Q3 2020 Wayfair Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to change we.
Wayfair Q3, 2020, <unk> earnings release and conference call I guess time, all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question during his section you will need to press star one on your telephone if you require any further questions. Please press star zero I would like to turn the call.
Now over to Jane Gelfand head of Investor Relations and special projects. Please go ahead.
Good morning, and thank you for joining us.
Today, We will review our third quarter 2020 result.
With me are near at Shah Co founder Chief Executive Officer, Co Chairman, Steve Conine co founder and co Chairman, Michael Fleisher, Chief Financial Officer, and Martin writer, Vice President and head of Europe. We.
We will all be available for Q and <unk> following today's prepared remarks.
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 fourth quarter of 2020, we.
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 identify certain factors that could cause the companys actual results to 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 otherwise.
Also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance be.
These include measures such as adjusted EBITDA and free cash flow.
These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results.
Please refer to the Investor Relations section of our website to obtain a copy of our earnings release, which contains descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.
This call is being recorded and at what cost will be available for replay on our IR website I would now like to turn the call over to rich.
Thanks, Jane and Hello, everyone.
We appreciate all of you joining us as we know there's a lot happening on this election day morning.
We are pleased to report the Q3 marked in other quarter characterized by strong growth and continued profitability for wafer.
Though the initial shock of the arrival of COVID-19, it's arguably behind us consumer behavior in both North America and in Europe is undeniably changed as a result of the pandemic.
From a macro perspective, we're encouraged by continued consumer resilience no clearly much still in flux Oh.
The home category seeing broad based demand as our customers reprioritized their spending on where and how they live in a way from other experiences like travel entertainment and dining.
To the extent that the urbanization trends continued to gain traction they should in the near to intermediate term proven additional tailwind for the category.
As an E commerce business focused purely on the home wafer continues to benefit from both increased online penetration and heightened spend on the category.
In Q3. This was reflected in continued elevated rates of new customer acquisition and strong repeat order growth, which together translated to an incremental $1.5 billion and net revenue or 67% growth year over year.
The exceptional top line momentum combined with our internal efficiency initiatives led to a second consecutive quarter of strong profitability.
Our Q3 consolidated adjusted EBITDA came in at $371 million or 9.7% margin.
Today I want to discuss three main topics.
First I will speak briefly about momentum in the home category more recently and looking out longer term.
Second I will comment on Wayfairs trends, including during way day, and the work that we're doing to effectively respond to continued strong demand.
This will be important for the upcoming holiday season, which promises to be unique for all of us.
And finally I will offer some thoughts on the progress we have made on our profitability journey and what's ahead.
Let's begin with the home category.
As is likely the case for you we find it difficult to precisely pinpoint where overall category growth is in real time.
But judging by the positive data points being reported across the industry, including by E Commerce players and reopen brick and mortar retailers.
Believe it is safe to say that the category as a whole is growing well above average rates, which are typically in the low single digits.
Against this backdrop Wayfair continues to consolidate market share it's dollars move online at an accelerated clip.
Importantly demand for home goods remains broad based.
We continue to see that the vast majority of the various subcategories or classes of home are growing nicely.
So while it may be tempting to attribute the recent strength of the category to so called Kobin classes like home office furniture, or outdoor furniture and play sets. The reality is quite different.
Instead, we estimate that all the other classes combined have driven more than three quarters of the growth we've experienced year to date.
As the environment further normalizes there'll be some volatility period to period, but I think it's important for us to zoom out and put things into a longer term perspective across three key dimensions.
First the home categories vast representing close to an 800 billion dollar total addressable market in North America, and Europe split roughly evenly between the two.
And despite the E commerce step change we've seen over the last several months the category remains quite underpenetrated relative to others, which began their migration online earlier.
Second this total addressable market can be further broken down into four different large scale and relatively fragmented verticals.
Namely furniture and decor.
Housewares.
Home improvement large appliances.
And professional or B to B.
We have a meaningful offering across each of these after the last several years of investment and yet are still quite small even in the scheme of furniture and decor, which is our most developed set of classes.
And third we have a portfolio of platforms and specialty brands that helped us reach consumers spending mass upper mass and luxury demographics and a variety of style and shopping preferences. The.
The Wayfair and Parago platforms help us reach the mass and luxury customer respectively, where they virtually enlist catalog and then to facilitate or discovery the perfect product.
Meanwhile, we're more tightly curated selection via the Allmodern Birch Lane and Josten main specialty retail concepts to appeal to those customers, who also approached the category with a very precise stylistic viewpoint and tend to gravitate to curated specialty retailers.
These different specialty retail brands, which together represent another billion plus run rate revenue stream allow us to effectively have more shelf space with our customer and she looks across multiple brands in her search to find the perfect unique item for her.
Due to the size of the market our presence across the major verticals and our well defined portfolio of retail concepts. We believe the runway for wafers growth is very very low.
We continue to operate and build this business with a much larger profitable scale in mind.
Turning now to what transpired in Q3.
Even as competition in the form of brick and mortar returned to the market.
Wayfair strong customer acquisition and retention trends continued and.
Nearly 29 million customers, our LTM active customer count was up 51% year over year.
We saw average order values normalize so after a dip in Q2 with LTM net revenue per active customer hitting a new peaks this past quarter.
It's also worth noting that in Q3, we did not see much deviation in sequential trends across our various geographies or various income demographics.
Well, we will move away from regularly describing the behavior of any one specific cohort in the future.
I will briefly mention that customers acquired during coded still appear to look similar to other recent cohorts in terms of repeat trends.
Looking beyond the acute pandemic period, we fully expect that Wayfair will benefit from having a relationship with each of these customers and being able to engage with them in highly personalized ways as we've always done.
We also worked hard this past quarter to ensure the best possible customer service and delivery experience in the midst of some industry challenges.
So inventory levels across the industry are still lower than usual, we believe the low point in product availability is now behind us import.
Importantly, though the inherent advantages of Wayfair is differentiated model actually shine through in the midst of some of the lingering issues.
So our model is uniquely inventory like we do not own the vast majority of the product we make available to our customers via our platform.
We're doing whatever we can to assist our supplier partners in mitigating bottlenecks.
For example.
We are working continuously on joint demand planning as Steve described in detail last quarter.
We are leveraging our scale to procure additional space on cargo ships for our suppliers and seeing our ocean forwarding business grow considerably in the process.
Post order our scale increasingly allows us to bypass the most congested points in common carriers networks and go straight to the last mile, thereby avoiding surcharges and delivery delays.
And when it comes to the suppliers, who drop ship to our customers. We are working hand in hand to share best practices and how to manage the complexities of elevated demand, even if were not directly handling the pearsall.
We're also closely tracking our suppliers inventory positions and backlogs to diagnose and together troubleshoot logistics issues before they become bigger problems.
Each of these measures as important to mitigate some of the supply chain disruption, we're seeing across the industry.
But they're not enough to completely shield the customer experience.
In this environment the inherent advantages of our model become even more pronounced consider the following.
By virtue of offering approximately 18 million products on site in a mostly unbranded category.
Our customers are highly likely to find a product that fits their style and budget, even if some of the options are out of stock.
During key promotional events, we can cure rate the selections was to drive demand towards those products, where availability and visibility to fast and reliable delivery are robust.
We also offer maximum possible transparency and how long a product might take to arrive supposed to manage expectations upfront.
And we're conservatively estimating lead times.
This is only possible on the back of strong data integration with our suppliers and proprietary technology throughout our Castlegate WD networks is a great example of the benefit of our long term mentality around investing in building our own proprietary systems.
Finally, our 100% in house customer service operations are approaching more appropriate staffing levels to reflect the higher volumes. We are experiencing so that customers may connect with wafer support without delay.
Are you self service options to reach a quick resolution.
Some of you have asked why we held way day, when we did at the end of September.
The main reason of course is that our customers are actively thinking about their homes are passionate about this event and we together with our supplier partners want to bring them the best possible deals at a time when they could really use it.
It's to an extended 48 hour timeframe, we drove the two biggest sales days in Wayfair history.
In line with our internal forecasts and an impressive result, particularly when considered against the backdrop of several months of peak demand.
To build on what I said earlier about the so called cobot classes being a lesser part of the overall demand picture.
The top five best selling categories. During this way day were the same as the top five best selling categories during way day 2019.
Despite drastically different macro circumstances this year.
Looking out to holiday, we think it will be even more important this year than usual.
With customers likely staying in close to home.
Absolutely getting social gatherings, creating the right atmosphere will be key to capturing the spirit of the season.
Like others in the industry, our marketing messaging will be more drawn out as a result, which should also help mitigate the extent of the cyber five peaks and potential ensuing congestion.
Before I wrap up I'll offer a few thoughts on the track record of profitability that we're beginning to establish.
It is true that elevated volume is clearly driving heightened gross margin efficiencies for wafer.
Well. So these benefits will fade overtime, we believe a good portion of the gains will persist even as the growth rate eventually moderates to a new normal.
Plus there are multiple other drivers to gross margin expansion.
All of which are detailed in the past that are also adding to the gains we are seeing year over year.
Further down the TNL, you're witnessing our payback driven marketing approach drive maximum customer acquisition, where it makes economic sense within a reasonable and measurable time frame.
No the advertising markets continued to recover relative to Q2 and were more competitive this past quarter, we were able to operate efficiently while achieving good scale across various digital channels.
Finally, despite our accelerated growth we are demonstrating discipline in our hiring approach and acknowledgment that we still have thousands of people staffed against future revenue and income streams.
We also remain thoughtful as we assess hiring needs into next year.
We believe Wayfair is now positioned to deliver the rare combination of strong growth improving profitability and smart selective and long term oriented investments for many years to come.
You are seeing the benefits of our investment mindset play out in 2020, as we take advantage of an extra ordinary and challenging set of circumstances.
Witnessed our long term growth mindset at work since the IPO and.
And we see a very long runway ahead.
Now the sustained profitability inflection we foreshadowed back in late 2019, even before Kobe is also more clearly playing out.
We expect to offer you more proof points of this over the coming periods.
With that I'd like to turn it over to Martin writer.
Martin as our VP and head of Europe, and as our featured speaker as we continue to introduce you to more of our executive team via this for.
Thanks, Eric and Hello, everyone.
I'm glad to be joining you today to discuss our exciting business in Europe.
Who share a bit of spectrum I joined weight for seven years ago, and that's helped a variety of leadership roles inside the company for the last five years I've overseen the European business.
Prior to Wayfair I'd been thought it'd be in these global presence across four continents as head of international having books to Groupon and Mckinsey before that.
Since I joined the Wayfair Weve come a long way wafer.
Wafers European business has grown about 100 fold search.
There's no over a billion dollar run rate revenue business and growing quite rapidly in the UK and in Germany on the Baker for Pan European infrastructure.
Our headquarters in building a company second global headquarters now, taking your shoes, universal to wafer and exporting best practices to Boston and vice versa.
Yeah, you could sense, a tremendous opportunity for us.
The total addressable market rivaling the size is North America, it's roughly $300 billion in DTC sales.
Another hundred billion dollar so between that and B to B.
And even lower ecommerce penetration rich relative to the U.S.B.
We see the same structural tailwinds and the long runway for profitable growth.
Today, we are in the UK, and Germany, which together represent nearly 45% of the European until the addressable market and operate here, which could be for Brent.
Like in the U.S. refund Europe is focused with the mass market consumer and helping her find the perfect item for home, but bring the whole of the industry selection to her by a enrich these really engaged in Olympic for its when industry, leading service and then they were excluded.
Oh positioning is clearly resonating.
In the UK aided awareness is now in the mid seventies wafers already the ecommerce leader in home category.
And we believe we're on the same project in Germany, though we are at that stage, they're having turned on our marketing engine only towards the end of 2000, but.
As always our success is driven by a partnership mindset with our suppliers and the same inventory like approach we.
We now feature approximately 4000 suppliers some of your peers platforms trekking closely along the trajectory before as the U.S. Kim.
Importantly, these suppliers a local regional and global players presenting.
Sensing products from over 30 countries.
In Europe.
We have supply of facing teams fluent in more than 10 languages, which are kinda enhances our category managers to build strong relationships across the TRID.
You're also seeing some of our U.S. based suppliers follow us across the Atlantic to reach to European markets were weaker.
As a result, we were able to offer up reducing driven customers unparalleled collection.
Over the last 12 months alone our Assortments has grown nearly 30% to more than 4.2 million products.
In merchandising and pricing we employ the same data driven approach as we do in the U.S. <unk>.
Several hundred out of <unk> 3300, engineers and data scientists working out for men. We are working jointly with Boston to develop proprietary global technology platform. So that go with them as we seek to balance our growth and profit restoration at the class level and encourage lower wholesale cost.
Meanwhile.
And then <unk> insights and see me, although my the creation of fueling the creation of numerous make cigarettes specific style focus unique product.
Red carpet merchandising.
<unk> earlier in the journey has been good and the U.S. These already represent close to 20% of your peak gross revenue.
In Europe too.
We're focused on introducing win win win solutions public customer the supplier and full wafer.
This includes the recent introduction of supplier services, which enable our suppliers to success on the platform.
For instance, just this summer we launched video solutions, such as sponsored listings and overtime. This should result in new marching to create this profit streams Felicia.
Perhaps furthest along our old castle, great ways for the Liberty metric and international supply chain logistics offerings.
These are designed individually and together to minimize time and cost and getting the product from the fixed or it's a customer or put another way to maximize what we called cost efficient preferred daughters.
You will recall this concept and the various initiatives behind that is what Thomas Matzoh wafer COO described in detail on the Q1 call back in May.
Let me give you a sense of how far along we are building out the logistics reach with two statistics.
Twentytwenty, thus far but it was direct container evolved into one of our casegoods warehouses in Europe, it's been shipped from Asia by wafer.
We are currently operating two fulfillment centers, we try to get penetration in Europe already on par with yours.
In the UK, we opened the 1.1 billion square foot facility level, but about a year ago.
It is actually the largest warehouse in the UK things to 60 foot ceilings.
We currently operate smaller scale about Hudson, Germany and 2021.
Moving to upgrade to a larger 1 million square foot fulfillment center.
To accommodate our continued growth.
Given the great. The population density and both my Kids you already took deliberate toward customers quickly from our existing footprint. So incremental square footage is and will continue to be motivated primarily by capacity constrained at.
And overtime market expansion.
I think achieved sufficient scale in the UK in 2019, we began operating in middle mile last mile delivery network out W did.
Because you need to optimize its something to bring the largest home products to our customers.
Total you're not employ about 1400 from plan at least in Europe enroll spanning from customer service to logistics.
Over the course of the last 12 months, we have made significant structural gains when it comes to profitability in Europe, though your ability to surrender submitted to somehow muddied by cobot related Tailwinds at 2020.
And because Europe is only a portion of our international segment.
So I'll refrain that discussion.
Defeat addressing a related question you might naturally have.
That is why.
Whether there are any structural differences between Europe and the us.
It would ultimately translate into a materially different financial profile.
The quick answer to that is no.
In fact, if you block Europe's progress relative to the U.S. from a variety of dimension from revenue ramp to supply or somebody else.
Advertising M P trends.
Hi, indexed lines look very similar which gives us additional confidence in our progress.
Oh unit economics are already attractive and should continue to improve and she's kit.
There are for sure some new ones to each market, but it's too much oh gross much in drugs remain the same as those new rich described earlier for the overall company.
Our marketing strategy, which is quantitative and pubic driven closely mirrors, what you're familiar with the U.S.
In Europe because of our earlier life stage, we have been lower pace of repeat than we do in the U.S., which translates into higher advertising cost as a percentage of net revenue.
Still weve already seen hundreds of basis points improvement here over time.
And as I, just mentioned a custom record gross and repeat revenue maintenance costs closely tracking our experience in the U.S.
Over the last several years, we have invested aggressively in our people and processes all of which should translate into additional leverage.
So European business skills from here.
We now have roughly 1000 Baltic simply the majority of former site in Berlin, and only roughly Humberto flick sit in the UK to tailor offering to the local customer. Thanks.
Thanks to our team's hard work ambition is truly established a.
A pan European infrastructure and position for Linzess, an equally strong pent up to close.
Simply said the flywheel is from it turning in both the UK and Germany, and there's huge opportunity ahead in both of these markets.
To be sure there will come a time when it will be also appropriate for us to pursue new frontiers in Europe.
Good confidence did wafers value proposition will strongly recommend that you know about country markets.
And.
There are also white spaces within home for us to consider all the time, such as certain additional classes or b to B, where you already have significant expertise and scale in the U.S.
What you ultimately choose to do next and when to do it we'd be rigorous analytical and secrets.
Importantly.
Thanks to the infrastructure and processes, we've already put in place in Europe.
Expect the operational and financial lift from any such move.
Be much smaller than the investment that was initially required for us to get there you can't revenue right.
With that I.
I'm going to turn it over to Mike.
Thank you Martin and good morning, everyone.
As usual I will first cover the financial details of the third quarter to compliment what your and has already said.
And then we'll turn to our Q4 outlook.
As you saw in our press release and IR presentation. Our Q3 total net revenue grew approximately 67%.
Our $1.5 billion year over year.
Growth rates were similar across the U.S. and international segments.
Reflecting somewhat faster normalization post the initial coated shock in our international markets as compared to the U.S.
Excluding the boost from way day, which occurred in Q3 this year, but not in the year ago period, we saw net revenue growth rates sequentially moderate towards the back half of the quarter.
Even so the absolute growth rates remained very robust and well above pre covance levels.
This moderation ex way day was consistent with our expectations and makes sense as customers strive to return to some kind of new normal.
Way they ended up benefitting Q3, net revenue slightly more than we had estimated thanks to some of the things we're doing to mitigate shipping congestion.
The more than half of the net revenue will still fall in Q4.
This is to say that the gap between gross and net revenue growth rates, we mentioned last quarter persisted in Q3.
It was a magnitude did narrow.
We do not expect it to fully close in Q4 as.
As delivery speeds will still likely prove slower than usual through the holidays.
Because you're just discussed many of the capabilities, we track earlier I'll now jumped to gross margin.
As I move down the P. and L.. Please note that I'll be referencing the remaining financials on a non-GAAP basis, which includes depreciation and amortization, but excluding stock based compensation.
Gross margin came in at 30% showing about 650 basis points of leverage year over year, but.
What about 70 basis points lower than Q2.
The sequential move reflects less volumes throughput through our logistics network relative to last quarter.
No there are still significant efficiencies accruing to us as volume remains robust.
More importantly, you run your expansion is also supported by internal gains made through all of our other initiatives like merchandising and margin accretive supplier services.
We will speak more about this in a bit but it's fair to say that we expect gross margin to settle out substantially higher than where we entered pre cove. It regardless of the net revenue growth rate.
The customer service and merchant fee line item normalized sequentially too and came in at 3.5% of net revenue.
This reflected more appropriate staffing within the customer service organization to calibrate against elevated order levels and therefore increased call volume.
Moving on advertising, we saw a 325 basis points of leverage year over year.
And another 70 basis points of leverage sequentially.
No media costs increased relative to Q2.
They are still favorable year over year and online traffic remains elevated.
This combination helped us run our various marketing channels at good scale well of course sticking to our efficiency goals.
We also saw a greater share of repeat orders this period and these run at a lower advertising cost as a percentage of net revenue.
To be clear, though we're pleased with the exceptional results, we wouldn't extrapolate Q3 as being indicative of a new run rate for advertising as a percent of revenue given some of the still existing irregularities in the market.
Consistent with what we said last quarter, we believe that a very low double digit 10% to 11% type range for this line is a more prudent assumption going forward.
Our selling operations technology, DNA or Opex expenses came in at $373 million and in line with our expectations.
Recall the compensation represents a significant portion of this line item in our Opex head count will be down for the year.
Because as many of you have asked about our head count plans for 2021.
Just offer that we remain disciplined and expect net hiring in opex to grow somewhat but remain at a relatively low level.
As always we will flex variable hiring commensurate with growth, but these employees compensation runs elsewhere through the piano.
Namely through Cogs and customer service.
To wrap up on Q3, adjusted EBITDA for the quarter was $371 million or 9.7% of net revenue.
In the U.S. adjusted EBITDA margin equaled 11.5%.
Well the international segment posted modestly negative adjusted EBITDA at negative $6 million.
As we've said before and as Martin just described we fare is at an earlier stage international and therefore, we are comfortable with the different margin profiles across our segments for now.
And see no reason why they could not be similarly positive over the long term.
In General we are pleased to report a second consecutive quarter of positive adjusted EBITDA performance for the company in Q3.
And to have moved into positive territory on a year to date basis.
We ended Q3 with $2.6 billion of cash and highly liquid investments on our balance sheet and free cash flow for the quarter was $255 million.
Well, there's two represents the second consecutive quarter of positive free cash flow I'd like to remind you that working capital swings will affect our free cash flow results quarter to quarter.
We operate with a negative cash conversion cycle, which.
Which is on the whole a significant advantage however.
However, this also means that the sequential change in our revenue and order growth can cause swings in our cash flow generation period to period.
Now turning to the Q4 outlook.
Recognizing that we remain in a highly fluid environment, it's too early to provide official guidance from top to bottom line.
Instead, I will continue to offer transparency on gross revenue growth, thus far into the quarter with some additional qualitative thoughts about what's to come.
I will also share some perspective on the progression of the various expense lines in the piano.
Quarter to date, our gross revenue growth is trending at roughly 50% year over year.
As I mentioned earlier, we did see moderation in growth in the latter half of Q3, excluding way Doug.
We still expect strong growth for the whole of Q4, and obviously well above pre corporate levels.
So were optimistic that holiday demand for the category.
Healthy and expect that many will prefer to shop online.
We're still tremendous unknowns state.
Statement, which is probably more poignant than usual when made on election day.
We are a mass oriented business, where the customer has to show up every day.
Between ongoing economic and individual uncertainty and a serious health crisis still underway there.
There is plenty of room for volatility and distraction.
And we need to appropriately calibrated in the way, we plan and model and we would urge you to do the same.
One side note before we move onto the rest of the personnel.
Because our plans this year call for an extended period of holiday programming and less concentration on cyber five specifically, we will not be publishing our typical post cyber five press release in Q4.
Comparability issues would simply make it meaningless.
Moving onto gross margins, even as volume growth normalizes from Q2 peaks, we're continuing to unlock structural gains along several key dimensions.
These include logistics efficiencies pricing.
Pricing leverage on the back of merchandising and house and flagship brand investments Pas.
Positive mix at supplier services grow and scale benefits across the entire wholesale and supply chain cost structure.
After multiple years of investments behind these initiatives 2019 marked a turning point as we started to see associated returns start to more meaningfully flow through.
And this is continuing through 2020.
As a result for Q4, we would point you to a gross margin range somewhere between 26 and 28%.
When you think about the other piano line items. Please refer back to some of my earlier remarks and consider the following.
Customer service and merchant fees should continue to move towards the 4% of net revenue that we typically target for this expense item.
Advertising as a percentage of net revenue should normalize further from Q2 and Q3 levels.
We continue to view, 10% to 11% as a more appropriate range to target here.
And finally, our Esso TG and $8 excluding stock based compensation.
Are estimated to be approximately $400 million in Q4.
Which is down modestly year over year, reflecting our hiring trajectory this year.
To help you with a few more housekeeping items for you just assume equity based compensation and related tax expenses of approximately $86 million to $88 million and depreciation and amortization of approximately $73 million to $78 million.
We expect basic weighted average shares outstanding.
Equal approximately 99 million.
Our diluted weighted average shares outstanding will ultimately be driven by the net income result in Q4.
You will recall that we discussed the accounting mechanics of this in detail when we reported last quarter.
Finally, we expect capex in a $75 million to $85 million range subject your expected timing.
These various moving parts should produce another quarter of strong and profitable growth to round out 2020.
As I wrap up I want to acknowledge that we fear has been fortunate to be well positioned thus far during this extraordinary and at times difficult year.
But it is not by accident a business can add literally billions of dollars in revenue over a short period.
And can do this relatively smoothly, while navigating enormous complexity.
Thanks to our long term oriented philosophy weaker has been built to scale well remaining ambitious and agile.
We saw the benefits of this approach in 2020 and this flexibility will prove crucial as there are still many uncertainties ahead over the coming months and quarters.
We still high potential for disruption and opportunity.
We are staying prudent as we plan for 2021.
Our prepared to adjust as necessary.
That said the long term orientation that got us here remains firmly intact.
We are laser focused on the huge home category Tam.
Reinforcing our winning platform for both customers and suppliers.
And on effectively balancing growth profitability and high ROI investments for many years to come.
Now I will turn the call back to the average for some closing remarks before we take your questions.
Thanks, Michael I, just want to express a quick but very sincere. Thank you to our nearly 17000 employees.
Whether on the front lines are working from home, we are prioritizing our customers and our suppliers in ways that will drive value well beyond the cobot period. We're.
We're demonstrating resilience in the midst of difficult circumstances and together, we're looking forward to making this upcoming holiday season, a strong success as the home becomes even more important to get just right.
Michael Martin and Steve and I will now turn to your questions. We'll have a hard stop at nine am. So that you can all go vote, if you haven't already.
Thank you.
At this time, if anybody would like to ask a question. Please press star one on your telephone keypad again that would be star one on your telephone keypad. Your fresh question goes to Peter Keith from Piper Sandler Your line is open.
Hi, Thank you good morning, congrats everyone for the continued success.
And Michael Thanks for the early peak on head Count for 2021, we do get questions on is 2020 ones can be an investment year and so maybe I'll focus specifically on your supply chain logistics network.
How do you feel about the current capacity within the network or given the build out that's occurred and in recent years and they've done some re racking to add space, but with the 6% sales growth year to date are you starting to reach full capacity, where you're gonna have to jump start to build out as we look out to 2021, either domestic or international.
Peter This nerd Josh Thanks for your question, let me jump in and.
Answer part and then Mike.
As well.
In terms of how you should think about 2021 forward on logistics I think the way to think about it is the 18 million square feet of logistics. We had built has still a tremendous amount of capacity, we can add and some of that as you mentioned is adding additional racking, which we've been doing some of it is what we've been able to do with sortation and methods to increase.
Throughput through the buildings, but as a result, we still have capacity that we cannot.
We can ramp to curb craxi sometime to come.
The fulfillment centers the way to think about them is they typically have a lead time, that's kind of in that you know round about call. It two to three year timeframe between doing the deal getting the permitting done building the building getting it up and running and so on you know that the relatively long lead times because of the capacity we have we don't foresee having any.
Constraints, despite what we expect to be a a tremendous amount of growth on the volumes through them over the next couple of years and so right now the only things we have in the plans for the next couple of years you have a building opening in Germany next year and then there is one potential additional building that would open in the next two year timeframe.
And then really what we're working on now with the buildings that would come online and sort of years 345 years from now and at that point, we do envision needing more buildings, but it would really be for capacity reasons due to aggressive scaling, but we think that you would kind of near term next couple of years worth of a scaling we actually can do with the buildings, we already had due to the large.
Weve already previously made.
Michael do you want to add any color on that.
No I guess, the only thing I would add Peter we talked about this over the last couple of quarters is we just feel like were in a really strong position at this point to both be making continued investments we need to make to grow the business for the long term and delivering.
You know really good positive financial results and so I think the balance between those should continue and we feel really good about that going forward.
Okay, great maybe even on a separate topic I'm going to also just ask about the competitive backdrop.
How do you feel about the competitive nature of the environment right now and then on a related note. There are rumors out there that your biggest U.S. competitor is a diminishing the home furnishings inventory. That's ODC network are you seeing more suppliers reach out to you or to take advantage of the Castlegate network.
So that's the part of the Clintons nerves, what I would say come to pass a one.
We've seen more and more suppliers adopting castlegate and as we've added capability functionality, we have easing induction operations, what we talked about our ocean freight forwarding business. These things make it easier and easier for suppliers to access castlegate in a cost effective manner, and there's clear benefits to being in Cascade.
Cost around delivery speed and how that drives conversion. So we are seeing suppliers adopt castlegate more and more in terms of competitors.
Just quite we have quite a few competitors and obviously the largest you know are the ones you know Amazon Wal Mart target home depot Lowe's, depending on the category, it's going to be a subset of those folks who are our biggest competitors, but then when you get into all the some categories. We're in there's literally dozens and dozens of competitors and so it's a really fragmented market and so what we don't see small aim we're seeing.
The competitive fields, they be very similar to what we've seen in the past and D. no. One competitor actually has a particular ability to impact our business either on the customer side or on the supplier side. So we can mcafee acute swings based on what I've given competitor would do.
And so it's rather just can't sustain momentum were seeing over time as we launch more and more self service functionality on our extra net which we call partner home as we make things easier for suppliers to access a for example, castlegate move to a standard rate card in North America earlier, this year and what that did is it made it easier for suppliers instead of having to negotiate the castlegate.
Deal in contract to make it easier and is quite grain the rate card easier for them to adopt it. So there's just things like that but we continue to do that allow suppliers to adopt our programs and easier and easier way.
Oh, no see how Michael if you have anything.
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No I think he covered that.
Great. Thanks, so much guys. Good luck with the holiday season.
Thanks, Matt.
Your next question will come from Steven Forbes from Guggenheim Securities. Your line is open.
Good morning, Eric.
I was hoping you could expand on your comments around demand moving online at an accelerated path right you sort of appreciating the difficulty around determining overall end demand grew up this year, but I wonder if you could provide some thoughts on how you think cogut has impacted wayfairs online sales capture rate this year compared to that 35%.
38% run rate the company has experienced over the past couple of years at any any thoughts on the sustainability of that.
Of a new right elevated capture rate going forward.
Yeah, great. Thanks for the question.
He got so one I would say I'm very basic fundamental level, one things Kobin has done it's it's certainly driven ecommerce adoption broadly.
And then you're kind of seeing that not just at home, but you see in categories like grocery et cetera, I think that was a little bit of a one way door sales customers come on line if they never bought online in categories like home. For example, we're not going to go back to not buying at all in home in a future state and so you kind of see that a little bit.
Numbers, you know last quarter, you new customer order growth was 109%, that's the only quarter, where news I'd repeat repeat and so if you think about the 100 mesh well that's just a crazy amount of new customer growth to get those customers within payback and simply that they are kind of coming online for the first time. This quarter. It was like 48.7% dropped back some but there is.
Like a big bolus millions of new customers, we've now gotten.
And as they go through repeating what happens is the shared wallet, we get from them. It keeps ticking up each year and so if you look at this quarter, it's gone back to a more normal pattern, where repeat beach Union repeat this quarter, we see order growth was up 84.5%. It's if you think about kind of how that sheer transfer works, it's that we market heavily to get.
The customer to check us out, but once they made an order really that really experience what we offer from a selection from product discovery from our customer service from a delivery and logistics standpoint, and it's that experience that causes them to come back and so I think what we're going to see is we're gonna see parity you know.
To your point about share take we're going to continue to take share quite nicely overtime, because what we're doing is we're simply onboarding more and more customers to an experience and then this period. We just had an opportunity to onboard you know far more and swept the 29 million active customers and you can kind of think of them as.
You can't take it for granted it's not an annuity that's guaranteed but effectively the way. It works. If you look at kind of how the cohorts built its a bit of an annuity we keep making the experience better better. These cohorts then just keep stacking on each other and each year and they can actually spend a little more than they spent the previous year. They can get the $505 were getting proactive customer still a small amount in terms of share of wallet relative to the future.
Sales in dollars, you're spending per year in home.
And so we would expect this to continue to compound. If you also think that all the things. We've invested into these are things that are bespoke for home so whether its around what we've done with threed models and imagery, what we've done to access exclusive selection or what we're doing on delivery and logistics remember every dollar in logistics networks not the same we're focusing on these home goods are big and bulky item.
They are prone to damage generally these experiences are hassle sales were making them easy and convenient.
Well, we don't customer service. These are all we're building mountain a very bespoke wait for home and that is the experience when a customer has with us and they are not commodity items. It's not like we had Bonnie paper towels entered I'd definitely say jump out at you buy it from us and the other guys out of stock or maybe all paper towels or whatever you can buy him anyway that same thing homes different and so I think the.
Managers were building is its long it does manifest in the numbers you're talking about.
And then as a follow up maybe for Martin as we look at the International segment performance in and think about the investment ramp over the past couple of years and the needs going forward any any comment on how we should think about the timeline behind that margin unlock should it be more accelerated than what we.
We saw here in the U.S. or how should we expected to be flattish for a time period any color would be appreciated.
Thank you.
So.
We believe that we have reached kind of critical mass with our offering in Europe.
As I elaborated before you know we have a few thousand suppliers across Europe, we have a few million products that we offer to a customer should have a pan European supply chain.
And we have digested. These investment so we think that we have quite some some runway in terms of scaling on that in terms of the marching band.
Happy with our unit economics have improved modestly every year in line with our internal projections and more or less tricking. The U.S. time shifted by few years very closely.
Thank you.
Your next question will come from Brian Nagel from Oppenheimer. Your line is open.
Hi, good morning.
Great quarter.
Thanks, Brian.
First question I have not.
I know you mirrors are likely both discuss gross margin clearly there's been a step function higher now given that.
The guidance you gave in fourth quarter is likely to persist I just wanted me a little clearer what.
What's the way changed here from from this is several quarters ago wouldn't work.
Gross margin is running significantly lower and then a follow up question.
Just more of a point of clarity with regard to the.
Run rate sales run rate you talked about here so far in the fourth quarter.
Wait it late in the third quarter. So its way the spillover of way they contribute to that 50%. It was an hour and all of that thank you.
Sure.
Let me.
Sure I'll answer the second part first they give way day as Q, a Q3 event, but from an accounting standpoint, some of that revenue doesn't get to live until Q4. So that revenue shows up in Q4, but from a demand standpoint thinking that as a Q3 event I think for Q4 revenue and 50% quarter to date you know, we're just trying to.
Be transparent and where demand has been.
Obviously, the holiday season, it's best quarters back weighted because you.
Obviously, the holiday period, as an acute period and despite the fact that demand has remained high what.
What we've seen with way day.
Is that there's still a lot of volume even above this kind of general peak demand, we've been saying, we would expect holiday to be significant but it's hard to know exactly how significant because the concept is that people are staying at home if they're likely to stay at home a lot through the winter and into next year, if they're entertaining just their own close family, they're not travel.
Like all these things bode well for investment into the home further investment into the home and so we certainly would expect that and Weve seen demand remember, it's not it's not acumen any particular class. Good it's been very broad based and so that's just people improving their home and proven experience in their home and then when you think about holiday. It was just a lot of categories that fit in there whether it's seasonal decor.
Whether it's you know core furniture or whether it's just buying things that like to entertain at home better way, it's a ping pong table and it's getting ready for the outdoor season, which you know in the middle which we wouldn't think about but to be honest. The outdoor season really picks up starting in March depending on where in the country you are so.
There's a lot we think.
That could happen there.
On gross margin just to go back to the first question you had.
This way just I think Theres remember, we've outlined a roadmap for a thousand basis points of gross margin.
And we sort of outlined that going back multiple years ago.
We also said that that's a many year road map and some of it will show up in gross margin and some of that will choose to get back to the customer in benefits for them. So you won't see it in gross margin, but it'll just be another yet another driver that drives up repeat and so that's just another benefit for customers and we still have the bulk of that road map I'd say, you know or <unk>.
What we have so much of it ahead of its basically you know it's tricky to say, where we are in that we're not because frankly over time I think we'll keep unlocking additional things that we will add to that roadmap, which is just make that well not even more beneficial.
That said, we're also in a period of time, where Koubei has created some acute die.
Dynamics in the business and one of them is this increase in volume has created some efficiency gains that show up in gross margin that we wouldn't expect to persist if demand dropped back to some sort of a more normalized level, which it could happen right and so what Mike was trying to do with the guidance I think it's tease apart. These two things for you.
I'll give you an expectation around gross margin that reflects the fact that we are unlocking gain but also points to the fact that some of the gains that are pulled in related will abate, but I think the expectation you can have is that there's still a lot of opportunity you know.
In front of it and so let.
Let me just as Michael has anything here.
No I think you covered it the only thing I'd just to clarify is that when we think 50% quarter to date. That's gross revenue so that would not for effectively bookings that would not include way day weighted would've been in the last quarter. Some way day revenue that revenue will show up in Q4.
But we have that every quarter right. There is always some revenue from the previous quarter showing up is delivered in the following quarter.
And so I think that that's that's sort of a normal course.
Thank you very much.
Thanks, Brian.
Your next question will come from John Blackledge from Cowen Your line is open.
Oh, great. Thanks, two questions, So niraj and Michael you, both dust indicated a more drawn out our marketing message in Fourq, you, so kind of expecting perhaps a longer holiday season are you doing anything different during the holidays are either on the promotional side and or youre kind of focusing on energy category.
Please and then secondly for AD expense as we look into next year, just given the influx of new customers. This year should there be natural kind of leverage.
Understand big opportunity at to add more customers, but just given the influx of <unk> in the repeat is cheaper on the AD side, how should we kind of think about that.
Thank you.
Yes, so in terms of.
The holidays with that what I'd just say there is.
You know what are we doing differently when we introduced our black Friday.
Friday deals.
Earlier, you know than.
Than we did in past years, but it's really getting a preview of black Friday. If you go back a couple of weeks ago.
We're talking.
I think that just thinking the messaging for the whole season being drawn out and it's not just us we're seeing all the major retailers do it too.
Just think from a consumer standpoint, they're just gonna be introduced to the holiday season at an earlier date, and we think we're going to be able to.
Kind of expand the holiday season.
Now you know how how big is the holiday season still a question to be seen were.
I actually personally think it could be quite big but it's a little hard to guess at that.
So that's kind of a tricky now let.
Let me go to your second question on AD spend did.
If you look at our AD spend there's two things that are in it one is that repeat keeps growing and taking share as a percentage of the total and that basically gives us leverage because the repeat volume is very inexpensive you can actually see repeat as a share of total orders hit an all time high this past quarter, just just under 72%.
So the 1.9% I know some of you last quarter. When you took off and kind of get down from 69.8 to 67.4 was like all cheese repeat didn't grow as fast as we did last quarter grew grew a 105%. It's just that you took off grew 109% well this quarter, you're seeing repeat grew 84.5% again, it's up to 72%. So that gives you.
Leverage.
But we're constantly trying to get new customers were willing to expand you know we went on to take payback model, but that's a few hundred days. So you're basically looking to that your payback means when you can unlock tons of new customers you actually you're spending that much money in advertising that that's an effect of pulling up the number and the newer businesses of ours like Germany in Paris.
Gold are earlier in their life stage. So they have smaller repeat base. They would that would drive that number up so when you get in the total is kind of a mix effect of the two and those are really fundamentally what drives it because I think the media costs and media markets really normalized demand. There. So I don't think that there's inexpensive inventory out there or something like that that's that can affect it actually.
Think it's more the back kind of the economics, we have in our business that allow us to go access new customers and keep them and that's really the described revenue.
I don't know Michael if you have anything.
No I I think you covered it.
Thank you.
Your next question will come from from Oliver Wintermantel from Evercore. Your line is open.
Hi, Thanks, guys.
I had a question regarding the buybacks this quarter was that they just an anomaly to offset some some of the options or.
Should we expect to get you know some of buybacks in the future just from a capital structure.
Well the return so what's your what your guidance is there for the next couple of quarters.
Yeah. Thanks colleagues its Michael I think on buybacks. This quarter. It was really sort of cleaning up the remaining 2022 notes.
And sort of offsetting the dilution from the remaining notes that did not convert as part of the new convert deal we did in August.
And then on a going forward basis, we've obviously left ourselves some room to sort of do buybacks on a go forward basis I think what you should expect this will continue to be [noise].
Smart and thoughtful and pragmatic as we look out at our future convert maturity.
And make sure as you've heard me say multiple times before we want to sort of minimize the dilution impact from that borrowing.
So I think we'll be thoughtful about that going forward.
Got it thanks very much.
Brings us to the end of todays <unk> session I turn the call back over to our presenters for closing remarks.
Well. Thanks, Thanks, everybody for calling in we are you know we certainly appreciate your time, a hot all the great holiday season.
Thank you everyone that spoken for today's conference call you may now disconnect.
Okay.
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