Q2 2021 Wayfair Inc Earnings Call
Good day, and thank you for standing by and.
And welcome to the weight, there Q2, 2021earnings release call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your speaker today.
MS Jane Gelfand head of Investor Relations capital markets and corporate development.
Good morning, and thank you for joining US today, we will review our second quarter 2021 results.
With me are near and Shah Co founder Chief Executive Officer, and co Chairman Steve.
<unk> co founder and co Chairman, Michael Fleisher, Chief Financial Officer, and Margaret Lawrence Vice President of wafer professional and per the old we will all be available for Q&A. Following today's prepared remarks, I would like to remind you that we will make forward looking statements. During this call regard.
Future events and financial performance, including guidance for the third quarter of 2021.
We cannot guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable and our expectations and assumptions.
Our 10-K for 2020, our 10-Q for this quarter and our <unk>.
Subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected and any forward looking statements made today.
Except as required by law, we undertake no obligation to publicly update or revise any of 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, including adjusted EBITDA and free cash flow.
These non-GAAP financial measures should not be considered replacements for and shouldn't be read together with GAAP results.
Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and Investor presentation, which contains descriptions of our non-GAAP financial measures and reconciliations of our non-GAAP measures to the nearest comparable GAAP measures.
This call is being recorded and a webcast will be available for replay on our IR website.
I'd now like to turn the call over to Nir edge, Thanks, Jane and good morning, everyone.
It's great to reconnect with you all today to cover the details of our second quarter results and to share some of our observations during this dynamic period.
Let me start off by saying that Q2 came in slightly differently than we initially expected.
A bit more subdued on net revenue.
And stronger than we had forecasted on profitability and free cash flow.
Many of you have had questions as to whether wafer can be sustainably profitable as the pandemic receipts.
And this is clear evidence to make that case.
This quarter represented the toughest year ago comp as we lapped the surge of pandemic driven demand and the spring of last year.
<unk> that backdrop vaccination rates picked up the economy more fully reopened and consumer behavior understandably adjusted.
And $3.9 billion Q2, net revenue was down about 10% year over year, but grew 11% relative to Q1 and the 2 year CAGR was north of 28%.
As we discussed when we last spoke in May and sequential growth rates and 2 year growth metrics will likely be more telling for investors until we get past 2021.
Despite any short term noise the underlying structural elements for continued long term category demand and share transfer to ecommerce remain in place.
<unk> balance sheets are strong and interest and the home is not going away post pandemic, even if there is some shorter term normalization.
As an example, our annual way day event in Q2 proved to be the largest in the Companys history, even as consumer spending began to flow back to experiential categories.
Our customers and particular tend to shop, 1 item 1 room, 1 project at a time and while there may be rebalancing their spend some home to do lists are nearly endless supporting the large size of the category.
Yeah.
Wafer should grow even faster as category demand shifts structurally online.
And roughly 20% penetrated and are most developed geography and set of classes and Theres a long runway ahead for online share of the home category to grow.
While there may be some short term rebalancing towards brick and mortar over the next couple of quarters, we're convinced the structural trends towards ecommerce will hold and.
And potentially accelerate.
History tells us that ecommerce gains tend to speed up when categories crossed the 20% threshold and the pandemic helped bring us to this point.
Wafer is furthering that ecommerce shift and our own wallet share capture by building out and unparalleled offering and more than 1000 and classes of home across 4 key verticals.
Furniture and decor.
Elsewhere.
Home improvement.
And professional.
We'll speak in more detail about our professional business today, but it's worth noting that while furniture and decor is our strongest and largest vertical we already enjoy good scale across each of them. We're also building our business across both North America, and Europe to immense markets, which combined are more than 800 billion and <unk>.
Size.
These dynamics may be hard to see by focusing on Q2 alone given the challenging year ago comparison.
On the surface, what you'd see us a modest decline and active customer count and slightly lower order frequency.
But zooming out you would recognize that we acquired nearly 18 million new customers over the course of 2020 with about 1 third of those in Q2 last year.
And Q2.2020, we also saw more frequent purchasing with smaller basket sizes as customers outfitted their homes for the demands of sheltering in place remote working and schooling.
While not all of our recently acquired customers will be and the active count at all times.
They are now part of our customer file and our highly engaged we now have 1 on 1 relationships with these customers, which allows us to develop individual insights about them as they engage with way fair, which happens much more frequently than they purchase.
We then use these insights to personalize, our content and communication with them and low cost ways.
Meanwhile, we're seeing repeat trends evolve as we would expect that is except in Q2 of last year at the height of the pandemic.
Pete orders typically outpaced new orders and this is continuing.
As a result repeat as a percentage of total orders reached new highs and more than 75% this period.
We are focused on driving repeat orders and a few ways.
And converting new customers into repeat customers through building frequency with our shoppers and by re engaging past customers who may have left.
The pandemic provided a strong push on each of these fronts.
We believe we are leaving the pandemic period with an even stronger repeat customer base and when we entered it we should have long lasting benefits given it cost us relatively less to drive repeat purchases than initial orders.
And as we go through this normalization period, we're very mindful of balancing the needs of our customers and our suppliers and.
And believes the wafer platform is advantaged in doing so.
And 1 advantage is our access to selection and inventory.
That said you are well aware that industry stock levels have been depressed for some time and exacerbated by bottlenecks at nearly every point in the supply chain.
We are seeing sequential improvements and inventory availability and fulfillment, but the progress is incremental and does not happen overnight.
Some port congestion is easing and our Asia based international supply chain services are growing quickly to support our suppliers.
We're also leaning into castle gave us a solution with inventory availability improving yet.
And yet the industry still have to deal with narrower selection and longer than desired lead and delivery times, which were unlikely to normalize until some point in 2022.
Our inventory light model helps us foster substitution with more than 22 million products on the platform and we're leveraging our logistics and technology solutions to closely manage customer delivery expectations, both pre and post order.
We believe this transparency is helpful and building long term customer trust and wafer.
These long lasting supply chain issues have also resulted and inflation.
We're working with our suppliers to pass through some of these higher costs, while paying close attention to our customers' reactions to higher prices across all of our classes.
So far we believe customers are generally absorbing the higher prices reasonably well.
Though the operating environment is admittedly very fluid.
Where we have a view of cost pressures being more transient we're being thoughtful as to how to reflect that to the end customer.
This longer term orientation has always served us well.
And we have been rewarded by our customers and our suppliers.
Over the last 18 months, we've unlocked a lot of efficiencies that give us the ability to be very deliberate during this dynamic transition towards a new normal.
With us seeming battle between variants and vaccinations and is not totally clear how quickly we will reach a new equilibrium and each of our geographies.
It is impossible to predict all short term outcomes.
So instead, we come back to the fact that even with LTM net revenue close to $15 billion, we're still less than 2% of our 840 billion dollar addressable market.
Remained most focused on the various elements that make wafers platform, a structural category winner with both customers and suppliers and alike.
Things like best in class selection, and merchandising and purpose built technology and logistics solutions.
We believe we can do all of these things, while outpacing category growth rates and remaining solidly profitable throughout.
With a strong balance sheet as a foundation you are also increasingly seeing our confidence reflected in our capital allocation decisions as we stepped up our buybacks in Q2 and repurchased $300 million worth of shares.
1 of the areas, where our long term mindset is really paying off as wayfarer professional or <unk> business.
We're coming back to the tradition of introducing you to our leadership team and.
And Margaret Laurence is here with us today to discuss <unk>.
I'll now turn it over to her.
Thanks, and your age and Hello, everyone and.
Glad to be joining you today to discuss wafer professional our dedicated business brand, which I hear many of you have been eager to explore and more.
I joined way fair over 4 years ago, and have led wafer professionals since the beginning of my time here.
Over the last 6 months I've also assumed responsibility for our paralleled brand.
We'll leave the paragould discussion for another time, but it has some clear similarities and synergies with B to B and I'm very excited about its potential.
Prior to wafer I held leadership roles at Google and and the venture capital World.
Our vision for wafer professional is to be the destination for all things furniture fixtures and equipment for every business.
There are more than 45 million businesses in North America, and 30 million businesses in Europe.
Our focus is to serve each of these and a differentiated way, particularly when it comes to those design driven purchasing decisions, where our professional customers benefit from the same core elements that make our overall business special selection service value and speed.
Wafer professional first evolved as many business customers initially came to the wafer platform through our consumer facing site.
We recognize that these customers were very different in nature and that there was an opportunity to build a customized experience for them.
We started that early work and 2015 and officially launched the wafer professional brand in the U S and 2017.
Since then we've grown meaningfully with the number of active customers growing at a more than 30% CAGR.
In addition to our vast BDC catalog and the.
The number of commercial grain products on site has grown by approximately 25 times from when we started.
And nearly all inquiries are now handled by dedicated <unk> service reps.
As we speak we are beginning to formally expand <unk> reach into Europe.
There we have already informally achieved some nice early scale by serving professional customers through the BDC platform much like our initial trajectory in the us.
Wafer professional is experiencing great momentum and the market.
Now with north of $1.5 billion and annual net revenue.
We enjoy strong and strategic customer relationships with businesses of all sizes from sole proprietorships to fortune 100 companies of which 84 are active customers today.
More importantly, there is an enormous future opportunity here with the total addressable <unk> market approaching $200 billion across North America, and Europe of which we estimate less than 15% is spent online.
While we serve businesses across many industries, where currently most focused on 7 verticals.
Interior design and commercial office contractors property management accommodation education and foodservice.
To date the main thrust of our efforts has been on the first 3 which cover more than half of the Tam, but we also already have meaningful offerings across the remaining verticals and are actively expanding our coverage there.
Some verticals like interior design skewed towards core wafer assortment, while others like commercial office need distinct suppliers products and merchandising.
Each industry has its own competitive set and we win when we get the recipe right for each vertical.
There are some core capabilities that we can leverage throughout like sophisticated order management solutions and proprietary logistics.
But across each vertical we layer and a differentiated set of tools to meet the unique needs of those businesses for.
For instance, contractors can arrange to have every item from a large project or multiple orders arrive on site at 1 time.
While interior designers can have access to a vast array of product options across our universe of brands.
And with fast delivery powered by our logistics capabilities. We can meet the specific needs of these customers. Thanks to our more than 16000 suppliers nearly 18 million square feet of fulfillment space via Castle gate, and our own middle mile and last mile Network and W. D and though each set of.
<unk> customers is unique it should perhaps come as no surprise to you the professional customers as a whole have a very different profile than our BDC shoppers for instance, the average professional shopper visits more frequently by us more often and spend more each time, they purchase and our BDC customers each.
Year.
Over the last 12 months, 80% of wafer professional orders were placed by business customers, who have already placed 4 or more lifetime orders.
We have designed a unique funnel for our <unk> shoppers that showcases the best ways that wafer can help them.
And it begins with customer acquisition, where we operate with the same data driven payback minded marketing philosophy as the rest of the business.
While optimizing for BTB reach through some unique business oriented channels.
We are also tuned in to recognize when businesses come onto the platform through the BDC experience at which point, we adjust our marketing strategy to move them into the wafer professional ecosystem.
And enrollment process verification and a gated site allow us to show additional assortment exclusive to businesses and provide the opportunity for our suppliers to lean in with sharper business pricing.
Customer service looks a bit different on the b to b side of the organization in the traditional offline universe customers may have to work with a dozen or more different providers to complete a single project.
We focus on demonstrating how they can use our tools and services to complete their entire job through wafer professional.
We have many self service options that are custom built for various use cases with tools such as quote creation and management project organization by it again for easy repeat purchases and bulk cart edit functionality to manage larger baskets.
For professional shoppers looking for a higher touch level of support or more than 500 business account managers help to educate customers about wafer services and proactively reach out to intercept emerging needs as we help them complete their orders and projects.
Our team has a wide array of capabilities, including design services custom sourcing coordination of support from multifaceted orders and consolidated delivery all of which we offer as additional options to create a seamless shopping journey for our <unk> customers.
Our customer engagement doesn't and after our customers make a purchase.
Specialized customer service representatives dedicated to BTB handle the vast majority of calls from wafer professional customers leading to lower average handle times, despite additional complexity as well as the higher NPS during the pandemic wafer professional sees the opportunity for differentiation versus the competition.
And accelerated our forward momentum there.
And there are moments of uncertainty and some natural volatility along the way, but we leaned into these as a chance to more closely partner with our customers at a vulnerable time.
We expect that these will translate into tighter relationships and higher customer lifetime values well beyond the pandemic, let me share a couple of examples.
Last year, our team worked with our logistics company that came to US looking to quickly open 3 new office locations on the back of supercharged business momentum.
We leveraged the full range of our commercial office capabilities, including space planning design custom sourcing and custom logistics.
We were able to complete the project within their existing budget and on and ambitious 8 week timeline and thanks to our strong supplier relationships and top tier fulfillment expertise.
Our ability to execute quickly was a huge win for the customer, especially given the complexities introduced by the pandemic and us since led to several more projects we worked on together over.
Over the last 12 months, we worked with more than 35000 customers and the foodservice space and they've reoriented their businesses around evolving norms..1 great example, earlier this year and in anticipation of a busy spring season, a restaurant customer decided to convert and unused outdoor space into a stylish patio.
And over a very short timeframe.
Our design team quickly got to work conceptualizing, what this customer could do with this space and worked in tandem with our product sourcing and consolidated delivery teams to find order and install the necessary products all in less than 30 days.
The restaurant owners, we're thrilled with the outcome and are in ongoing discussions with us to support future expansion.
Now that macro conditions are normalizing across the us many of our business customers are in the midst of a meaningful refresh cycle hotels restaurants, and schools are all reopening and adapting to new norms, while contractors and interior designers are busier than ever.
We are focused on making wafer professional their 1 stop solution and have a long roadmap of new initiatives ahead, such as offering even more project financing options to help many of our small business customers get started.
I'll wrap up by saying that I'm. So proud of the team we have built.
Our wafer professional colleagues are enormously talented and motivated.
Wafer brand and platform is a powerful well known calling card as we scale the business and the resources. We have at our disposal are largely unmatched and a fragmented industry. We have enviable momentum in North America with a long runway ahead and are just starting to embrace our proven playbook and Europe, which is another.
Very large market I would be remiss if I didn't mention that we are doing all of this with already solid bottom line economics.
I'll now turn it over to Michael and look forward to keeping you apprised of progress overtime.
Thank you Margaret and good morning, everyone, let's take a look at the financial details for the second quarter before discussing the forward outlook.
As you saw in our press release. This morning, Q2 total net revenue was $3.9 billion.
And this was $447 million less and the second quarter of last year, representing a 10, 4% decline year over year. We are now comping what was a truly extraordinary period a year ago. So.
So the moderate year over year decline is not a surprise we are seeing a change in the macro environment as consumers embrace our reopening economy and are beginning to rebalance spend towards categories. They have sorely missed over the past 18 months.
This makes complete sense, though we would not expect interest and the home category to meaningfully Wayne sequentially.
So rather than dwelling on year over year noise. We are instead focused on quarter over quarter trends on this basis Q2, net revenue dollars were 11% higher relative to Q1.
Gross to net translation did normalize year over year, leading to percentage growth rates and net revenue terms that were above the gross revenue rates and the U S. Net revenue declined 15, 2% over Q2 of 2020 down by $554 million year over year quarter over quarter U S. Net revenue grew.
And by 9.8% compared to Q1.
Our international geographies are a bit behind the us in terms of reopening so Q2 momentum was stronger in this segment.
International net revenue grew by 16, 3% year over year or $107 million and was up by 15, 6% compared to Q1 and 2021.
On a constant currency basis International net revenue grew 3.2% from the prior year.
Turning to Q2 kpis at the consolidated level.
The last 12 months active customers surpassed $31 million this quarter, nearly 20% higher year over year.
While order frequency over the last 12 months was $1.96 up.
Close to 4% year over year.
Both of these metrics showed sequential declines, which makes sense to us given Q2.2020 rolled out over the last 12 month period and represented a peak moment for new customer acquisition and purchase frequency given the sudden onset of the pandemic.
The slight quarter over quarter decline and LTM order frequency was more than offset by higher average order values.
Resulting and LTM net revenue per active customer.
Up 9% year over year, and up 4% quarter over quarter.
Higher <unk> represent 2 factors this period.
Cost inflation being passed through.
And higher than typical mix towards the outdoor category.
Which tends to have higher priced items for us.
I'll now move further down the P&L.
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 related taxes and other adjustments Q.
Q2 gross margin was 29, 3%.
You will recall that in Q2 of last year, we saw outsized efficiencies as order stepped up sharply and.
And these conditions normalized over the quarters that followed.
We are also now seeing inflation and transportation costs Youll.
You'll note that this is our third straight quarter of roughly 29% gross margins.
Which we believe is a nice representation of the inherent unit profitability and our business.
And the forward upside we can unlock over time through the many investments, which we've previously discussed.
Customer service and merchant fees were 3.6% of net revenue and the second quarter in line with our outlook.
Advertising as a percentage of net revenue was 9.1% or about 60 basis points lower than last year.
Higher repeat mix helped drive some leverage but this result was still somewhat lower than expected.
We've said many times that the advertising outcome in any 1 quarter will depend on the opportunities we see in market.
And there is some natural variability period to period as a result.
This quarter that long term ROI orientation translated to less scale in some channels.
Our selling operations technology, and G&A or Opex expenses totaled $408 million.
This was slightly above our forecasted range due to higher than anticipated technology costs.
Got offset by a slower pace of hiring.
We are focused on making the right hires and a competitive labor market and.
And are making sure to keep the talent bar high as we do so and we feel great about the new people, we're adding to the <unk> team.
For the second quarter, adjusted EBITDA was $311 million or 8.1% of net revenue.
In the U S. Adjusted EBITDA was $323 million at 10, 4% of net revenue.
While the international segment booked slightly negative adjusted EBITDA and negative 11, 7 million or negative 1.5% of net revenue.
Moving onto the balance sheet and cash flow, we spent $300 million.
When opportunistic share repurchases in the quarter.
Through this move we are signaling both our confidence and wafers trajectory.
And taking proactive steps to mitigate dilution that could ultimately result from the settlement of our outstanding converts.
Even after these discretionary buybacks, we ended the quarter with $2.6 billion of cash and highly liquid investments on our balance sheet.
And Q2 net cash from operating activities was $275 million.
And free cash flow generation was $207 million after factoring and $69 million of capital expenditures.
Turning now to our outlook.
Let me preface all of these remarks by underscoring once more how dynamic this period is particularly as it relates to the top line.
By now you will have seen a flurry of reports attesting to ecommerce trends, having predictably softened on a year over year basis, and a reopening environment.
While we can make some educated guesses, it's difficult to be definitive about how things will trend from here.
We all only have a few weeks of data and various crosscurrents like vaccines and variance to contend with.
I expect much more will be clear by the time, we next speak but for now I'll do my best to give you some framing though explicitly without providing precise guidance.
The faster than expected reopening has pushed out our expectations for a return to so called normal quarterly revenue flow.
And expansion.
But these things are never a straight line, particularly when the period is as choppy as it is today.
We forecast customer service and merchant fees and approximately 3.5% to 4%.
And while advertising as a percentage of net revenue will move around depending on the opportunities, we see and the period, we continue to see 10% to 11% as and appropriate range to forecast.
<unk> or Opex dollars.
Excluding stock based compensation and related taxes should be approximately $440 million in Q3.
Based only on the top line trends, we've seen quarter to date.
This would translate to a low single digit adjusted EBITDA margin in Q3.
Touching now and a few housekeeping items for Q3, please assume equity based compensation and related tax expense of approximately 89% and $91 million depreciation and amortization of approximately $80 million to $85 million.
Interest expense of approximately $8 million to $9 million.
Basic weighted average shares outstanding equal to approximately 104 million shares.
Though as a reminder are fully diluted weighted average shares outstanding will ultimately be driven by the net income results and Q3 and the result of applying the if converted method to our converts.
Only a couple of notes on cash flow.
First we expect capex to land and a $70 million to $80 million range again subject to timing.
Second as you know, we typically benefit from a positive working capital float.
However, we tend to see networking capital outflows in quarters, where revenue us sequentially lower you've seen us at work and nearly every Q1 across normal seasonal years.
Given the current revenue trends were fully prepared for a negative free cash flow result in Q3.
But this will be modest and the context of our very strong balance sheet.
Before we turn to Q&A, we need to acknowledge that this is probably the murkiest moment in 2021 frankly.
Frankly, it's the most complex macro environment to read that I've seen and my entire career.
Every public company is having a base it's comments on only a few weeks of data.
All other macro and public health picture is rapidly changing.
We believe we will get to a better view of consumer behavior and people settle into their normal routines post summer.
We will of course remain prudent as we navigate any near term normalization. However.
However, we also know that by keeping our iron and the long term, including the bigger market opportunity investing and strong supplier relationships and custom solutions for the industry.
And much like what Margaret just described for me to be.
And by staying focused on the customer we derived hugely positive and sustainable longterm outcomes.
For us this translates to the ability to generate solid top line growth and bottom line profitability, while simultaneously investing to build and ever wider competitive advantage for many years to come.
This is what we have always oriented wayfair towards as leaders employees and fellow shareholders and what we continue to do today.
Thank you very much now nearing Steve Margaret and I will be happy to take your questions.
And as a reminder to ask a question you don't need to price star 1 on your telephone to.
And withdraw your question price per pound.
We asked itchy and I only ask 1 question and 1 follow up part turn.
Well apart for just a moment chicken habits and a roster.
Yeah first question comes from Peter Keith with Piper Sandler.
I I think it's good morning, everyone.
Interesting comments on Wayfair professional sounds like it's now about 10% of sales already I was wondering if you could comment how that's turned it up as a percentage of sales and and then longer term where do you think are wayfair professional could go as a percentage of sales within your mix over the next couple of years.
Thanks, Peter let let me get lets us Margaret.
And the question.
Peter Thanks, so much for the question and.
We have very large ambitions at Wayfair professional.
And.
The trend has increased over the 4.
4 plus years that and at Wayfair and and frankly, we're doing everything we can it serve and professional customer with the.
Hi Tech experience, the broad selection, adding like consolidated delivery and and financing.
Financing options and the future. So we're doing everything we can to to do.
And to increase at the Sheriff.
Wayfair overall and feel like there's a huge opportunity ahead, given the size of the market and where we are now.
Okay. Thank you and then maybe pivoting over to advertising.
So it might be a play out it was pretty efficient and Q2 below your regular run right.
Maybe could you hit 2 topics what are you seeing now with some of the privacy changes that are impacting your AD cost and then more recently with this slowdown are you seeing irrational competitive behavior within the advertising landscape.
Thanks, Peter Yes, let me, let me try to answer and so yeah. As you noted and cost came in round about 9% of sales this quarter.
Little lower than it had been but just to remind you how we target and spin and we don't actually sit and budget. We in fact, our goal would be to spend as much as possible, but how are we tightly manage it with the payback and the payback were and flexible 1 and because we can totally measure that we have we have a pretty strong advantage because within us.
Technology in terms of targeting will use creative optimization will build new channels will do all these things to grow our access to customers, while keeping that payback time and so.
<unk> noted there's a couple of things that have happened recently and the market..1 is obviously the privacy considerations continue to get tightened we actually have a significant advantage there and both because we have our own proprietary add technology and because we have such a large house file a customers that we already know and we can reach them an email we can reach them with app.
<unk>.
And with this lets us do is and a very low cost way have a 1 to 1 relationship with them that isn't reliant and using when the large media providers and they are targeting and so when someone like apples doesn't let you know the apps cross track that doesn't really hurt us and the way it hurts others, who are really counting on third party and vendors, helping them with that in terms of your comment about <unk>.
A rational and spending I will say, we've seen and inflation in the market is sort of the world has reopened significantly and the countries were in but to just remind you. We don't chase that so anytime we see inflation that we think is irrational, we just won't spend into it and what we always see us any kind of virtually that tends to come back to rationalist folks realize that they're overspending or what have you.
And then we were able to grow our spend through all the methods I described around targeting and creative optimization really so we feel really good about our ability to grow our and spend over time, but.
Keeping it very <unk>.
Fish and in terms of not changing and paybacks.
Okay. Thank you very helpful and keep up and good work.
And thank you <unk>.
Our next question comes from John Black legs with cow and.
And Texas.
Hi, 2 questions..1 just curious and back to school impact is that a tailwind or a headwind. This year and then the gross margins were a little bit better than we thought despite the slightly lower top line could you just talk about the levers there and as we round through the year.
And just kind of the levers for the gross margins. Thank you.
Thanks, John.
Now back to school.
Back to school I would say should be a tailwind but.
I guess I would take a step back and say our business has like all these different pieces of seasonality and it for.
For example, holiday and Overindexes, and housewares and people gifting things to themselves.
Right after holidays and January that's 1 of the best seasons for entertainment furniture, because a lot of folks get a television during the holidays and then they want their living room set up for the Superbowl and then the sort of.
Textiles tends to do well in the spring and things like the outdoor season, which is a very big season for us and starts in the late winter and runs through the spring into the summer back to school. Obviously, you just reference so there's sort of like this ongoing pattern of different seasonal events that caused certain categories to kind of grow at certain times.
Relative to other so but I would think back to school should be a tailwind.
And we're just entering back to school now schools.
Or just opening now and that sort of runs through the next 6 to 8 weeks.
In terms of a question on gross margin.
And things we try to highlight 1 I would say multiple years now and is that there's 4 main pillars that contribute to the growth and gross margin and and that there is a very long runway and gross margins and back when we were running at the 24% are so gross margin and it talked about how there was over a thousand basis points of runway between these pillars and how at the time.
And our guidance was 25 and 27% that.
A few hundred basis points of any 1 of the 4 pillars could cover up that entire range, but in fact, there's 4 pillars now gross margins higher I think Michael guided this quarter of 2007% to 28%. Despite what we're seeing and the market would supply chain congestion and these things and that's still there is a large large 1 way ahead of us and so just to recap us for leavers really quickly.
1 is suppliers us to do more and more volume with us they can maximize their profit dollars at lower costing and that can allow are effective margins to increase from.
The second us, we've been building and and to and logistics network and at this point is not just.
The.
It's 18 million square feet and it's not just the warehouse and that's just the transportation, but it goes all the way back to ocean freight and drage, and so it's and and to and logistics offering that lets us tackle the logistics spend make it much more efficient and there's a lot of savings to come out of that while facilitating much faster and customer delivery.
The third leavers everything we been doing on merchandising the red carpet merchandising the house brands and what we do with 3 D imaging and as we improve the experience there at a lower and lower unit costs that effectively gives us gains and demand response, which accrued and margin and.
And the last pillar is supplier services and the and the oldest when we have us castlegate, but over the years, we've added wayfair advertising to the mix.
<unk>.
We have merchandising offering us and it's very early days and so we've had these additional supplier services that effectively.
Allow suppliers to spend money with us and services that they would otherwise do themselves or spend elsewhere and with us more efficient for them gets accounted for us contract cause drives up gross margin and that's another put us very much into early day. So.
Long story short these are the pillars that add to what you're going to see us a sustained rise and gross margin overtime. Now. Your question was over the next few quarters I don't know if I'd make it that micro I think over the years, you're going to see a very large rise and gross margin, but I wouldn't focus on anything changing particularly and a quarter or 2 and.
Jonathan Michael the only thing I would add us I think when you look at the.
The last few quarters, we deliver 29%. The reason we continue to guide 27, 28%, particularly and we look at what the period and right now and we think about it and they're just pointed out spiking stream from <unk>.
Hi chain constraints.
Inflation et cetera.
I think the 27, 28% of the right place to be targeting sort of for the near term not taking anything away from the long term opportunity to drive increased gross margin and increased EBITDA overtime, and and and you saw that and the changes we've made over the last couple of quarters and how we're talking about the long term and what we think the long term opportunities are and it continued to point and everybody.
It's near it adjusted back to that.
When you start to think about what the opportunity us over the next few years.
And your next question comes from Steven nickname Us with.
BNP per anthrax.
Hey, good morning, I'd say for taking the question.
So just wanted to follow up on BBB.
Spoke a bit about international but.
I was just wondering what you're thinking in terms of.
The timeline there for a full roll out and in Europe, and the color there would be great.
Steve Thanks, Thanks for the question.
The way that we are thinking about market expansion in general.
It probably following are the recipe that we've built and the success we've seen in the us so as we build a robust business on the PDC side. There is there is an advantage to us waiting for that happen and then layering on or Wayfair professional platform leveraging the.
The customers that are shopping on the BBC site, bringing them into our wayfair per professional experience and and then and then having a dated site experience focused on the vertical that we that we will and E serving.
So that's kind of how we're thinking about it at a high level following the Bdc's success and Steve This and they're trying to just shy and and I guess, if you want to think about the <unk> you can maybe think about us 3 phases phase 1 us where we just sort of doing a very light way and we have account managers, but that's really all we have.
That we've already done that and Europe.
And Europe as a result of only 1% of revenue versus run about 10% and rumour based I-i us where you really operationalize that business you are adding the selection of category teams here.
Really managing the sales force, we've already done that North America, that's what we're embarking on and Europe known these 3 which we're now embarking on North Americans were you really go deep and these verticals and you make each vertical bespoke experience. So just think of them and sort of like 1 follows the next and Europe's like running 1 phase behind but progressing on the identical kind of trajectory.
Okay. Thanks, and then just a quick follow up on.
On international margins any update and how we should.
Think about kind of the cadence and the back half and maybe a bit longer term, how international profitabilities tracking verse and.
First initial expectations.
Yeah internationals developing very nicely.
Caution is like the problem with International's, that's not really like a thing because like international of Canada and has the UK and has Germany, and we add them together and we call them international but they're a very different life stages and just even if you zoom in on Europe. We first we headquartered in Berlin, because our goal is to build a broad European business and first market, we focused on us the uke.
K, where the leader and the UK UK sizably larger 1 today than Germany, where and the number 1 position we have a household brand.
Teams based and Berlin, and we only have 100 people in London, and we have over 1000 and Berlin, then, but once you Kate was working with and focused on Germany, Germany is now growing really well, but it's only a little over 2 years into the 4 year cycle to build a household brand bits tracking very nicely and it's growing quite well so what happens and if you zoom and for your question and profitability zoom in and you would see the margin profiled the UK.
<unk> is meaningfully farther ahead and the margin profile and Germany. So these things to sort of go sequentially and so for the overall segment P&L.
Show the kind of profitability, we have the United States that will take some time, because you need the bulk of the countries and it to really be mature to the degree that the us as mature.
As helpful. I appreciate it as best of luck.
Thank you.
Your next question is from David Ballinger with Wolf.
Hey, good morning, Thanks for taking my question.
So first on passing through higher cost onto consumers are you anticipating some type of change and buying behavior near term and if I recall.
LOL correctly, I believe shoppers are taking a bit longer to convert and for some of the tariffs and went through a few years back are you seeing any early evidence of that now or other notable changes and buyer activity and just any thoughts on how that could affect this holiday season.
What I would say, we're we're seeing consumer demand remain really high and just just to kind of give you. Some context of and if you think about our business 75% of our orders were repeat orders. So the business is really driven by people. We already know if you look at the active customer count with 31 million people and the.
2 customer accounts and if you're just looking at 5 quarters ago. We only had 21 million. So it's grown 10 million active customers and just the 5 quarters, but in truth, the number puke and our sites for more than that when the steps. We gave US with 4 billion visits last year. So if you think about the number of active customers.
2.4 but because.
Let's just run it this way and say we had 100 million people visit last year that would mean that came 40 times each or if we had 200 million people visit last year. They would've come 20 times, each so what's really happening and the businesses you have a tremendous number of people coming and visiting regularly than buying on some frequency. We're not seeing any other kind of delays you mentioned and whatnot and in fact, we're seeing a brand gets stronger so I would.
And because you think about a holiday, while we certainly could be buffet and run by the macro market and so the question is like what overall demand levels are I think you're going to see us taking share quite nicely as we rolled through time.
And then I think well raw and the macro and we believe the macro market is we think the summer's sort of a little software, but we feel pretty good about where things are headed.
That's very helpful and just a quick follow up can you talk about what you're seeing in terms of labor pressures within your fulfillment centers for even at your your suppliers operations is that having an impact on the timing and volume deliveries and yeah. At this point and you're building and some type of incremental costs and to the business over the next few quarters.
Well I'd say their labor markets no question tight and we see the congestion and we see us more on the transportation side and it is on the fulfillment center side, but part of that as we've been very proactive we've raised the minimum wage and the company.
Widely to me and the whole company minimum wage 15% to $15 and that was some period of time ago, I think that puts us and the kind of the bucket of kind of leading employers and so I think as a result between the culture, we have and the wages. We pay we are able to attract people.
Fine so we don't have a shortage and our fulfillment centers.
I think.
The transportation congestion will take some time to play out, but we've been able to continue to access the transportation capacity, we need so far.
Thanks scenarios appreciate the color.
Thank you.
And next question is from Steven Forbes with Guggenheim.
Good morning.
Maybe just a quick follow up on the international segment.
I think someone mentioned that prepared remarks right that the.
The strength was mainly a function of the delayed reopening cadence overseas, but.
Anything to call out on.
And a country by country basis in terms of.
<unk> other business and and what it tells you about the opportunity ahead, because I think in general.
And the strength here was was higher than expectations and.
Any sort of.
Key metrics or data points, we should think about for the back half strength.
And that segment as a whole.
On a country by country level.
Well as you know we operate we sell and 4 countries today and and so the U S. Canada, the UK and Germany, and I would say what's happening in all 4 is very similar to 1 another although the exact timing us shifted and each 1 and this way or that way by some period of weeks or months.
And so we're seeing the same cycles play out and so I don't know that there's anything significantly to know, we're obviously, a smaller player and some markets than others, which means we have a lower percentage of the total which means we can grow faster rate more easily but we're a small player and all of them. So the growth is really ahead of us and all of them and there's no real thing to point too.
Michael do you have anything that you know.
I think I would.
Says as we've talked about the last few quarters.
UK business and sort of what we would call the sort of flywheel working really great and we feel really terrific about how that sort of continuing apace.
And all of this is sort of X COVID-19 right, just sort of like where we're at those businesses, which I think is the question you were asking.
And Germany is sort of us coming up that.
Ram.
But coming up and and a really nice way and I think in terms of the sort of.
Brand work we've done there.
Understand how customers are sort of seeing us and our brand and the investments. We've made they are starting to see some really good payback and.
And Germany, and so I think.
We continue to feel good about the entire international segment of near to pointed out a couple of questions ago. Each of those businesses is quite distinct right. So that we operate from is this segment that has the international segment, but they're all different places and they're maturation.
And and maybe a follow up sort of a bigger picture right as we think about the kpis, specifically active customers and you talk about sequential change and yeah, I guess, the slight moderation and active customers and the second quarter and.
Is there anything that would prevent the business from seeing sequential improvement from here on out or is that.
The international cadence or some other factor right.
Still at risk here in terms of where the active customer bases and absolute terms.
And <unk>.
Let me just jump and real quick Michael's R. And then you'd please turn them and.
I think there is and math optical illusion, there as well, but I just point to the Q1 Q2 of last year, we added 5 million active customers and the way the math works US if you don't buy for a 12 month period, you fall out of the number and so as you noted those.
Those down 2 million sequentially from Q1 to Q2 Q2 year over year goes up by 5 million and it said it said 12 month cycle with a particularly large jump up from Q1 Q2 that makes the coupon to Q2 of this year look a little odd, but if you zoom Mac out the underlying trends are all very strong you can see that and the repeat us.
A portion of total measure and so you'll you'll see the normal pattern kind of come back now that you're past at 1 time blip from a year ago.
I think last year.
Early periods of Covid and on those first few quarters, you saw we saw much higher and new customer growth not surprising right bookstore and sort of trying us out for the first time is not surprising at us for us at all but some of those folks would fall out of that 12 months right that metric. The thing that is so important to remember and I.
Sort of harp on us all the time is that's not how we actually manage that relationship with our customers right. So in fact that a customer purchased from us during that immediate COVID-19 pandemic period, and Q2 last year and Hasnt purchased since then doesn't mean that they're not actively engaged on site opening E mails, putting stuff and their idea board.
It's like all of the things that we look to to manage engagement is how we worked it every day and where we choose to sort of spend our AD dollars and sort of how we want to be in front of the customer and.
We have a lot of customers who might buy every 15 months and those are really really good customers, even though from a external reporting perspective, they fall in and out and every 12 months.
Oh.
A total upstate fish.
Thank you.
And your final question comes from Chet Gram with Gordon Haskett.
Hey, good morning. Thanks.
My question is on July and and the slowdown that you've seen so far and I'm just curious because could speak to how much you think you can attribute to seasonal climbing versus a lack of interest and the home.
From Michael and we could comment on this phone number and a small milk and 2020 once I'm just curious how you think the backdrop will unfold from here.
Yes, Thanks Chuck.
And we say a couple of things and the nearest.
And and the 1 thing I would say about July just to point out is July was not markedly different and April and May.
And June and so I want to be careful here and that.
The.
There is sequentially, we're sort of continuing to see I think over the last few months very similar level of engagement from our customers and sort of where the revenue is coming and particularly when we look at it on a year over year basis.
And so.
I do think that you've got this.
It is murky because right now there's a combination of macro factors are just really hard to read the combination of.
Folks are vaccinated folks are out enjoying summer now you've got very and.
Masked mandates sort of the world is changing and sort of a very rapid way and how that's going to impact consumer buying behavior, particularly as we start to go into what I would call book sort of more regular season of people getting back into offices and back to school I think it's just really hard to read which is why we basically said look we think we're we're at quarter today's probably as good read US we can give you.
Yeah.
And I don't have a lot to add other than the.
Only thing I would comment us if you look at the shape of the revenue last year you see this COVID-19, obviously starts and the United States March but you really see this.
Root spike and so I sort of like heavy and May and June July and then kind of like taper. It tapers overtime. So a lot of this year over year comps I think we're not really great numbers to look at because you're kind of comparing him to a very non traditional pattern a year ago. So the actual year over year numbers look really weird, but what's really weird is actually last year's pattern not tissues patent and so.
I think as you roll this year forward.
And then you're going to see a play out the way you would expect you to play out and then I think once you comp that next year you are back to more normal comps, but last year's comps are very unusual so right now and the year over year doesn't it looks very odd.
Makes a lot from from my follow up will be I was hoping you could speak to the performance of a customer stuff chopped you guys for the first time last year, perhaps in the first half of last year and.
What their performance looks like relative to typical patterns.
And this is 1 of the many things that gives us a lot of confidence about the business us we're seeing the behavior, we would expect and.
Try to save us from 5 quarters ago were up $10 million and the active customer count from 21 to 31 from 4 quarters ago. After the big spiked up we're still up 5 million active customer. So that's a that's a huge number of ex customers that are still and account never mind. All the other folks who have may may not have bought and 12 months, but are still engaged with us and they're visiting the site and et cetera.
And that was my point about the number of visits we had last year as an example, and so I think you're going to see.
This is this is 1 of the many many reasons and you just you're going to see this kind of that kind of normalized growth. We've had historically you're going to see that continue where we're doubling every 2 to 3 years, and that's where you and our investor decorative I want stat, saying by 2030, we would be 8 times as big $112 billion. If he took some conservative assumptions around share shifting online to share, we could take et cetera and multiple.
Fly them out and truth, the numbers and actually been getting better and so the average us we used to end up being conservative so that kind of <unk>, you would actually expect to exceed that and we have less than 2 per cent share of our time right. Now so even if you multiply the percentage of share we have by 8 you still don't have us being that big a share owner so.
There's a lot of head room, and and and it's fundamentally sound because the offer and keeps getting stronger the customers and reactionary posit deliberately to it and we're getting more and more customers.
I will now turn the conference over to the Wayfair management and start closing remarks.
Well I just want to thank everyone for joining today, we appreciate your interest and Wayfair and we'll look forward to talking to you and next quarter. Thank you.
This does conclude today's conference you may now disconnect your lines.
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