Q3 2021 Wayfair Inc Earnings Call

Ladies and gentlemen, today's wafer conference call is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.

[music].

Okay.

Yeah.

Good morning, Thank you for standing by and welcome to the way Fair third quarter 2021 earnings release Conference call. At this time you are a 10 day lines are in a listen only mode.

After the Speakers' presentation, we will have a question and answer session to ask a question. During this session you will need to press star one on your telephone keypad as a courtesy to all callers. Please limit yourself to one question and one follow up question. So that all callers may have a chance to ask a question. Please be advised today's conference is being.

Recorded if you require operator assistance press Star Zero, It's now my pleasure to hand, today's conference over to director of Investor Relations Landry Zambia. Please go ahead.

Good morning, and thank you for joining us.

Today, We will review the third quarter 2021 results.

With me are <unk> Shah cofounder, Chief Executive Officer, and co chairman.

Steve core nine co founder and co chairman.

And Michael Fleisher, Chief Financial Officer.

We will 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 regarding future events and financial performance, including guidance for the fourth quarter of 2021.

We cannot guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions.

Our 10-K for 2020, our 10-Q for this quarter.

Subsequent SEC filings identify certain factors that could cause the company's actual results could differ materially.

From those projected forward looking statements made to date.

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, adjusted EBITDA margin and free cash flow.

These non-GAAP financial measures should not be considered a replacement for and should be read together. We got 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 non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded and webcast will be available for replay on our IR website.

Now I'd like to turn the call over to <unk>.

Thank you Andrew and thanks, everyone for joining us this morning.

We're glad to reconnect with you today to discuss the details of wafers third quarter results and to share more about the various initiatives on which we are focused.

In Q3, we generated $3 $1 billion in net revenue and over $100 million.

Adjusted EBITDA.

Though net revenue declined this was not overly surprising given the quarter played out against the backdrop of customers eagerly embracing reopening trends.

Still having to anniversary an extra ordinary moment of category demand last year and.

And supply chain issues, becoming more pronounced this period.

Even so we are seeing sequential acceleration in the year over year gross revenue growth rate in Q4, thus far and product availability is improving albeit slowly.

As various geographies have reopened post pandemic consumers.

Consumers have naturally shifted some spend towards travel and entertainment and from ecommerce towards brick and mortar.

Demand and interest in the home remains resilient and it will take a few more quarters for our growth and ecommerce growth in general to get back to normal.

Through this period of transition we are not standing still.

Those of you who know US will appreciate that we manage the business with a horizon of years not quarters.

Therefore, we are focused on making the necessary investments against ongoing strategic initiatives to deliver the best possible customer experience.

Our $840 billion total addressable market is huge.

We're already a leader in the category and we plan to only widen our competitive moat.

While the macro situation may mean, more financial volatility on a quarterly basis than we <unk>.

You might have initially expected we are fully convinced that we continue to make the right moves for the long term.

I'd like to spend most of our time today on these longer term initiatives, which focus on all aspects of wayfarers platform model.

However, first let me address some of the supply chain issues buffeting the economy.

Yeah.

To put things into perspective, our product availability has improved versus the spring and is well above trough levels seen at the height of the pandemic.

It's just not where we or the industry would like it to be or consider normal.

We feel reasonably well positioned into holiday and have built our promotional calendar to ensure adequate supply and sufficient lead times.

Still it is true that the home category like many sectors of the economy is facing various supply chain bottlenecks that are resulting in inventory shortages prolonged delivery timelines and inflation in both wholesale costs and retail prices.

Ripple effects from factory closures in Asia.

Container shortages port log jams, and a tight labor market are all factors that will continue to cloud the picture through much of 2022, even if governments and private enterprises mobilized to remedy them.

We too are doing all we can to mitigate these effects on behalf of our supplier partners and our customers.

Many features that are natively built into our platform model helped in this regard. Additionally.

Additionally, we are also changing some practices to adjust to the environment.

Here too our model is wayfarers expansive catalog of products and inventory light approach, which helps preserve substitutability and.

And customer choice. This is not a new feature and does not totally absolve us losing out on some revenue if a customer decides to look elsewhere when faced with elevated out of stock levels on best selling products.

However, it is an important dimension of the platform that we believe translates into a long term competitive advantage vis vis inventory carrying retailers with markedly more narrow selection.

We're also adjusting some internal practices that became counterproductive in this environment.

Specifically wayfarer did not sell items that we're currently not onshore in either our or our suppliers' warehouses and therefore, we've listed these items out of stock to the customer.

In the current environment customers have come to terms with much longer lead times on products and we need to adjust to that.

Just now beginning to sell products that we know are in transit, including those goods that are on the water and doing so we are estimating delivery timing further out and using that to level set customer expectations.

Another important feature of the wafer model, especially at times like these is our international supply chain, which we now call Castle Gate forwarding.

This is a set of services and freight forwarding capabilities, which translate into ocean container availability and competitive rates for our suppliers something they would not consistently be able to unlock on their own and which is particularly difficult to source today.

We're leaning in here in a big way our effective shipping capacity is growing multiple fold year over year and supplier demand for these services continues unabated.

And our relationship building and large volume with ocean freight carriers is paying off.

As long term investment, which we started several years ago is creating an ever more connected partnership between us and our suppliers.

As we speak we're also simplifying the supplier value proposition for using our logistics services beginning to end starting all the way in Asia and ending at the customer's room of choice.

Bundling the various services together in a cost effective way aligns incentives with our suppliers to forward position products as deep into our network as possible.

We expect this to drive further adoption and penetration, which should in turn increase product availability speed of delivery and unlock greater efficiencies for our supplier partners and for wafer.

To be clear there is no panacea solution for the supply chain challenges.

They will take some time for the world economy to work through but.

But we're staying flexible and we're doing all we can to drive the best outcomes for our customers.

Wayfarer also continues to look ahead, while navigating these short term issues.

It's easy to become distracted by the current noise around us so well now pivot to talk about the variety of initiatives, we have underway that will translate into an even stronger competitive position over the years to come.

Wafers platform is fundamentally about connecting the industries customers to the industry's suppliers and delivering an easy and inspirational shopping experience that is tailored specifically for the home category.

We do this through custom built technology and infrastructure solutions across merchandising logistics customer service and supplier services on the other side of this transitory period and as the market resumes its structural shift to online we expect to return to historical growth levels as wafer translates these competitive advantages into share gains.

I'll give you a sense of how we're expanding our reach and deepening our offering on a few of these fronts reinforcing why are 2% market share and is nearly one trillion dollar market has substantial runway from here.

When it comes to customers our focus remains on activating new or lapsed customers, while driving repeat among existing ones.

In the U S brand and category awareness are important drivers of frequency.

Our new there's no place like it Universal marketing campaign emphasizes the emotional value tied to our homes and establishes way fare as the destination for all things related to it across all sets of classes.

We continue to innovate with AD formats via our apps, we recently launched way fair on Air and initial set of Influencer led video content, which will grow into an on demand shopping offering tar.

Targeted print catalogs for paragould and our specialty retail brands are also soon headed your way and emphasize shopping spaces not just items.

All of this is done via an ROI oriented framework consistent with how we drive our considerable ad spend.

In Europe, where the U K and German Flywheels are nicely, turning and under the direction of New executive leadership, we're laying the groundwork for our next set of geographic and brand extensions starting in 2022 with.

We've long said that any expansion will be methodical and built on the back of existing infrastructure. So you'll not be surprised to see our next country launches b into adjacent markets like Ireland and Austria.

Over time, you should also expect us to establish a presence in other large European countries.

When it comes to merchandising the pandemic has only underscored the fluidity between the online and offline worlds while shopping for the home.

Online penetration for our category has substantial upside.

Categories, including consumer electronics and office supplies has set the water line for online penetration at approximately 50%, while even the most established classes of home are only about 20% penetrated today.

That said some customers clearly value the physical shopping experience. We saw this via our pop ups in our mall based store over the past several years.

And the temporary swing back towards brick and motor. This summer was another interesting proof point.

These data points provide further validation for one of our key future ambitions, which is to establish a new kind of omnichannel shopping experience that blurs the lines between the online and offline.

You'll begin to see that manifest starting next year.

We're embarking on this next phase of physical retail experimentation by establishing multiple formats for our family of brands.

We'll take the time to test into the winning format and then scale as we've done before with other initiatives.

Spearhead our physical retail strategy. We've spent the last couple of years assembling a highly capable team of both externally and internally source talent and we're truly excited to begin to unveil what we've been working on in the next year and beyond.

As you know our supplier partners are a critical part of our business model.

We're building out tools and services to empower them to own their success on the weight per platform.

To enable that we've reorganized internally to modernize our partner home Tech solutions. So that every supplier regardless of size can have a seamless experience when partnering with weight fare as our customers do.

We're also unlocking the capability to welcome suppliers from all corners of the world onto the platform.

We now support suppliers in their native languages, including French Spanish Polish Italian Mandarin and of course, English and German I'll follow the Sun support service model also leverages, our offices and multiple time zones, including Boston Berlin and Shanghai.

On a personal note it has been a real pleasure to meet with many suppliers in person over the past several months our teams have reunited at our offices, where we've hosted multiple supplier summit events and also had several in person trade shows nothing replaces the in person experience and we're feeling the benefits of that connectivity.

A pivotal part in our ability to work with a truly global set of suppliers is our end to end logistics infrastructure.

And we can take possession of products in Asia break the shipments in bulk to go to different locations range for transport over the water and to population adjacent fulfillment centers, we optimize the supply chain for our suppliers, who cannot do it on their own.

We also drive efficiencies and cost and speed that would not have been otherwise possible.

This enables us to provide extra ordinary service to our customers.

Part of our focus next year will be to drive even greater utilization through our network.

New programming and incentives in 2022 should kickstart, our progress once again, which will only further accelerate our suppliers rebuild their inventory positions. This in turn should unlock the next level of efficiencies for our suppliers our customers and for wafer.

Nearly everything we do at way fare is supported by a powerful backbone of custom built technology.

We already employ more than 3000 best in class engineers product managers designers and data scientists.

And I'm proud to be a magnet for the tech industry's brightest minds.

We have significantly evolved and up leveled our technology organization over the last year to expand our employer reach even further we're opening new engineering hubs across North America in the Bay area, Toronto, Austin, and Seattle and are welcoming the next generation of technology talent to way fair in these locations.

You may now see that despite short term volatility and admittedly some macro murky NES. Our long term vision is if anything in sharper focus.

The initiatives required to realize it or fully in flight, even as we work through near term macro challenges and consumer behavior continues to adjust.

The wafer model is resilient and built to scale our people are energized and our financial condition is strong.

We are ever focused on the long term balancing strong growth and profitability over years, not quarters and solidifying our position as the definitive destination for the home.

With that I'll now turn it over to Steve.

Thanks, Nir and good morning, everyone I'm excited to provide an update on paragould for you today.

We continue to see real strength with our higher income customers and pair of gold as a core part of our luxury appeal. Our success. Here is also a good reminder, that we have built our platform to extend beyond just wafer dot com and to support our family of brands that span various styles and customer profiles.

We first launched paragould four years ago, as our luxury home brand and shopping destination drawing on the insight that this part of the category was underserved and rapidly growing.

Across the industry households, with over 200000 of annual income have grown their spending on home furnishings by more than 40% since 2017.

We estimate that high income households in North America, now spend more than $80 billion on the home category annually.

There are also new tailwind here as many of these customers upgraded to larger spaces are second homes over the last 18 months with para gold we have created a platform for consumers to learn about engage with and ultimately bring home the world of luxury design across every style.

Leveraging our technology logistics and merchandising expertise paragould has seen tremendous growth with a revenue CAGR of more than 70% since 2018 alongside strong bottom line economics.

Historically, the industry's luxury selection was accessible and only a fragmented way the exclusive showrooms and through interior designers are.

Our key focus with <unk> is to unlock the whole of the industry's luxury selection across all styles complemented with content on one digital platform, whether a shopper is working with a designer or not while many brands were initially hesitant to make the leap online today more than 1300 suppliers embraced paragould is their showroom.

That's nearly two five times as many suppliers as when we last spoke about the brand back in 2019.

Early on we invested in the technology to help suppliers translate their physical products into a digital selling environment with visualization tools and online merchandising strategies.

The COVID-19 period underscored to luxury suppliers the importance of e-commerce, and paragould stood out as the natural platform for them.

We have now grown to more than 350000 skus across the catalog, which is up by almost 50%. Since 2019, we've expanded our class collection to include items like pilot appliances, and Youll see us continue to build presence in areas like recreation outdoor and seasonal decor shop.

Shoppers coming to <unk> looking for a wide selection, but also rely on us to put in the thought time and effort to curate the best products for all of their needs across their homes.

One important initiative, we've been focusing on recently is a full redesign of the paragould site.

Which started rolling out just last month.

We have heightened our focus on presenting imagery of designed rooms across the site, bringing to life. The range of high end styles that the catalog offers.

This past summer, we also launch our design council, giving shoppers inside access to inspiration interior design ideas product durations and more from some of the world's leading pacemakers. These enhancements are the most visible part of a suite of initiatives that helped drive sequential improvements in SKU conversion rates in Q3.

We encourage you to visit our paragould site and App and to experience the elevated aesthetic luxury brands and customer appeal for yourselves.

We are very focused on the customers' full shopping journey and are putting thought against each component of their end to end experience from our first interactions with potential shoppers.

Our marketing strategy employs a similar payback driven approach as the rest of the business, but ensures we speak to the customer in a way that resonates with their unique interests.

For example, we just launched our first parallel and physical catalog, which features products across a range of categories and it gives our shoppers a physical touch point they can come back to you for inspiration on their own schedule.

The post order customer experience in luxury is just as important as the product discovery and inspiration phase.

The bar for high quality delivery and customer service is even higher than it is for the mass market and we are becoming more intentional about what happens post order, while leveraging the very strong foundation, we already have in place as a company.

Over the course of this year, we dedicated parts of our customer service organization to paragould to ensure that customers get the white glove treatment they expect.

We are also experimenting with a specialized design team to support luxury shoppers and to assist them in realizing their visions, both at the room and item level earlier.

Early results from these initiatives have shown a very positive reaction with higher engagement and larger basket sizes.

As you can see we are upping our game across all aspects of <unk> and we can't wait to share was coming in the future. We just hosted our paragould supplier summit to dive deeper into our go forward strategy and to reinforce the close partnerships with our luxury supplier partners.

You heard Nick speak earlier about some of our vision when it comes to new frontiers for wave here and we expect paragould and these suppliers to play a meaningful role in our future growth.

With that I'll turn it over to Michael.

Thank you, Steve and good morning, everyone, let's take a look at the financial details for the third quarter before discussing the forward outlook.

As you saw in our press release. This morning, Q3 total net revenue was $3 $1 billion, representing an 18, 7% decline year over year.

The quarter played out largely in line with our preliminary read back in August.

During the early months of the summer, we started to see a rebalancing and consumer spend towards services as the U S economy more fully reopened.

As the summer progressed, our international markets, followed the same pattern on a staggered basis, which contributed to the quarter over quarter softness in Q3.

On a segment basis U S. Net revenue declined 28% from Q3 2020, while international net revenue declined by six 8% year over year.

On a constant currency basis international net revenue was $12, 1% lower than Q3 last year.

Turning to the Q3 kpis at the consolidated level in.

In the trailing 12 months, we had more than 29 million active customers, one 5% higher year over year.

Order frequency over the last 12 months was 192.

Essentially flat year over year.

Both of these metrics were lower quarter over quarter, which was expected given the outsized customer activity. During lockdowns last year is now rolling out of the LTM window.

This is similar to what we saw in Q2.

Which inflationary elements to pass through versus absorb in the shorter term.

Customer service and merchant fees were four 3% of net revenue in the third quarter. Just slightly ahead of our guided range, primarily due to increased compensation costs advertising as a percent of net revenue was 10.1%.

Online advertising markets are adjusting post reopening and in part due to iOS privacy related changes.

We are staying disciplined and sticking to our ror driven framework across all major channels.

While our marketing colleagues also focus on unlocking efficiencies by a new AD formats and channels.

Are selling operations technology, and G&A or Opex expenses totaled $418 million, which was below our outlook.

The pace of net hiring was once again a factor in a tight labor market, though.

So I'm pleased to report that after mobilizing extra recruiting capacity earlier. This year, we are now, making headway and catching up against our hiring intentions.

This is something Opex dollars will start to reflect in Q4 and beyond.

Putting this altogether Q3, adjusted EBITDA was $101 million or 3.2% of net revenue.

In the U S. Adjusted EBITDA was $167 million at a 6.4% margin.

While the international segment booked adjusted EBITDA at negative $66 million.

Moving on to the balance sheet and cash flow, we ended the quarter with 2.4 billion of cash and highly liquid investments.

In Q3 net cash from operating activities was negative $131 million and free cash flow was negative $203 million.

After factoring in $72 million of capital expenditures.

You'll note that a swing and networking capital drove the operating cash outflow.

Something we flagged would be the case given the sequential deceleration in net revenue.

This dynamic should reverse as revenue dollars grow over time.

Turning now to our outlook.

The macro environment is clearly still very fluid.

It will take a few quarters to really settle out in terms of getting a clean read on customer behavior. The.

The longer term state of the global supply chain and ongoing impact of inflation, including a higher cost for talent.

In this context, we as a management team are being very deliberate about making sure. We have a firm grasp on what's happening making adjustments when required some of which we spoken about today.

And are also making conscious choices as it relates to pushing on longer term initiatives.

That said, if our assessment of what's happening in this macro environment changes you can expect us to continue to adapt and make trade offs as we deem necessary.

As we move into the holiday period, we continue to expect queue for net revenue dollars to be above Q3 levels.

On an orders placed basis quarter to date, our consolidated gross revenue is down approximately 10% year over year.

However, wayfair dot com in the U S is trending down only modestly.

So we've seen some improvement in growth rates year over year, thus far in the quarter versus Q3 trends.

We are in a mass oriented business, where the average customer does not have an unlimited discretionary budget.

Inflation is rampant across the economy and there are competing demands for their time and wallet share.

We're watching closely to make sure the customer shows up every day.

In light of the various cross currents influencing consumer behavior approve.

A prudent modeling assumption would be to not project further improvements in trends for the rest of Q4.

Given the large scale of our business and the Tailwinds, we experienced through the height of the pandemic. It will take a couple of quarters until we are fully lapped COVID-19 enhanced demand and returned to year over year growth.

When it comes to gross margins, we continue to see 27, and 28% as a sustainable range for us with continued visibility towards longer term expansion.

However, the low end of this range is a more appropriate place for you to model for Q4.

Even with the benefit of operational efficiencies and supplier services ramping nicely Ah.

A tight labor market and higher wholesale and third party shipping costs are all acute near term factors that we have to work through.

We forecast customer service and merchant fees as a percentage of net revenue will be in line with the Q3 levels.

Advertising as a percent of net revenue will move around depending on the opportunities we see in the period.

We continue to see 10% to 11% as an appropriate range to forecast.

S O T G&A or opex dollars, excluding stock based compensation and related taxes should be approximately $470 million to $480 million in queue for.

Our annual compensation and promotion adjustments took effect in queue for as.

As we make sure our valued employees are competitively compensated.

We are also now making progress against net hiring goals after a slow start to the year.

Technology costs, primarily related to our continued migration into the cloud or another driver here.

Assuming the top line trends, we've seen quarter to date continue this.

This would translate to a near breakeven adjusted EBITDA outcome in queue for.

To build on <unk> remarks, I want to acknowledge that we are actively accepting some quarterly financial volatility.

So it was to stay the course as it relates to our longer term strategy.

And we will not managed to a particular margin level in any single quarter.

You have all seen the underlying margin potential of wayfair over the past several quarters and we expect to have some patience and getting back to those peaks and ultimately beyond.

The bottom line recovery will accelerate as we get back to more normal levels of top line growth.

We remain focused more on full year results for 2021 and 2022.

As those will be far more telling than any particular quarter.

Touching now and a few housekeeping items. Please assume the following for Q4.

Equity based compensation and related tax expense of approximately 111 to 113 million.

Depreciation and amortization of approximately $78 million to $83 million.

Interest expense of approximately eight to 9 million.

Weighted average shares outstanding equal to approximately 105 million shares.

And we expect Capex in a $65 million to $75 million range subject to timing.

We are maneuvering through a complex macro situation.

Year ago comps cloud the picture consumers are still finding their new normals and we are closely watching how supply chain challenges and inflationary pressures across the economy.

Impact our core mass market customer.

In this environment, we remain laser focused on our customers and our suppliers who are core to the wayfair platform.

As you heard we are highly connected to both sets of stakeholders responsive to their feedback and nimbly adjusting our practices when the situation merits.

Yet the longterm opportunity remains unchanged. This is a vast and complicated category and winning and it requires scale and a long term mindset.

Next year will Mark wayfarers, 20th anniversary and we're building for the next two decades ahead.

Thank you all very much now near <unk>, Steven I will be happy to take your questions.

Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad to withdraw question press the pound key and as a reminder, please limit yourself to one question and one follow up question.

Okay. My first question is going to come from the lineup Peter keep with Piper Sandler.

Hi, Thanks, Good morning, everyone I wanted to ask around the inflationary pressures as it might relate to some changes in pricing with Wayfair. So based on our supplier conversations and some of our own analysis. It looks like there has been a decision to raise prices.

Even to a point, where you're a little bit about the competition. So I was wondering if you could unpack that a little bit. Obviously, you have the house brand strategy, which should allow you to take price, but are you concerned about losing share in the current environment with this.

Thanks, Peter Let me, let me answer that but let me start with just a real quick recap on how we think about setting prices.

<unk> I think that's important to the way we do it I think is different than the way most retailers do it in the sense that we don't have individuals who are picking margin levels for categories are sub categories.

Instead, what we do is we have a large data science model.

And it is basically figuring out what tranches of the catalog to set it what margin levels.

And it does it off the concept of really understanding consumers demand response to pricing changes.

What we're really focused on is not so much substitution because we view substitution has an advantage of our platform, which is someone might buy one item instead of a different item based on how they're relatively price.

But rather what we're focused on is how do we make sure that customer stay on our platform and the price levels aren't such that they want to leave and go elsewhere.

And over the years, we've been able to make that more and more sophisticated we're constantly running hold out test and control tests to basically make sure that the algorithm as well tuned and that kind of science based agenda is actually guidance, we think to quit advantage place.

And so you'll notice when you talk about national brands, where something is a specific part number you know you have to be basically it market. The algorithm sort of does that and at the same time to your point, we need to have exclusive brands House brand you have items that maybe are not on other platforms. You have items that you invested a lot into the merchandising of.

And identified that as well.

The point.

I guess I want to make as we are.

Over the last four or five years and had this a gender and how we can unlock a lot of gross margin. We've talked about 1000 basis point runway and this was back when we were at 24% to 25% gross margin.

Just six could unlock a lot of savings we talked about how the merchandising could unlike a lot of savings how the volumes going through the platform allows suppliers deleted with better pricing and still make the margin they want and we talked about how supplier services play an increasingly large role and I think what you've seen happen is that we have been successful at unlocking margin and frankly.

As we look forward, we think there is a pretty.

Solid roadmap of unlocking a lot more unless.

Unless we do that that actually provides customers.

Excuse me customers with lower pricing, while also occurring margin to us.

So I think where we sit today.

We feel I'm sorry water.

So what are we to today, we actually feel pretty good about price levels overall.

In the.

Roadmap, we have to keep me, even more and more sophisticated we feel very good about as well.

Okay. Thanks, so much maybe I'll ask a follow up and maybe if it made me for Michael <unk>.

Near do you get your voice back the the one saw we've had around with Castlegate certainly, it's a huge long term opportunity, but with revenues running down and supply chain and inventories very very tight are you at a point, where the castlegate flow is actually running down in a dollar basis and thereby.

Could this continue to put some margin pressure on you as you deleverage some of the fifth sixth costs within the network.

Peter Let me just chime in on Cascade before I headed over to Michael for your kind of the financial asked that question.

Castlegate.

The inheriting advantages of Castlegate between our ability to access ocean freight at a competitive price and get availability in a congested time, all the way through to our ability to forward position and therefore offer customers both speed of delivery, while the outbound costs actually falls all of which manifests also and customers getting sharper retails does benefit.

It's actually been they've been very kind of a a very nice bright spot through this period. The fact that we built this network has proven to be quite a boon that said the mix effect basically scarce inventory has caused castlegate to have lower inventory levels in front of the lower percentage of the total business than it was prepandemic when.

We look forward to 2022 suppliers are now seeing an inventory levels recover we're seeing inventory levels recover we have more ocean freight capacity, what you're going to see happen is we believe castlegate penetration will hit all time highs and actually kind of meaningfully continued to expand some of this is what we talked about on the call about how we're bundling the service together make it easier for suppliers.

And some of it as suppliers are also seem afford positioning with the carrier congestion being something that they they can't avoid on their own they need to partner with us because we have that dense network. We can do different forms of sortation injection. So castlegate as you roll forward through time, not only are they kind of on a unit basis is it already showing that it's very beneficial but as he rolled through time.

Mix actually goes from hurting us to helping us and it's actually I think it'd be fairly dramatic and its benefits, but let me turn it over to Michael that kind of answer you Peter the only thing I would add is obviously if you. If you have if you have a warehouse operation and you're running a little less through it then there is some deleverage there, but I think you've seen the continued strength in our gross margin right. So.

North of 28% North of are the high end of a range this past quarter and staying within our range for next quarter and so as <unk> points out there's many pieces to the supply chain, where leverage happens right Ocean freight is another example.

So I think as more I think about it this way it's more suppliers now start to load more inventory into castlegate theirs. They are taking advantage of that ocean freight that's an <unk>, that's an opportunity and creates leverage for us and then as those units flow into the building will flow more of them out of the building and will create leverage back there too. So I think it's remember castlegate in this entire so.

Hi chain network as a long term investment with massive Roy.

And so I don't think he can sort of look at it a sort of any one particular court.

Okay. That's helpful feedback thanks, so much and good luck.

Thank you.

Our next question will come from the lineup I'll ever winter mental with Evercore ISI.

Hi, Good morning, guys. Thanks for taking the question.

Excited to hear about your multichannel strategy, maybe near which I know, it's early you will announce more next year, but.

Maybe after you gave us a little teaser can you maybe give us a little bit more details what what are you planning to do you said, it's across the family of brands, but maybe a few more details would be helpful. Thank you.

Yeah.

Okay, great let.

Let me just share a couple of thoughts on physical retail so far.

First thing I would say, which kind of covered in the scriptures, we'd kind of view ourselves as in year four of the journey, where the first couple of years had to do with pop up stores and malls and we had a permanent store in the Natick mall small when the 5000 square feet 3700 square feet front of house and at each step along the journey, we feel like we had a learning agenda that we were able to complete and maximize which sort of.

Lead us to know we sort of we have some ideas for different concepts that we think could be the late concepts that we would then want to scale and so what we're going to do you're going to see this over the next two years, we're going to launch a series of these different concepts and we're going to see by getting a couple of each up and running how they perform in the real World and then there's a series of different things you want to try and.

Kind of what I was referred to as a testing agenda that we've been doing all along the way and if you think about stores.

Cause there's obviously the cost of a store, but typically the big costs that are associated with that are also the cost of the physical supply chain to enable the flow of goods and delivery the cost of the inventory in the supply chain and the cost of whether you want to call it advertising or marketing or building a brand, but the cost for someone to know who you are and to kind of understand why.

I didn't want to visit and I think what's interesting is those latter three or things that we already have effectively spent the money on it we have a household brand we have tens of millions of customers, who we email every week we have.

Its supply chain, that's quite vast that enables fast delivery to customers everywhere that is full of inventory another supply our suppliers on that inventory, but just seem to available for immediate delivery. So all of a sudden you start thinking about man if you get that store alright, and it's just an other channel you've added into the mix and additional stories you tell on television and what you're doing.

On social media and what you can do with catalogues. What you do online you can start to see will man. That's that's quite a nice leverage point is roll it for one day and it's 50% online 50% off line will G. As you are now getting to participate in that 50% off line that you wouldn't otherwise.

So we're pretty excited about it we think these concepts make a lot of sense of we've hired up a very seasoned team of folks who have significant physical retail experienced quite a substantial team and we made sure that a number of internal wafer folks who have a lot of expertise are transferred over to that team and so when we talking about having thousands of people working on things.

They don't impact the piano today. This is just one of many different efforts that would total up to that number of people and so we're pretty excited about it and you're going to see the.

Concepts rollout against the him starting early next year through 2023.

Got it and it just just to clarify.

Would be really like stores with with inventory and not just showrooms or pop up stores.

Yes, they would be the permanent stores, so not pop ups.

Obviously, you have the inventory that's on the floor. So you have like the whatever you want to call. The showroom itself and then for inventory that people could take with them. If you think about our categories of goods, there's certain items people might want to take with them. It's gonna over bias on the smaller items when we get to the bigger items. We would expect they would want those items to be delivered so there'd be a mix. We think the vast majority of the <unk>.

<unk> would be set up for delivery.

Because of the nature of the categories and that's where when you think about the fulfillment centres. We have you think about the delivery operations. We have that would just flow through existing infrastructure. We already have that set up for that and that infrastructure doesn't care, whether the order was placed in a store or the order was placed over the phone or the order was placed online. It's an order that will deliver but of course for smaller items we were.

And of course enabled cashing area as well.

Got it thanks, very much and good luck.

Thank you. Our next question will come from the line at set Bash them with Wedbush Securities.

Thanks, a lot and good morning.

My questions around how you're thinking about customer acquisition, it's environment, because Christ acquisition costs in the third quarter, whereas some of the highest ever.

And given the challenges to acquiring customers and the cost of it how you're thinking about launching that in the current environment.

Yes.

So let me let me just kind of recap how we think about advertising because I think the way we manage it historically has proven to be a great benefit and we're sticking with that approach, which is simply we don't pre setup budget, but rather what we do is we effectively til our marketing organization have an infinite budget. However, we're very inflexible and have a very tight framework unmet.

During paybacks and they have to keep it within that payback framework and that payback framework is what make sure that we don't find ourselves down the road, having overspent on cohorts that will never payback and then frankly it has a secondary but perhaps even more beneficial rule, which is by keeping that constraint tight what it does is dead and the team has put a lot of effort in.

Developing new channels, there's things like Influencer marketing or podcast has a lot of channels were not in today or technology, advancing the technology platform or better targeting or creative optimization and these things are the things that lead to breakthroughs, where we get increasing reach more and more effectiveness of our AD spend and we are able to grow the at and spend really productively.

We have noticed when you've noticed which is there's inflation out there we've been careful not to chase it and the reason we don't chases we generally feel like we don't have it quantitatively measure the value of that traffic and we noticed competitors would chase it tend to in the not too distant future later stopped doing that because they find they figure out that they're overspending and we have in fact seen some of them.

I'm already pullback so that's a common cycle and we feel it behooves us not to chase men. In fact, if you look at or add spend any kind of adjust for the repeat orders, which obviously keep taking sure because that's the strength of our model happy customers come back that repeat order growth is what drives the overall growth of the business, which is why we can keep doubling every two to three.

Years, if you look at that and adjust for that you'll find that our customer acquisition costs remains in the range that we've had if you look back over the last few years and we're still paying back in that same.

Timeframe less than a year and we think that discipline.

Behooves us even if there are moments where someone's out spending.

That suggested clarified since the beginning of the pandemic there Elpida cat.

You're projecting for the customers you acquired during this past period has not changed much as you look at the near term you are willing to accept fewer new customer adds in light of higher customer actually caused that named milk does our lives unfavorable.

Yeah, well I'll go except for the not only has the payback periods. Since it began the pandemic not change, but frankly, if you zoom out even longer than that we've kept the same high level framework on paybacks for quite some time and if anything we've only tightened it a little over time as we've been able to get more nuanced and how we account for costs. So so that's not.

We continue to tighten that up but basically that what you're saying is true. We've we've kept it since abandoned start yes, we kept it very tight.

The thing about LTV to Kirk I'm talking about the payback right. So that haven't been roughly roughly a year. If you zoom out and you're really trying to kick okay lifetime value three years five years pick up period, you actually find that the LTV IRR is increasing because what you're seeing is repeat gets stronger as fuel come back more and more often as you look at yours 234.

Five if you would calculate that in which of course you wouldn't know till you can look back on years 2345, you would actually see the IRR then is increasing because we don't give that credit in that first year. When we give credit in the first years, what actually happens in the first year. So if you are to a cohort stronger than you are to it used to be you are actually seeing an ever improving return on your head spin, but we won't put that into the firm.

Here and so we will therefore not put that into the answer.

[noise]. Thank you.

Thanks.

Our next question will come from the line of John Blackledge with Cowan.

[noise] excuse me great two questions first on the international expansion can you discuss the timing of the launch of Wayfair in Ireland in Austria and should we expect other launches in Europe in 2022, and then for Michael <unk> revenue.

What's the difference between the consolidated revenue pacing down, 10% and we fair U U S being flattish and if you could just provide some more color there that that'd be great. Thank you.

So so.

So let me.

Try to answer those John and then maybe Michael I Dunno, if Michael would have anything additional or Steve they can jump in.

An international launches reasonably highlighted Ireland, and Austria overtime, we certainly would expect to be in more countries with the same way. We took the infrastructure we had in the U S. We've leveraged it for Canada and adjacent market more underserved.

<unk> market, if you think about Ireland related to the UK or you think about Oscar related to Germany, you have that analogous situation, where you can actually pick up that volume become the market leader much more quickly. It's a great way to start your expansion over time, we will certainly expand to other countries but.

We were just more trying to point out.

What's going to happen next which is what Ireland, Austria or when you think about next year.

And then on your fourth quarter revenue question I think what we're trying to do there is provide a couple of pieces of inside so one is look.

Quarter to date down round about 10% and I think we sort of said in that that number is actually sequentially improving and that's just to give you a directional feel for where we're headed and as you kind of get through these kind of COVID-19 periods from a year ago and so if you kind of look to kind of the future a little bit use all of a sudden start.

Senior Comping normal periods, all of a sudden you're going to see those growth rates until you're you're doubling every two to three years et cetera, and we're just trying to tell you where we are in that journey. The only reason we comment on Wayfair dot com cause we generally don't break out the whole business to try to tell you about every segment and there's meaningful segments, obviously, the different countries and different retail brands, we have the lines of business professional versus the consumer side with simply.

A lot of times folks take or Wayfair inks number and they may compare it with someone where the more comparable number might be wayfair dot com, which is R. U S mass business and so we said well look as a period of time, where people are trying to figure out things are going where the directional trends are so tell you that we've heard dot coms only down modestly the whole point was they don't take the 10 and assume it's linear across the board each of the countries have.

A a different time period of Covid happening Europe, seeing another COVID-19 Serge and as you have the different things that are happening and basically let's just kind of tell you. The total comes downturn you kind of hear that number from us every quarter and just to give you a little flavor wafer dot com, which is use mass that's down very modestly says, okay, Oh, well, okay. I would assume that's downturn, it's only down modestly that's better than I thought.

Okay. That's interesting I Gotta remember you have a big and multifaceted business. Each piece is a little different that's all you're trying to say.

Thank you.

Our next question is going to come from the line of Steven Forbes Guggenheim.

Good morning marriage, you mentioned the thesis of selling spaces, not just items. So.

Curious if that's centric to just power gold or if you see an opportunity within the Wayfair brand as well and those Underserve household.

Thanks, you know, we see it for the Wayfair brand as well, we see a for a specialty retail brands.

The design services.

Offering that we have inside our BDC sales team, where we work with customers.

Leads to multiple item purchases and thinking of projects. If you look at what we're doing at home improvement if you think.

Think about what we have between the categories flooring and tile lighting plumbing vanities door hardware large appliances, you can start to think about Monty rooms, bathrooms kitchens and those types of projects, we do those projects.

In addition to selling people just items right. So we do both.

So we see it applicable broadly obviously a pair of old it's very applicable and then we think about Wayfair professional we have.

There is a vertical a lot of whom have to do with projects and the interior design decorators. There obviously, the decorators doing a lot of the work, but then our team can provide a lot of support and help and then of course, we have the resource catalogue, we have the logistics ability to help them and then when you get over to whether it be contractors, who might be referring their customers, where you get into what we do in hospitality, where we've outfitted into.

Her boutique hotels, you know there's a lot of project work in these various different segments of our business.

That can just a quick follow up baby for Steve I'm on power ago, you talked about sort of the strength in that that brand over the past couple of years here are curious if you could give us any insight or data on on how many high income households are you're engaging with the platform and then maybe what the average order value is on perrigo relative to Wayfair.

The whole.

Yes, thanks, Yeah. So you know.

We're not going to give real specific detail unparalleled at this point, but since we first talked about in 2019 to where it is today.

Really seem very nice growth and it it's still early I think our penetration in that category is quite low.

The high income luxury customer we feel like it is quite underserved.

And the.

And the pair of old operating is really key for them and after.

The engineered chairman.

I would just add saved your point that the <unk> certainly many times higher than that on Wayfair, which I think I see your tears you are asking it's definitely we don't disclose the exact number but it's multiple times higher.

Thank you.

Thanks, Steve Thanks.

Thank you and with that I will end the Q&A session I'd like to turn the conference call back over to the Wayfair team for closing comments.

Thanks, everybody for joining the call.

We are excited to chat with you happy holidays to all of you look forward to talking to you again next quarter.

Thank you once again to thank you for your participation on today's conference call you may now disconnect.

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