Q4 2020 Wayfair Inc Earnings Call
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Ladies and gentlemen.
Thank you for joining today's conference call is scheduled to begin momentarily until that time of your lines will again be placed on music hold thank you for your patience.
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Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the way Fair fourth quarter 2020 earnings release and conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need the press star one on the.
The telephone keypad to withdraw question press the pound key us era.
Reminder, today's conference call is being recorded for operator assistance. Please press Star Zero, It's now my pleasure to hand the conference over.
The <unk> head of Investor Relations and special projects Jane Gelfand.
Good morning, and thank you for joining us.
Today, We will review our fourth quarter 2020 of result, with me our nearest Shah cofounder, Chief Executive Officer, and co Chairman, even call nine cofounder and co chairman and Michael Fleisher, Chief Financial Officer, We will all the available for Q&A following today's prepared remarks.
Mark.
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 first quarter of 2021.
We cannot guarantee that any forward looking statements will be accurate, although we believe we have been reasonable in our expectations and assumptions.
Our 10-K for 2020, and our subsequent SEC filings identify certain factors that could cause the company's 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 any of these statements.
Or is the result of any new information future events or otherwise.
Also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance.
These 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 the webcast will be available for replay on our IR website I would now like to turn the call over to Nir edge.
Thanks, Jane and good morning, everyone.
We are pleased to report the Q4 marked another solid quarter of growth profitability and free cash flow and that 2021 is off to a strong start.
As the pandemic drags on online shopping behavior is becoming increasingly entrenched and consumer demand for the home category remains elevated.
Wayfarers of capitalizing on these tailwind by delivering a truly differentiated experience for both customers and suppliers.
And the process, we are cementing our position as the leading platform in the space and reinforcing our brand to tens of millions of customers.
Just as we do every year with the Q4 earnings we published our annual letter to shareholders today, and we hope you find the time to read it.
These letters of afford us the opportunity to look back and think forward in the longer term way.
In this environment. It is so tempting to fixate on the latest news headline web traffic update credit card data refresh or the year ago quarterly comp.
But there are bigger things happening at wafer.
Perhaps the pandemic has accentuated some of them, but the opportunity and what we're building is so much greater than any single period. It.
It seems more important than ever to think of years, rather than quarters and that is exactly what we do in the letter and how I want to frame my remarks for you today.
In 2020 of revenue grew 55% year over year to $14 billion.
To be sure we are fortunate to have been well positioned during COVID-19.
But the growth is not totally unprecedented.
Since our IPO in 2014 and through 2019 pre Covid, we experienced a nearly 50% revenue CAGR.
We believe the runway for future growth is just as impressive.
Let us first put the marketing context.
Across the BDC and beat of B, the North American and European home markets are about $840 billion inside of today.
They're also growing by 2030, we estimate they will be well over one trillion dollars.
Like virtually all categories shopping for the home as quickly and structurally moving online.
We believe online penetration for USB to see us likely hovering just north of 20% of these days with B to B and European BDC likely lag.
E Commerce for our category should easily come to represent more than 50% of all shopping this means of growth in the online channel should average in the double digits for many years to come.
This is exciting because we are and should continue to take outsized share us category dollars move on line.
Wafers platform model is truly unique.
We are neither of retailer nor on marketplace.
Ted will take the positives of both while minimizing the drawbacks associated with each.
The clear advantage traditional retailers enjoy is holding the keys to the customer relationship.
If they deliver an exceptional experience they build customer loyalty and in the process of strong brand.
We embraced much of this first party model or one P M and our results show it.
More than 31 million active customers today and are welcoming more new customers to wafer at a rapid clip.
The repeat purchases represent more than 70 per cent of our business and customers are highly engaged with our platform even in between the orders.
In the us wafer us very clearly a household name where.
We're the number one place consumers thing to shop for their home online.
Well on our way to the same status in Europe. Following a similar trajectory in timeline as we did in the us.
Today, the wafer platform connects our tens of millions of customers with more than 16000 of suppliers.
Given the nature of the category most of the suppliers are small and unbranded no supplier represents more than two per cent of revenue on the way fair each supplier wants to control their own destiny.
And so we embraced the best aspects of an enhanced marketplace model to give them as much transparency as possible.
We also developed the tools of our suppliers need to succeed value added solutions like end to end logistics media and merchandising.
We enhanced the third party or three P approach with higher touch supplier partnerships that arm them with data insight and assistance to help them make the best decisions to grow their business with the wafer.
Putting together the best elements of retailers and marketplaces allows us to unlock unlimited selection for our customers and an inventory light way and deliver a topnotch reliable wafer of branded shopping experience to them in every instance, the.
This accelerates supplier participation on the platform and encourages them to us the applicable tools and services that we're continually creating to support them in growing their business on our platform.
It's a virtuous cycle that enables the strong share capture we have experienced since our start in 2002 and also expect to see going forward.
None of what I, just said is new.
So it is perhaps a clearer articulation of the ecosystem we have built.
What is evolving however is how effectively we can compete across the four verticals two continents in the hundreds and hundreds of classes of Homegoods on which we focus.
We are no longer small in any of these you know the U S D to C business, well, but our north American professional or <unk> business is approaching $1 5 billion of net revenue in.
In the U K and Germany combined are north of $1 billion in net revenue.
With the benefit of the scale, we are creating an ever improving shopping experience for each type of customer, while unlocking cost efficiencies the benefit customers suppliers and wafer.
The market is vast and underserved is going through a period of structural change and consolidation into fewer hands as it moves online.
All of US accelerated some of this and we believe these forces will not reverse wafer already has a strong foundation in each area that is critical to delivering a great customer experience and we of the drive resources and ingenuity to reinforce and compound our share gains.
In 2020, we proved out our path to profitability and we are now firmly demonstrated our ability to grow strongly and profitably in.
In Q4, adjusted EBITDA totaled $263 million and the 7% margin.
In 2020 of the hole, we generated about $950 million and adjusted EBITDA.
So the magnitude of margins will move some quarter to quarter, we are confident that our strong profitability will continue.
And we will expand over time.
Many of you have asked whether it makes sense to refresh our long term financial targets in light of the fact that we surpassed some of the original ones first established at our IPO.
Frankly, we think it's much more interesting to think about the compounding potential of profitable growth, while paying attention to the initiatives in place that should over time and the margins of.
Each of the lines of the P&L interacts with the other so we've tried to take a different tact and our latest investor presentation to give you a sense of the long term direction of travel from our original targets six years ago.
Well you will see upon closer review is that we have confidence wafers adjusted EBITDA margin will grow significantly over time versus our original targets.
Because we operate with a truly long term view, we're not putting a time stamp on this is there's always volatility from period to period.
Still we see significant scope to drive gross margin and customer lifetime value higher overtime the.
The drivers remain the same.
One of the benefits of scale and unlocking better wholesale costs.
Two logistics efficiencies.
Three the growth of value added supplier services.
And for merchandising and associated pricing gains will.
Both of these gains up with exceptional customer service, where we will continue to invest in line with sales growth.
Advertising remains the ROI and payback driven and as a function of variable contribution margin.
The variable contribution margins are now higher than our original model contemplated and should trend higher still which means that we are comfortable sort of advertising remain near current levels as a percentage of net revenue in the near term.
Longer term, we expect to extract further efficiencies and leverage on the advertising line.
This leaves us with S O T G&A.
Our opex, which we expect to naturally lever over time as technology and productivity gains allow us to temper, our hiring of opex people relative to the rate of revenue growth.
These are just mechanics, the outcome of our platform positioning our strategy and the sharp execution, we expect of ourselves, we will remain ambitious and aggressive while investing with the long term view and.
And we believe we will do so while growing increasingly profitable over time.
Put another way growth via happy customers the gets more growth.
Which then expands the profit margin.
I have deliberately taken the step back today to zoom out from the noise that surrounds the pandemic and its effects on weight there the.
2020 was of volatile year every year brings its own opportunities and challenges in 2021 will be no exception. We think 2021 will be solid but are focused on the much larger opportunity.
This is what I've laid out for you today and this is what the entire wafer organization is rightly focused on us.
We hope you agree.
I'll now pass it over to Steven to dive deeper.
Thanks, Neil and Hello, everyone. Since you are all close students of wave here in the industry I wanted to cover off on three topics that are likely top of mind as we closed out 2020 and look ahead.
These include our cohort performance the evolution of certain marketing channels and the law.
In terms of product availability as category demand remains elevated.
First we thought it was important to give you a sense of how the exceptional circumstances of 2020 affecting our customer cohorts.
We do not intend to offer ongoing updates. We did include the latest snapshot of our annual cohorts in this quarter's investor presentation.
Upon closer inspection, you will see very strong and increasing the engagement across the board.
Recall the denominator on these lines represent the total number of customers activating each year effectively the area under the line represents the lifetime value of each annual cohort capturing the respective customer spend on wafer since they began shopping on the site.
The flattening out of each curve and eventual upward smiled that we can see on these lines indicates the strong tale of repeat revenue and growing wallet share over time.
So the chart doesn't capture of this is important to note that the profit by of the space under each curve is also growing.
After the onset of the pandemic multiple cohorts inflicting meaningfully and now nearly 12 months, hence the appeared to be flattening out but at higher than previously achieved levels.
One of the most interesting insights here is the cohort lines also showcase the less active or even lapsed customers really engaged in 2020.
In the process of stay experienced the wafer platform the new.
We got another opportunity at reading whatever reason behind why they didn't take the platform. Initially are just plainly convincing them that shopping a line for the home does not have to call the tradeoffs.
As they reengage these customers discover the collective benefits of the investments and upgrades waster has made since the first interaction.
It should have had a rich positive and much improved experience.
In the process, we effectively reset those relationships and got another chance to establish trust and loyalty with the set of customers.
This is part of the reason why we are seeing several of the cohort settling out kind of higher levels on the chart.
How we reach out to and engage with customers new or repeat is constantly evolving and anticipating some of your questions I'd like to quickly discuss some developments in the digital marketing landscape as well as the physical retail.
You are likely aware of upcoming privacy related changes that stand to affect the way, we interact with apps and some forms of social media.
While the way we market to some of our customers may well have to changes. The result, there are many puts and takes in play here.
The end result is debt, we don't believe there will be a meaningful financial impact most.
Most importantly, our proprietary AD tech stack close customer relationships and strong brand appeal will allow us to adjust more quickly and more effectively than other digital marketers out there.
While none of the potentially impact the channels is the significant portion of our spend we are deploying our energy and skills to optimize within any new constraints on our ultimately focused on doing what's right for our customers.
Change is constant and over the last 20 years, we have seen many adjustments to the marketing landscape.
The hallmark of our proprietary technology and World class team is that we have always maneuvered into the changes and created opportunities from them.
Separately you may.
I have heard that we closed our natick, Massachusetts based store last month.
As a reminder, the knee. The experiment was opened for about 18 months. It was a very small format space that represented our first real retail test.
The liberally called me take an experiment.
As we were looking to testing to the right Omni channel strategy for wafer through iteration and all of wide based analysis, just like we do for all of our emerging marketing channels.
We believe debt home has a long future runway for online penetration, but also see value on our customers interacting with other brands and products through other channels.
What the format of our physical locations will look like however remains to be seen and will likely vary as we think about our different portfolio of brands and widespread geographic presence.
Maybe it was of great testing ground for what was on what wasn't resume with the wafer customer.
You should expect to see those learnings recycled in the future concepts.
Finally, I want to finish up with a quick update on product availability as you know the industry continues to operate with elevated out of stocks.
While we are not immune to the circumstances, we do have more means to mitigate pinpoints given the wafers inventory light platform model.
The good news is that availability of sequentially, improving having reached maximum out of stock levels in mid 2020.
Production has ramped and carrier networks are expanding capacity just as we have with our large parcel of dedicated wafer delivery network.
Still there are bottlenecks on the supply chain for instance, we are currently dealing with the seasonal pattern of China's shutting down production around the lunar new year.
Somewhat exacerbated by Covid.
There is also well documented pressure and lack of availability on ocean freight, which is amplifying the backlog of orders flowing through in the North America and Europe.
These are transient issues and at current levels of demand, we expect the industry to reach more normalized inventory levels by the summer of this year.
In the meantime, we are heavily leveraging our international supply chain for IFC.
Services to improve the bottleneck for our suppliers.
Through ISC, we're helping suppliers on the freight capacity at fair market prices. Thanks to our scale on close partnership with leading ocean cargo of companies.
So the situation is unfortunate because customers are having to remain patient when it comes to lead times on certain products. We do think this presents wafer with the unique opportunity to strengthen our partnership model and to drive greater adoption of our end to end logistics services.
I S T in cost of getting fulfillment.
We are already seeing this play out the new.
Number of participating suppliers and castle gate grew at 60% year over year in 2020, and we expect the significant growth to continue across all of our value added services.
I will stop there and when I'm on the call over to Michael.
Thank you, Steve and good morning, everyone, let's jump into the financial details of the fourth quarter and then we'll turn to some forward looking thoughts.
As you saw in our press release, and our new IR presentation Q4, total net revenue was $3 $7 billion.
This represented 45% growth and more than $1 $1 billion added year over year.
The quarter played out largely as we expected with.
With the incremental lift from cyber five and other holiday programming somewhat muted versus the typical year.
Given demand has been elevated for some time now and the holiday themed marketing was spread out over a longer than typical timeframe.
We saw strong gains across both reporting segments. The was slightly different dynamics net revenue in the U S grew 40% year over year.
We believe this reflects some normalization of customer behavior as we all adjust to the persistent pandemic backdrop.
Meanwhile, in our international segment, we saw a sequential acceleration in growth to the tune of nearly 400 basis points.
Leading to net revenue up 71% year over year.
Tighter COVID-19 restrictions put in place during the quarter in the U K in particular did contribute somewhat.
<unk>, Canada, and Germany momentum was also quite strong.
In Q4, with the strong customer acquisition and retention trends continued.
We surpassed $31 million LTM active customers, which grew 54% year over year.
New orders grew 31%, while repeat orders were up 56% year over year.
<unk> orders represented more than 72% of our total mix.
LTM orders per active customer continued to edge up sequentially and were up 5% year over year.
LTM revenue per active customer grew both year over year end of quarter over quarter to $453.
I'll now move down the P&L as I do so please note that I'll be referencing the remaining financials on a non-GAAP basis, which includes depreciation and amortization, but excludes stock based compensation and related taxes.
Q4, gross margin was 29, 1% showing about 620 basis points of year over year leverage.
This was about 90 basis points lower than in Q3.
The year over year expansion continues to be supported by multiple drivers, including merchandising gains strength and higher mix supplier services and efficiencies and logistics.
However, as we expected the magnitude of logistics related benefits with somewhat lower quarter over quarter.
In Q4 customer service and merchant fees, largely held steady relative to Q3 of three 6% of net revenue.
We do still expect to work our way back towards a more normalized approximate 4% of net revenue on this line.
Consistent with our expectations advertising came in at 10, 2% of net revenue or about 210 basis points lower year over year.
Our selling operations technology, and G&A or Opex expenses came in at $376 million, which was modestly below our forecast.
This is mostly due to the timing of net hiring and will reverse somewhat in the first half of 2021.
Also embedded in Opex were higher cloud related costs, which were offset by lower unutilized rent as volume in our network increased.
All in adjusted EBITDA for the quarter was $263 million or seven 2% of net revenue.
In the U S. Adjusted EBITDA was $275 million or nine 2% of revenue while the international segment posted slightly negative adjusted EBITDA at negative $12 2 million or negative one 8% of revenue.
We ended the year with $2 6 billion of cash and highly liquid investments on our balance sheet.
And free cash flow for the quarter was $128 million.
This is the third consecutive quarter of positive free cash flow generation.
As a reminder, Q1 is typically a larger cash outflow period for us given the timing of supplier payments post holiday.
So I would advise you to be aware of our seasonality and sequential flows as you model free cash flow quarter to quarter.
Turning now to our outlook.
We are not going to provide traditional detailed guidance instead, we will share review into the gross revenue momentum thus far into the quarter along with some qualitative color.
Quarter to date, our gross revenue growth is trending roughly in the mid 50% year over year.
Though as we look ahead to March we will almost certainly comp lower.
We will start to comp over a very complex moment, particularly the initial COVID-19 periods last year. When there was an incredible spike in demand from existing and many many new ways for our customers.
Obviously, we successfully fulfilled those customer needs and continue to do so and of created ongoing lasting brand relationships.
But how the back half of March and frankly, a good part of Q2 performs versus 2020 is very difficult to forecast.
We're clearly entering this period with a very strong tailwind and strong revenue performance both in terms of dollars sequentially and growth rate year over year.
We will obviously fill in more details for you as we go and in particular moving back together with you in 10 weeks with Q1, actuals and greater visibility in the April's actual performance.
Our P&L thoughts below revenue for this quarter largely mirror, what I said last quarter.
We expect gross margins in a 26% to 28% range.
We expect to return to 4% of net revenue for customer service and merchant fees.
Advertising as a percent of net revenue will move around depending on the opportunities we see in market in any given period.
But generally we think a 10% to 11% range is appropriate at this point as we continue to see strong ROI.
Finally, the largest driver behind S&P G&A dollars will be the pace of net hiring we undertake.
In 2020, we significantly slowed our opex hiring and let our newer team members mature in their roles.
We held steady despite the demand growth the Kmart way and so on productivity really accelerate despite being worked from home.
This coming year, we do expect Opex net hiring of pick back up somewhat.
Be it to what we think is a more measured and moderate pace.
By moderate we mean, a pace of scaling that should continue to translate to operating leverage over time.
To Orient you as to how we plan to start the year, we would expect Q1 opex to be modestly below $400 million.
All in we fully expect that the first quarter will mark our fourth consecutive quarter of positive adjusted EBITDA at a total company level.
To help with a few housekeeping items, please assume equity based compensation and related tax expense of approximately $89 million to $91 million.
And depreciation and amortization of approximately $75 million to $80 million we.
We expect Capex and a 68% to $78 million range subject to your expected timing.
Lastly, we expect basic weighted average shares outstanding to equal approximately $103 million.
Though our fully diluted weighted average shares outstanding will ultimately be driven by the net income result in Q1, and the result of applying the if converted method to our converts.
When the 10-K is filed later today, you'll notice that we used approximately $100 million during Q4 to repurchase some of our stock.
We will repurchase shares from time to time under our previously approved buyback authorization.
Though I would not model that is an ongoing activity as it will be opportunistic and episodic.
The longer term goal of reducing potential dilution from outstanding converts.
Turning briefly to the long term margin outlook that mirrored shared earlier.
Now believe we can clearly exceed our original 8% to 10% EBITDA margin target range as laid out at the time of Wayfarers IPO.
Back in 2014 is a brand new public company operating in investment mode, we needed to illustrate where we were headed through highly specific P&L line item targets.
Now that we've executed and delivered on many of those goals, we're providing you with a framework for how we view the next level of opportunity.
To be clear, we're not changing our guidance philosophy and as we have always done we will continue sharing ongoing updates around our various initiatives and the drivers of increased profitability over time.
As I wrap up I want to Echo some of what you were just started with us.
It's easy for all of us to get distracted by the ups and downs related to year ago comps, but the.
These will not tell the whole story, which is far more positive the.
The reality is that we are going through a remarkable period of customer acquisition and retention on.
On a similarly remarkable period of strengthening our supplier relationships and the tools and services with which we equipped them.
These dynamics will drive long lasting and compounding benefits to the wafer platform.
We're steady in our desire and ability to innovate ambitiously and scale quickly when the ROI proves compelling.
Were also stronger operationally and financially than we have ever been so we will remain prudent and realistic as we think and plan forward.
And the team we have no doubt that these attributes should translate to continued share gains and strong profitable growth in a very large and underserved market over many years to come.
Now we'll go back to <unk> for some closing remarks before we take your questions.
Thanks, Michael as we look ahead to the rest of 2021 I want to take this opportunity to thank our more than 16000 employees 2020 was the year that brought out the best across the way fair and we are incredibly proud of how our team stepped up for our customers our communities and for each other.
Now, Steve Michael and I will be happy to take your questions.
Thank you.
Thank you.
A reminder to ask a question you will need the press Star then one on your telephone keypad to withdraw your question press the pound key in order to allow as many callers as possible to ask a question management requests that you do limit yourself to one question plus one follow up question.
Please stand by while we compile the Q&A roster.
Our first question what kind of from the line of Peter Keith with Piper Sandler.
Yes.
Thanks Juan.
The details in the prepared remarks day.
Okay, operator, I think the last Peter.
Peter Please go ahead with your question.
The focus on four.
Maybe on the bad connection can you hear me okay.
You cut out Peter could you start over again.
Okay.
Yes, I'll try to pick the 29.
Of the percent level.
So are you seeing suppliers looking for into your share.
Bringing us type of thing.
And also the logistics center off of a group that you have out there.
I can try to be honest the question broke up some so let me state what I think the question was and the.
The answer is because I'm not I wasn't able to hear of St. Peters said, but I think what you were asking was around gross margin I think you referred to kind of the current level of gross margin around the 29% and I think you were asking about drivers and I think I heard you asking our suppliers leaning more into the advertising products, we have and are they.
More of the logistics offerings, we have.
And so the answer to that would be so we talked for multiple years now about the 1000 basis point runway, we have on gross margin and we referred to those four key levers for key buckets, where supplier services, absolutely one logistics efficiency absolutely one of the merchandising approaches were taking was one and then the benefits.
The scale of suppliers was one and what we've talked about us.
You go back to when we went public debt.
Didn't even have some of those things like the logistics network didn't even exist yet so where we are now as youre seeing that we've been unlocking some of these gains and they are in fact flowing into the gross margin and despite that there's a lot more to flow in over time and so that's why when you look at the new long term model slide we provide a directional indication that the gross margin.
Expansion into the future is still quite strong because of the opportunity is still in front of us and we're going to continue to unlock these gains.
But some of what's happened so far in terms of why are we at this 29% level on.
It certainly does have to do with logistics gains.
And yes suppliers are leaning into advertising, but I would point out that the supplier services, it's still very early stage and so the relative impact of its small and very small if you consider of competitive potential.
Thank you Andrew.
Our next question is going to come from the line of Kunal <unk> with Deutsche Bank.
Alright, thanks for taking the question.
I understand from from from the seller perspective.
In terms of what the options are when they are looking at selling and the what.
They were good said they have in the us.
Whether it has been on Amazon or Walmart or target the equivalent of them to the kind of upselling into <unk>.
Oh.
How do you compete for that.
And.
What kind of economic impact.
But of our economic model is do the competitors have.
When you come out.
<unk> versus everybody else.
Thank you.
Yes so.
We are of large network of suppliers right. So.
This is not dozens but.
The well in excess of 10 thousands of suppliers and.
A number of them have been doing is just the continued to build their business on our platform. Because again. These are suppliers on focus on the home categories, where we have the disproportionate volume and we're growing very quickly and were given the more and more tools that are bespoke for homes. So if you look at some of the logistics tools that we give them around the ocean freight or you look at some of what we're doing around integration.
For sortation and delivery or some of the merchandising tools, we're giving them.
Very much speaks to their products and their categories. So the economic model. They worked with us on US obviously, they sell to us at wholesale we sell at retail we at our margin in there.
But then we also do other things to impact the cost of goods at the items can hit sharp retail so they can benefit from volume and the logistics offerings that I referred to would be of Great example, and so while our suppliers, obviously do sell other folks whether it's regional furniture stores or it's a generalist ecommerce platform like an Amazon or whether it's the home improvement.
The home depot, lowes, or a walmart target or more specialty.
The reality is the.
Volume in the volume gains that can have in the wake and compound on our platform very attractive to them and that's why we're seeing suppliers continue to lean in during this period of time, where they have scarce supply we're seeing them focus on making sure that they have supply of available on the wafer.
Yes, I think the other thing I'd add on.
On this one is.
We of the executive team spent a lot of time of our supplier partners one of the things Thats been really clear in the sort of unique time when they have more limited inventory is how much they want to be on our platform largely because they recognize that the way our platform is built having the right reviews.
Having the right.
Customer ratings, having the right merchandising and having the product in the stock continuously is a very important part of how they manage the wafer platform of long term to the rate of success and.
And so I think you've seen a lot of our suppliers if anything double down during this time on what you share because they are recognizing the long term potential of what it is and how our customers are shopping and the.
Therefore, it's really important for them to be sort of be there and be in stock and do that on a continuous basis.
Great and as a quick follow up given given the increase of the sharp increase in price shipping prices and the <unk>.
The next set we are seeing the how.
Does that change, especially given all your China. The U S shipping initiatives and what have you how does that kind of compound on yard.
The competitive advantage that you have versus everybody else.
Yep that's the.
That's a great question actually.
So we've referred to our ISC offering which is effectively our freight brokerage.
Offering, which is ocean freight and drayage and its for goods, particularly coming in from Asia from China from Vietnam.
And what we've done there we started that a few years back and the whole focus was how do we build deep relationships with the top tier carriers. So that we can get competitive pricing from high quality carriers, who honor their commitments even during times of the spot market spikes.
On that offering last year, we carried at just under 50000 Teus on this.
Coming year, we expect that to grow dramatically, 5100% growth on the container quantity and what we're finding is that that is offered price stability as well as access to capacity to our suppliers. During the period of time, where the spot market has spiked significantly and the problem with the spot market spiking significantly it's not even just the.
The cost one it's actually the even if you are willing to pay the cost of getting capacity is hard and we had been able to continue to secure capacity and the pricing we have us far below the current spot market and our suppliers who are then using that offering are benefiting because they have had that price stability and they can continue to move goods.
A lot of what we're doing.
It's us, but it also benefits our suppliers and the predictability of it is one of that the high value drivers and this is where the long term orientation. We have around building. These offerings, even though they will take years to get to scale. This as an example, one that we started a few years ago on its paying off well right now.
Thank you.
Thank you and our next question what kind of from the line of Heath, Terry with Goldman Sachs.
Great. Thank you very much.
Two questions here I guess, one one longer term just in the.
The decision to raise your longer term EBITDA guidance, but maybe even more relevant to the outperformance that we're seeing currently.
How are you thinking about the level of investment relative to the kind of growth that you can get out of that investment you guys have obviously been incredibly successful over the years in terms of reinvesting in the business to drive faster faster growth, where where is your where your thoughts now on the level of investment of our level of.
<unk> the investment can kind of return.
And then just kind of more of a short term question, obviously, the port issues of effect of a lot of a lot of companies is there a way to quantify what you believe the longer shipping times fulfillment times I've had on.
Have had on our had during the quarter.
Sure Let me start with your first question so.
The concept of investment and the.
The the P&L on how EBITDA plays that is actually really important one I think for folks to understand because what's interesting now is the EBITDA. You're currently seeing is while we're investing literally with thousands of people on new efforts as well as in marketing to scale, new businesses like Germany in paragould and alike.
What happens they didn't end up being bigger businesses. They end up increasingly profitable and so while you are then scaling of new set of things what youre going to see happen is the margin expansion will happen. While we are basically maximizing investments. So that we're big enough now that we're effectively doing is going to be doing both in parallel. So you will see margin expansion play out while youll see.
Growth remained high because we're continuing to invest in.
Ambitiously with the long term orientation and quantitatively, so you're going to actually see those two things be mutually consistent.
Which I think is part of what's so exciting.
And then.
When I talked to.
To your point about the port issues and trying to quantify the impact what I would say is the biggest impact is frankly, it's just delaying the timeframe to get back to the availability levels that everyone would like meaning the quantity of items in stock for immediate shipment across the number of skus that they would like to have in stock et cetera, So of <unk>.
Lot of suppliers have items finished goods that have already been produced and sitting in Asia that they've been not been able to move or factories are not able to produce goods because theyre still store and the other finished goods.
It's just delaying I would quantify that as well.
Without the ocean freight congestion makes the be getting back to this in stock levels in the next month or two and instead I think it will take an extra quarter.
A few months to really get to the high end stock levels.
For us, we actually benefit more than most because again, we have such a broad selection available on the platform of from so many suppliers the substitution effect for a customer so that customer is still able to choose amongst many coffee tables and they don't feel like Theyre selection has been curtailed.
Despite the fact that perhaps the number of coffee tables that we'd like to have available or not and so that's where the aggregate selection we have the huge benefit for us.
Great. Thank you very good adoption of ours.
And our next question will come from the line of Steven Forbes with Guggenheim Securities.
Good morning Amir.
After reading the letter this morning, I know you guys talked about.
The cohorts and I appreciate that update really just wondering if you could provide some qualitative comments on on how you believe right. The investments that you've made over the years here has changed the first experience.
For the customer.
And then sort of what your what you think that means right for stability.
The stability writer of less churn in the active customer base.
In 'twenty, one and beyond.
Yes sure Steve.
What I would say there is if you think about the improvements we've made the improvements we've made of really across the board, meaning fast delivery.
It's.
Convenient delivery high quality merchandising better product discovery.
The.
It's kind of like we've been making improvements in every area of the experience where we see it manifest then as we see it manifest in customer repeat rates and so you can see how of the repeat order growth continues to grow at a rate faster than the total business.
And that's just a function of.
Last quarter repeat orders from 55% New orders grew 30% interest customers basically value of the experience and so they come back and so we are up to like 72% of orders of from repeat customers and so what we've been able to see us we havent really indicators to that rate, which is where the people stay engaged with us or the downloading the app or the visiting the site.
What we're finding is that debt, we're continuing to be able to drive that up.
And in truth, we still have a relatively low share of wallet. So theres a lot of opportunity with the existing base. If you look at our average revenue per customer of some of that $450. So it's relatively low compared to their annual spend and so as we merchandise each category more as we keep adding value propositions for the customer as our brand gets better understood.
Not just being furniture and decor, but it really spans all of home. So it covers the <unk>, 50% of home improvement that are the finished items. It covers housewares. It covers large appliances. These are big opportunities for customers to keep diverting more and more spend to us and that's effectively the engine that powers the growth and so these are the things we continue to invest in.
When we talk about thousands of people working for things for the future. It's these types of things in these types of things keep on locking gains since we're basically creating better and better experience for our suppliers and better and better experience for our customers and thats the drives the flywheel.
Yeah.
And then just as a quick follow up there is I think I think it was about a year ago at a conference you spoke to sort of 'twenty.
Of every dollar of revenue being spent on logistics.
So curious if you can sort of update us on how that expense ratio right or overall, the just the cost.
Have evolved throughout 2020 and how.
How we should think about Inc.
This is the sustained scaling of the business right has done too.
On that expense ratio of any sort of comment would be.
Or quantity of kind of it would be helpful.
Sure so.
If you go back into some comments here two years ago, when we talked about the 1000 basis point runway on gross margin when we refer to each bucket one of the things. We did say is that the delta between where we were at the time and what was in the long term model slide at the time, which was kind of a few hundred basis points Delta. We said that each of these buckets could cover that off of loans and one of those buckets.
With logistics and so if you think about the 20 cents of every dollar of what we were saying was that a few of those since we cannot lock through efficiency efficiency is everything from my preferred the ocean freight of few minutes ago to Ford positioning goods to the last mile delivery leg is less expensive to enhance sortation, which then launch even skipped.
Terminals to route density, which lowers our cost of delivery, we run our own transportation operations for the larger items.
And so youre seeing youre seeing the starting to play out in terms of where we are on the journey.
When you look at our annual filings, you'll see that we had on 100 basis points of leverage in 2020 from fulfillment efficiencies and so it is a complicated number to read because some of the savings accrue to suppliers to the way they buy services from us and so there is just kind of like a there is some accounting around when suppliers are buying things from us.
It's contra Cogs and then some of the money comes out of their wholesale because we're not doing ocean freight, which otherwise would be embedded in their wholesale and the like but the point being where we are we.
We are getting gains from that 20, but there's still a long way to go to.
Thank you.
Yeah.
And our next question will come from the line of Oliver Winter.
The winter mantle with Evercore ISI.
Yes, hi, good morning, guys.
Another question also regarding.
The investments if you look at the.
Some of some very relative competitors to you like Amazon Walmart, but then also home depot Lowe's the law.
Last few days that they said how massively the aren't going to increase our capex spend and square footage growth.
I just wanted to see how you guys are viewing your of.
Built out of the castle Kate the delivery of that work, where you are in the build out and if you if.
If you think the Capex for you guys has to increase over the next few years.
What the capacity is there.
Sure. Let me first touch on the Castle Gate and can answer your question on little bit and then turn it over to Michael for him to chime in as well so the.
What I would start with us on Castle gate.
I think we described the number of tons of we built a footprint that covered the geographies. We wanted to cover, albeit at low utilization and we've gotten to a point, where we have the footprint to now we're only adding buildings for capacity reasons and so what that means is that the the costing for new buildings us significantly diminish because we don't have this unusual.
The station effect, rather we add the building for capacity and it will ramp fairly quickly. The next building coming on line will be one the summer, which is in Germany, and so today, we have a small warehouse in Germany that is full and we will be moving to a 1 million square foot building that will then afford us opportunity to continue to scale in Germany, where there is significant demand for casualty.
For example.
We recently signed a lease for a building in Chicago large warehouse that'll come on line next year. The reason for that is again not footprint, but it's simply because we actually in that geography need additional capacity at that point in time and sort of ramp quickly and so.
If you look at square footage build and you roll over the next few years, Yes will continue building significant square footage, but if you look at capex and sort of thinking that as a percentage of revenue youre actually youre not going to see an increase in cost. So the question is are you looking at absolute dollars of Youre looking at percentages and do we get leverage in the factor into the financials play out quite nicely, but let me let me.
On it over to Michael for any specifics.
Yes, I was just confirming that in here I think.
If you think about Capex ran last year at sort of 2% to 3% of revenues and I think you can think about that as sort of the.
Near term forward at the same levels. So there's obviously still a subsidy of investment that we're making there as we sort of build out for growth.
But I don't think that we see a need to sort of dramatically stepped that up in any meaningful way beyond what we've been doing already.
And the lack of them and I'll make also has like part of it is also historically in Capex, we had technology spend there and we're increasingly using cloud Google cloud and so that's actually move to Opex and so.
Capex, if anything we're going to show.
On a percentage basis bad benefits over time I think.
Got it thanks, very much and good luck. Thanks.
Thanks Ali.
And we have time for one final question. Our last question is going to come from the line of Jonathan <unk> with Jefferies.
Hey, guys. Yeah. Thanks for taking my questions first one I had is on the <unk> business I appreciate the the.
The color there on sizing that.
Do you have the medium or long term goal, there you'd be willing to share relative to the $1 5 billion today and relatedly.
Among the six verticals you're focused on there where are you most concentrated today. That's my first question. Thanks.
Sure.
Jonathan So the <unk> business I think we highlighted its current size of 1 billion half, but when you talk to us and that's in North America, and we look at the Tam in North America. We I think we highlight thats round about 100 billion. So we're relatively small compared to the Tam.
And frankly, we.
We have a pretty bright runway for growth. So we don't have specific the milestone guidance numbers for size, but I think as you've seen us we build the foundation and we add value. In these cases are on deliberate logistics assets. The selection all of the same value drivers we provide on the consumer side the business can much from overtime and on the <unk> side, if anything that repeat.
Fly will is even stronger because of the annual spend per customer of the potential annual spend per customer is much higher than it is on the consumer side. So when you get a customer and they're very happy the frequency of purchase on the annual spend is a much bigger upside.
Unity.
And then when you look at our verticals, obviously, we've picked the six verticals.
The highlight the ones that we're focused on and hopefully the each makes sense to you and we haven't said anything publicly about sizing them. That's something we can address in the future.
They are clear of the ones, we're focused on and you can see how they.
Dovetail into the rest of the business and so hopefully that makes sense as to why those are the six.
Gotcha, Yeah. That's helpful and then just my second.
Question.
It looks like you mentioned the quarter day trend in the mid fifties I believe for Q was the 45% any thoughts in terms of the acceleration you're seeing.
Any thoughts on kind of contribution from stimulus spend or any factors playing a role in the sequential acceleration through.
The late February would be helpful. Thanks.
Yes.
Seeing continued strong demand stimulus, obviously always helps but frankly, we're seeing the effect of stimulus be a lot less than the the first the stimulus was last last April and.
I think youre seeing some of the reports of how the money is increasingly being saved you used to pay debt and the like and I think that would dovetail to our numbers as well in the lab.
The comment I would make us since the start of Covid, we've seen spending.
The demand levels remain consistently high and less spending concentrated around holiday periods and so I think one of the things you've heard from a lot of retailers last holiday season is the demand started the.
The holiday demand started earlier and was more steady versus being more acutely around kind of cyber five and peak periods.
And so I think thats just the trend that is kind of tied to the current timeframe where people are at home. They have more theyre licensed falling of more regular cadence versus.
The day normal cadence for the the one that we had before Covid and the one will return to in the future.
And so I think theres some of that but.
Demand is the remaining quite high and so theres nothing of acute that I was running to that sort of caused the T cell in our retail.
So yes.
The only thing the only thing I'd add Jonathan is that look of the business is obviously performing extremely well as I noted in my comments right. We start to hit the sort of spike in Covid period in the back half of March.
And then the other thing I just want to comment on us that we we give these statistics to you as of gross revenue quarter to date number that's off of different than the net revenue tied to sort of shipping delays and things of that nature and so you've seen for the last couple of quarters. The gross revenue quarter to date has been higher than sort of actual net revenues at the <unk>.
End of the quarter.
And I, just will keep pointing that out to everybody. So everyone understands that there is a difference between those two figures, but obviously, we've seen really great strength of the business quarter to date.
In many ways I feel like the business is now operating at sort of a new level of a new baseline.
And I think that's going to continue and I think theres, a theres a ton of opportunity from here, but obviously, we're kind of goes we're going to compare against these very spiky periods from 'twenty one.
From joining us.
Helpful. Thank you.
Thank you I'd now like to turn the conference over to Mr. Shah for closing comments.
Well. Thank you everybody for joining us this morning, and we appreciate your time. We're excited for 2021, we think we've got some of pretty pretty exciting things to come and we look forward of spending more time with you in the future. Thank you.
Once again, we'd like to thank you for participating in today's waste their fourth quarter 2020 earnings release Conference call you may now disconnect.
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