say that Q3 should prove our second consecutive quarter of positive adjusted EBITDA at a total company level, even without kobin related tailwinds.
Yes.
These assume equity based compensation and related tax expenses of approximately 70 $880 million and depreciation and amortization of approximately $70 million to $75 million.
We expect basic weighted average shares outstanding to equal approximately 96 million.
Though our diluted weighted average shares outstanding will ultimately be driven by the net income resulted in Q3.
Impacted by the accounting rule I noted above.
Finally, we expect capex in a $95 million to $105 million range in Q3.
We have long discussed with you the when and how and how much of a profitability inflection for wayfair.
Some of these questions were addressed in Q2, and we expect to further speak to the sustainability of this turning point with another set of profitable results in Q3.
So the elevated demand in the last several months somewhat up escape the underlying improvement in our economics. It also helps to reveal more about the long term profitability potential of Wayfair as we build on our position as the most trusted robust and top of mind platform for customers and suppliers.
In the home goods ecosystem.
In the hearing now however visibility is strange and there are multiple conflicting vectors to consider.
Commerce shift remains real and powerful and consumers are finding high satisfaction as they adopt E commerce and Wayfair.
They also have good reason to remain focused on their homes.
Yes recession risk still leaves real the competitive landscape remains fluid in the state of reopening is ever evolving.
Regardless of the macro environment that comes our way we are focused on executing with strength every day and on further reinforcing wayfair is highly differentiated model for the long term.
And we have the operational and financial strength to definitively do so.
I'd now like to turn the call back to marriage before we take your questions.
Thanks, Michael.
2020 has thus far been a remarkable and challenging period for all of us.
Even I are proud and impressed with our everyone at Wayfair has stepped up to support each other our customers our suppliers and our local communities.
There's no telling quite what plays out over the coming months.
But regardless, we are committed to being that go to solution for our customers as they see comfort in their homes and a strategic partner to our suppliers as we navigate these uncharted waters together.
Now, Steve Michael and I would be happy to take your questions.
At this time, if anybody but like I ask a question. Please press star one on your telephone keypad I've gotten up like they start one on your telephone keypad Afghan we ask that you keep your questions to one question and one follow up to a lot of everybody had chance to ask your question. Your first question.
Comes from Peter Keith from Piper Sandler.
Your line is open.
Peter Keith Your line is open.
Sorry about that everyone. Thanks for taking the question and congrats on the results the swing to profitability is a quite impressive and dramatic so I guess on that note I wanted to just asking about the long term EBITDA margin target of 8% to 10% to think we've gone for years.
I was wondering when you might get there and and now asking are you rethinking that that could be higher and perhaps specifically around the gross margin, which will probably not sustainable I with what you saw Q2, but was guided a very solidly for Q3, and you'd mentioned increase supplier listings leverage of Castlegate et cetera. So.
Oh, we thinking about the at the longer term margin structure, given everything you've seen the last couple of months.
Hi, Peter Thanks for your question you know this marriage so.
So.
Let me.
Let me try to answer the question, giving us some color on a couple of things. So first just said.
Recap a bit of history that I know you're aware.
For years as we've described the gross margin runway and what we've been investing in.
Even while gross margin was steadily between the 23 and 24% range that we were continuing to guide. We had described that bridge between now and the long term gross margin, which was a few hundred basis points higher in the model that we had four different believers that each alone couldn't clips that whole gap and so the first one with suppliers.
Gaining efficiency at meeting and on our platform the second with gains associated with logistics. The third with all the merchandising improvements we were making any gains associated with those are just house brands red carpet merchandising and alike.
In the fourth was seller services and.
Sponsored products. Even one example of that are carried the castlegate about business for us and Merchandizing services et cetera.
And.
Well when we describe them, we talked about that that large thousand basis point plus runway, we basically said that what's going to take a long time to unlock of it'll be over multiple years, but that we're making good headway.
Now we're at now at a point, where some of these gains are starting to come through.
And what's happened is it then been accentuated by the surgeon volume associated with Covance, providing efficiencies that to your point will lapse.
But if you just look back over the last few quarters, you can see gross margin sort of broke out of the 23 to 24 point percent range down to 25, how Michael than guided it to be a 20, 26% now he's getting it to be 26 to 27, even while revenue would be into 20% growth rate. So in other words, there's structural.
There are structural gains coming through and there's a long runway still on those so if you think out multiple years. The long term model frankly, it's something that we will update for you and give you some color on it and a much better understanding of the gross margin trajectory and we'll do that at some point here down the road, but I think even certain pillars like seller services frankly warning.
Been contemplated when we built that model. So there's a long runway now specifically in this quarter you know on one hand, when structural gain starting to come through on the other hand or is some kobin search related gains of efficiency that will dissipate. So you know gross margins going to continue to advance, but but theres that put put and take but the point being though the long term even job potential.
So in the business is incredibly high and what you can see in this quarter with it shining through as you can actually see that it's been there and we pointed to how that embedded profitability. It's very high but that we're also investing aggressively in a long term and so even in today's TNL, even with the 440 million in EBITDA in the core.
Sure and billion dollars of free cash flow, we still literally have thousands of people working on things for the future and we're still investing at the maximum rate that we can do productively and so that's really what the plan that we put in place at the end of last year was about it was about mentioned the priorities could be executed very well and that we weren't trying to do.
Too many things in parallel, which would which would erode our ability to execute on our top tier priorities, but does have to your priorities were not near term in nature. There long term in nature and the the two big expensive ones, which are really Europe, not logistics network, we're pretty far into them and so whats nice is we can be investing a tremendous amount of money against a tremendous amount of capabilities and still in the piano and you can.
Yeah, we're still very profitable with that still is true and that'll continue to play out over time.
Your next question will come from Maria reps from Canaccord. Your line is open.
Hi, good morning, and thank you for taking my questions.
So in the markets a that you are that are reopening can you maybe give us a little bit more color on what you're seeing in terms of trends are related to a average quarter today trends that you highlighted and then secondly on international can you update us on where you are in international markets in terms of a key customer <unk> I keep your eyes and marketing efficiency and do you have.
Do you have eyes on any additional international markets at this point.
That's it thanks Maria.
Reopening trends what we've noticed is the economies that did that have reopened a reopened earlier that growth does dissipate, they're a little faster, but it's still stays at very elevated levels relative to where we weren't before and so I mean it I think you can think at this point quite a few markets that were in or reopened.
Two to some decent degree and you can you know Michael I'd said that revenue quarter to date was it that 70% range. So you can you can keep in mind like it's.
That is with stores opened although obviously you have you have people, perhaps not wanting to go to stores. So you said, that's a covert related tailwinds, but then frankly, we picked up a year's worth of new customers in just one quarter and so that those customers, we're seeing great repeat behavior from them and ongoing engaging so I think.
Frankly, even as Reopenings continue we're going to see that the secular shift ecommerce has been accelerated meaningfully and then that that continues and that rolls forward.
In terms of your second question around international or the International business. You know, we're seeing so the international business just runs three countries are in that Canada.
And then two countries in Europe, the UK and Germany.
They're all continuing to develop a very very well now international will continue to be investment area for quite some time, but if it gets bigger it will get the same efficiencies that we have in the United States and it's moving in each country is moving along that trajectory at the rate. We would expect so it's actually coming along quite quite nicely in terms of other geographies or countries to enter.
We have no immediate plans on that but I think the way to think about that overtime is that in Europe. We built a we've invested in buildings and infrastructure that would support us throughout Europe. So in other words today, even though we only deliver into that you can't Germany, we actually have suppliers all across Europe, Poland in Spain, and Italy and then.
Netherlands, Denmark, and so our transportation logistics network allows all of those goods to flow.
All throughout the continent, and so and ended the U.K. as well and so there is theres, obviously opportunities to deliver it to other countries and pick up that benefit similar to when we actually optimize the Canadian business and sorry grow very nicely very quickly because of all the U.S. investments and so we'll get to that but right now the focuses on the same four countries.
Got it thanks, so much further color.
Your next question comes from Haste carried from Goldman Sachs. Your line is open.
Great. Thanks.
Ross when you when you look at sort of where you are from a capacity utilization standpoint in the level of investment that that you're making into your infrastructure. Obviously this was a year, where you felt like you had built some some excess capacity into the system before we before we got into the into the environment that where they were had unit given.
The short timeline between here and what's likely to be a lot of demand that you're going to see during the during the holiday season.
How.
Well prepared do you think you and your third third party suppliers will be.
To deal with that with that demand and when you look at sort of the longer term trajectory of what you're going to need for mechanical net perspective from a capex investment perspective.
How long should we anticipate sort of this level or potentially even higher levels of of Capex investment into the end of the business, obviously with the understanding that it's that it's all going to sort of very very productive very good returns.
On that investment.
Thanks, He yeah, so to your question.
The network, we had built and the on 16 million square feet.
It really was a it had a tremendous amount of capacity that we were not yet utilizing because the focus during that first phase was to make sure that we have the footprint the geographic footprint we needed.
And with the racking projects and some of the automation projects that we've been doing we basically are creating more capacity without taking on more square footage and so we have quite a lot of capacity left Didnt network and a lot of the projects that are continuing that are underway and we we've not slowed the plan due to co bid, but but frankly were.
We haven't really accelerated run the same plan and it's going quite well and so I think the capex guys. Michael can maybe chime in I think it's been over 100 million a quarter plus or minus and that plan basically allows us to continue to develop the network.
So keep in mind when we plan to network you plan a couple of years ahead, because basically these buildings don't necessarily exist until off and you are having them built into your specific needs et cetera, and so we're continuing to develop the network, but I think we're in very good position to serve the demand. Despite the elevated level because of the investments in the past few years and then.
One thing I would highlight when you mentioned that the our suppliers as well.
Yeah, obviously over the years had been working on optimizing their business for E. Commerce more so that means that basically means making sure that their network is more integrated with our network.
Their network has more capability and frankly more specifically, it's really around inventory availability and so as we've ramped up our demand forecasting capabilities and been able to give them more guidance on what we would expect based on what we're seeing and then as we integrate the logistics network and as we can handle for example, how we're flowing ocean freight into port pace location. So that's.
The last mile is much shorter faster less expensive and and the delivery promise can be very fast livery promise that creates a lot of benefit for for everybody and and so then industry, where you see demand take off in the spring and obviously that means you're gonna run through inventory more quickly. We can very quickly start forecasting and with them. We can then start planning ahead. In this is what we're so.
Turning to seize that while there was periods, where inventory levels, where a lot lower than we would like one thing Steve referenced earlier in our prepared remarks is that we're actually seeing inventory building back up nicely right now because of how quickly we're able to respond to it earlier and so then when we look forward to the rest of the year you know things like a you know wait a little you know.
And a holiday we're pretty excited about the inventory levels will have.
Great and then that level of comfort extends to your last mile delivery partners. They they're gonna have the capacity this holiday season to to be able to accommodate the the surge that you're going to need them too.
Exactly so I think the way to think about that it's when the Tobin related search first took off no one was prepared for it.
So obviously everyone starts scrambling then is the weeks and months go by you see the delivery capacity keep increasing you see the delivery speed get better you see et cetera, et cetera, and so.
And it will you can expect is as we continue to move through time is that actually we should see.
All of those things improve versus out worried that the kind of a forward coming demand will be a problem.
Great. Thanks, Rob.
Your next question comes from Jonathan not Chivinski I'm Jefferies. Your line is open.
Hey, guys. Thanks for taking my question nice quarter.
First one was just on your conversations with vendors during the quarter and kind of what those conversations revealed regarding potentially higher propensity to use castlegate.
Going forward and kind of whether you expect accelerated adoption rate versus history.
As suppliers kinda I realize this this new dynamic and kind of rising consumer expectation. That's my first question.
Yeah, Let me say, a little bit and Michael could maybe a chime in if you if he wants and what I, what I would say is what we're saying is that.
What we're seeing is suppliers or are clearly.
So let me start from Super high level.
Suppliers were ready excited about ecommerce series of events or transfer. This year have only made a much more interested and excited in any about ecommerce well, we see from our suppliers as they view Wayfair is their natural primary platform for home and so a lot of what's transpired over the quarter. So the surgeon new customers and then what we've been seeing is that these are actually very high.
Quality you customers to repeat behavior on it was very high. We then shared a lot of that information with our suppliers and then that turns into a demand forecast. Since then they see this demand it's building in a steady predictable long term way.
And our suppliers are integrating some of our long term plans. The fact that we have thousands of people are working on initiatives for the future a lot of those will stimulate demand sources. This all ties together specifically on Castlegate. We continue to see increased in in adoption with you know added more suppliers into the program, we're adding more capabilities into the program. So I think what you're going to.
See from suppliers is that we're effectively going to have a more integrated logistics network and that will be the combination of three things, we'll see more and more suppliers using castlegate well see suppliers increasingly improving the quality of their logistics operation and having it more integrated with with ours and then you'll see that the demand forecast.
At the item level will create integrated solutions at the item level, whether that be Asian consolidation or direct containers into castigated port locations are using their logistics network in parts of the country, where they actually have capabilities versus where they don't et cetera, et cetera, and that combinations you know.
For more suppliers are kind of working with us on this bespoke type opportunity, which is basically creates more and more benefit and it does result in them using more and more of our castlegate and logistic services.
Michael was anything you wanted to add ons.
No I think I get the only thing I'd add is I think you mentioned that we've nearly doubled the wholesale dollars running through castigate this past quarter, and just echoing what near term, saying and all of our conversations with suppliers and as Steve mentioned, we're all spending a lot of time talking to our supplier partners is very clear that they're there they've used the soft this opportunity at this moment.
Even with Wayfair.
And I think Dave reassessing, the sort of entire retail landscape and they see the movement from offline to online in a power more powerful way than they ever just before I think this little bit of a shock to the system for many of them and so I think shipping all of those folks sort of more and more to our business model is clearly an outcome, we're going to continue conceal before.
The quarters coming out of this period.
Great. That's Super helpful. And then just a quick follow up you mentioned way day sounds like it's still in the works for 2020 can you share any thoughts in terms of timing for the event, then and how you may be thinking about it differently this year versus the last.
Yes, sure. So you know wait a obviously a very very big event for US. It's this will be the third year, having it and obviously its traditional spring timing, we moved because of the obviously the events this year.
So the current plan is to have it similar to how Michael explained that you know last quarter, where they would you order intake was over 90% and it actually continued to be over 90% through the ended the quarter VC that net revenue came in at 84% that with some revenue moving into this quarter, while the timing of waiting later this quarter, you're going to I think we'd it can be quite successful, but the actual revenue.
This on delivery date, a lot of that show up really next quarter.
But we think and have it sort of separated enough from holiday, but actually have the effort.
That's our current plan for weight aim work, we're excited about about.
Makes sense, that's the Buckeye.
Thank you.
Your next question.
<unk> Your line is open.
Great. Thank you a couple of questions just first on.
It's July update.
Hey changes in the competitive intense.
To the from from offline retailers, moving online or maybe Amazon in the home goods category and then second bigger picture maybe from Raj.
You know you've had a big increase in category penetration, maybe if you have any thoughts on where that is now and where it was pretty cove. It and when you get into next year and you kind of lap. This big Big surge do you think that penetration can keep thank you.
Hi, Thanks, Justin let me try to answer some of those and then.
Let Michael add up.
In terms of Prime day I mean.
Good day does and drive the kind of an ecommerce halo and but what I would say about this year. It's you know the comps have and is weird.
Tapes that occurred relative to last year, you know like mid April there was the stimulus didn't we're gonna have weighed a later this year, Brian de I'd say, it's pretty modest in comparison to those other puts and takes but.
That's a you know there as you know or different timings and then last year. So if you look at Guizhou me to like days and weeks you do see some some some lumpiness, but fundamentally I would say not not that much impact from prime day.
Competition, you know, so I think Amazon Walmart reduce some of their online advertising for the while and then came back in in truth. If you look at the impact of that it's actually quite small. This is primarily in one of the Google advertising products the P. outlays.
Where we are actually the outsized step player in our categories and so well folks move in and out infection, a little bit there's actually quite a few other players at the same magnitude as them and that's home depot and low isn't it.
Target and so you.
It's actually not as big an impact as you think and so the way to think about it to your point you know we added $2 billion in revenue this quarter year over year and you know we did it well driving the sustainable profitability, which is a continued thing that we're going to do so I think what we're going to see going forward is we're gonna have to.
Gross.
While you the patent the profitability you got shine through in that.
And the nature that even in the piano today, you see the investments and we're getting gains from some of the investments that we've been focused on over the last couple years that combo.
You are going to see this develop I think.
Tactical question on lapping I'm you know this this period next year I guess the way, we think about as we focus on the outcome.
And that's measured in years, many years and so.
It happens in a given period of weeks or in a cool.
What are some but I expect we're going to be able to continue to grow and I would expect that primarily because even if the size rat weve, a very small share of the total category to your point about.
Hi online category penetration I do think it jumped up but I think a lot of that will prove to be sticky.
And I think frankly that large number of customers. We got I think a lot of them will prove to be sticky and we're seeing the early early results of that so as a result, I think we're gonna be able to keep growing and I think we're going to be able to keep taking share in the broad based home category and to your point this year might be a bigger step up and penetration that you see perhaps next year I think if you kind of like zoom back out you're just seeing a one.
We wrote were penetrations from.
Michael Thank you good thing you want to add there.
No I think I think you covered it really well marriage I I think this notion that.
If you think about how many new customers, we just picked up and a positive experience they have with Wayfair and as we know our business is predicated on repeat and so when you start to think about not just the back half of this year, but next year that long term perspective that we tend to have we're thinking about those customers how to super satisfy them to make sure they keep repeating in.
That that's sort of a a bolus of new penetration that certain should continue to serve us well not only the back half this year, but into next year as well.
Great. Thank you.
Thanks, everybody I think that wraps up the call. So we appreciate your time and hope you're all healthy insects.
Thank you everyone. This will conclude today's conference call you may now disconnect.
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