Q4 2021 Wayfair Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Good morning, My name is Rob and I will be your conference operator today.
At this time I'd like to welcome everyone to the wafer fourth quarter 2021 earnings release and conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your.
Telephone keypad, if you would like to withdraw your question again press Star one.
Landrieu, Zambia director of Investor Relations you May begin your conference.
Good morning, and thank you for joining US today, we will review our fourth quarter 2021 results with me on New H Shah Cofounder, Chief Executive Officer, and co Chairman Steve.
Steve <unk> co founder and co chairman and Michael Fleisher, Chief Financial Officer.
We will all be available for Q&A following today's prepared remarks.
I would like to remind you that during this call. We will make forward looking statements regarding future events and financial performance, including guidance for the first quarter of 2022.
We cannot guarantee that any forward looking statements will be accurate, although we believe that we've been reasonable in our expectations and assumptions.
Our 10-K for 2021, and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made today.
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 as we review the company's performance. During this call we will discuss certain non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin and free cash flow.
These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results.
Please refer to the Investor relations sections of our website to obtain a copy of our earnings release, and our 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 a webcast will be available for replay on our Investor Relations website I would now like to turn the call over to new age.
Thank you Andrea and good morning, everyone.
Great to reconnect with you today to share the details of wafer is fourth quarter 2021 results.
2020 to March 20th anniversary since Stephen I started the business in our annual shareholder letter also published today, we talked about what we're doing to set ourselves up for the next 20 years.
When we launched weight bearing we use the tagline.
<unk> home.
Today, we have embraced everything home tourist space, that's all of you.
Even if taglines change one thing has remained consistent for wafer throughout.
And that is our focus on the customer and building a shopping destination, where everyone can find their own unique expression of hall.
You've heard us talk at length about how we do this through our platform business model, bringing together tens of thousands of the industry suppliers and tens of millions of customers for the widest possible selection and choice.
You've heard us talk about the investments we have made across technology and logistics to build a unique and purposeful online shopping experience offer wafer shoppers fast and reliable delivery.
The customer experience is what continues to drive every decision we make as we work to optimize it for today 510, and 20 years from now.
<unk> has grown from two entrepreneurs, who saw a massive market opportunity to our world class team with more than 16000 employees globally.
We all share the same vision and wake up every morning, eager to serve our customer and supplier partners.
Most of them Blayne is that we recognize that we've only just scratched the surface.
Taking stock of the more recent past the last two years post unusual challenges for us and the industry as a whole.
But meeting those challenges came with opportunity.
The onset of Covid and 2020 redefined how focused customers are on their homes and shifted how much time, they intend to spend there.
Never ending to do lists group and online demand surged, which allows wafer to demonstrate the true scalability and structural economics of our platform.
2021 began to normalization process, though the world is still working through the ripple effects of the pandemic.
As countries around the world reopens at their own pace last year home category growth remains largely resilient.
Pendulum swung back with outsized strength in physical stores as consumers sought to return to old habits.
Supply chain disruptions impacted economies everywhere.
In part to repeated factory closures and port log jams around the world. These cascaded into global inventory shortages and widespread inflation.
Our teams reacted to support the needs of our suppliers and customers as we navigated 2021 and.
And we are now leaning in to capture the benefits of returning inventory normalization in 2022.
Throughout the pandemic, our core strategy did not waiver.
Primary elements for success in our category have not changed.
The home is and will remain top of mind.
<unk> trends favor a durable shift to ecommerce.
Serving our 800 billion.
Total addressable market is only possible in the long run.
Richness of assortment.
And enjoyable product discovery and fast reliable cost efficient delivery.
We're orienting our business to win across each of these dimensions three technology first approach and investing accordingly.
Ensure that our platform is built to win irrespective of the ebbs and flows in the macro environment.
Let me take a moment here to walk you through what we're doing across these dimensions.
When it comes to assortment it all starts with our supplier partners.
Our ability to offer industry, leading assortment is enabled by our supplier base and last year, we on boarded more than 7000 suppliers.
Having a wide variety of suppliers on the platform is important not just in maximizing selection, but also in driving the kind of healthy competitive tension that leads to more innovation and even better pricing for our customers.
In 2021, we resumed in person engagement with our suppliers, including through our summit events.
Through these interactions and also through enhanced supplier facing communications and survey work. We are gathering valuable feedback that we are putting into action.
A core part of this is building user friendly technology solutions to improve the supplier experience and enable them to succeed.
Effortlessly as possible.
Based on our platform.
Let me just ask on wafer emboldened suppliers to lean in with their whole catalogs.
By offering items on wafer that are not available at other vast platforms and.
In 2021 oscillation grew by more than 11 million products.
Within our flagship house brand portfolio in the U S. A meaningful share of goods is extended to wafer with a degree of exclusivity.
And we have strong momentum and following the same playbook in our international markets.
As our assortment growth finding exactly the right product among millions of items is not a trivial exercise.
Our customers look at dozens of items before settling on the perfect choice for their homes among.
Among our most important assets is a deep and growing data driven understanding of customer behavior.
Through data science and machine learning, we are building an increasingly personalized shopping experience for each customer and are starting to develop stronger content to appeal to unique customer profiles.
You will also have seen our announcements about upcoming physical store launches through 2022 and beyond across our portfolio of brands.
Our specialty retail brand concepts will debut later this year and will be 10% to 15000 square feet in size.
While the wafer store format will be substantially larger and is slated to first to open in 2023.
These spaces will allow us to tap into the store based portion of our can and will be valuable avenues for discovery visualization and marketing complementing all that we're doing in e-commerce .
Now that we've talked about assortment and discovery, let's shift gears to delivery and logistics.
Just a few minutes ago I referenced the supply chain disruption our industry has faced for the last two years and how our team is planning to continue to tackle it over the course of 2022.
So we're not completely immune to global supply challenges.
Or is it more apparent than in logistics, how our philosophy of thinking and investing for the long term can serve us.
Four years ago, we recognized that there was an opportunity to drive even more efficiency for our suppliers by becoming a digital freight forwarder.
In doing so we stood up a logistics solution to reliably and cost effectively get products from where they are manufactured to as close to the end customer as possible in North America and Europe .
Solution, we now call castle going forward.
In 2021 is the industry watched ocean container prices Spike casting forwarding offered a safety net for many of our suppliers and moved more than 80020 foot equivalent containers during the year.
This was not a one time fix but instead the result of several years of forward thinking into solving an industry problem, albeit one that ended up getting quite acute last year and is likely to remain so in 2022.
This year, we expect to roughly double castigate forwarding volume, which makes us a significant player in this industry.
We didn't start Cascade forwarding, specifically to solve the problems of 2021 or 'twenty two.
We did it to create value for our suppliers and our customers.
The value of this solution will only grow as our scale increases and as we add services over time, such as our domestic break bulk facilities, which began to come online in the last quarter.
I wanted to zoom back and now it gets aggressive execution is what turns visions into reality and that's exactly what we're aiming for this year.
Almost two years now suppliers have been solid product nearly as fast as it can be produced and were just slightly less focused on optimizing inventory positioning.
Lead times expanded and speed promises degraded.
While shoppers temporarily accepted these circumstances, they did Sophie grudgingly and our customer insights continue to show that availability and speed are still very important to that.
Now the inventory levels are recovering we are leaning in with our fulfillment network to once again deliver on those customers speed expectations and to reinforce the inherent benefits of our proprietary logistics infrastructure.
For 2022, we've created a tangible set of financial and operational incentives for our suppliers to drive even more products through our castle Gate network.
And we expect penetration to return to you.
And then exceed prepaid debit cards as.
As this plays out our customers will wind through the plethora of choice and the convenience of fast delivery.
Participating suppliers will win because it costs and speed advantages translate into lower retail prices and conversion gains.
Commercial benefits and cost efficiencies will also accrued a wafer accelerating a self reinforcing flywheel effect.
I've just given you a flavor of how we're building durable advantages across all aspects of the wafer platform by continuing to think and invest in longer term.
With this mindset and the backing of a solid balance sheet. We're navigating today's challenges while empowering thousands of weight variants to focus on our customer in the future.
When we began this journey.
And I had some ambitious goals for what wafer could be in two decades.
At spire to think about the business in the long term focused on years and not quarters.
<unk> accomplished a lot already and there is so much more opportunity ahead.
Wafer has matured and reached the point, where we can sustainably Mary growth profitability and continuous investment each year.
At the same time, we remain comfortable with the quarterly volatility that inevitably results from disruptive thinking.
So theres a lot of macro noise to work through today. This is also how we think about 2022.
Before I hand, it over to Steve I wanted to touch on our upcoming CTO transition, which we announced last month.
As part of our long standing succession plan, Jim Miller, Our Chief Technology Officer, who is also a longtime board member prior to that is retiring.
And Fiona Tan, our current global head of customer and supplier technology will step into the CTO role.
Jim has been an invaluable partner and leader during a highly dynamic time and has helped transform our technology organization for the better.
<unk> very capable hands and we have no doubt that Fiona will take a pivotal part of our business to an even higher height.
Jim will stay on as an adviser until June and we thank him for his many contributions and dedication to wafer.
As we typically do now lets turn our attention to a specific business area within weeks.
Steve is going to talk about the latest developments across consumer financing and how that reinforces customer loyalty.
Thank you Mary and good morning, everyone.
The world of payments and financing is rapidly evolving as our customer expectations around how and when they choose to pay when they shop.
Our goal in this arena to make way for our financial accessible to as many households, as possible and to responsibly cater to their various needs.
Could you so we offer a menu of compelling payment options with competitive underwriting and fee structures for both customers and for weight there we.
We are also incorporating loyalty benefits into our financing solutions to attract new customers increased spend and increased purchase frequency.
Across our portfolio, we have four types of solutions in the financing space.
The most recent of which is our offering for professionals on.
On the consumer side, we have credit cards are wafer or financing platform and buy now pay later all of which cover a wide range of customer use cases profiles and project types.
Each financing solution, we offer a different.
Hoffman coming with its own built in brand affinity and customer networks that we can leverage in many cases, we can customize financing options to drive wafer specific deals and programming.
Let's talk about these in turn.
You've heard us talk in the past about our exciting and RV cycle <unk> business. It continues to enjoy strong momentum and a big part of the flywheel for professional customers is making sure they too have compelling loyalty and financing options.
We're very excited to have partnered with capital one trade credit can begin offering a wafer perpetual credit card rewards your business shoppers and away from professional flex account with flexible payment terms, both of which we expect to rollout later this year.
Progress will be able to apply with their business credentials to build credit and we have built out a suite of business specific features like tracking spend by customer or project and provisioning account access with multiple employees. We're.
We're taking what used to be a complex multi dimensional process and consolidating into a single partnership could wait there.
Turning to our BDC side today wafer shoppers in the U S have two major credit card options that combined loyalty with financing.
These are the co branded wafer and Mastercard in our private label credit card through which we offer the choice of rewarding discounts or financing offers.
Card members across both can earn 5% back in wafer rewards for purchases on wafer sites and wafer Mastercard members can also earn rewards on purchases made everywhere else.
Some of you might recall that we launched these options in the fall of 2020 in partnership with Citi.
It represented a major improvement in customer benefits since the.
Introduction, we have seen a strong response from shoppers with over 750000 card members now spending hundreds of millions of dollars on wafer per year.
We have been adding tens of thousands of new card members every month and during their first year of the card in my brain waves here. They spend two five times more than our average customer.
For consumers, who prefer other ways to pay we have to wait for financing platform, which provides leasing and financing to meet the needs of each shopper.
Customers applied just one and an accessible wafer native application and eligible applicants.
Do you have options available to them.
Our model maximizes approved customers and minimize their costs through a marketplace of providers.
Once approved customers are able to choose from a menu of offerings for more than half a dozen brand named providers.
You can pay in catapult.
Letting shoppers choose which format.
Best.
Once again this is a good example of how we are using that technology first solution to introduce smart competitive dynamics to drive the best outcome for our customers.
The way they are financing platform as an important new customer gateway for us this past quarter more than half of orders that use this platform came from new customers and over the last year. We've served more than 400000 shoppers.
Rounding out the set of payment solutions.
Global customers, who want to pay it over time without a credit application can leverage multiple buy now pay later option from.
From leaders such requirement.
Consumers are enthusiastically embracing these programs and you will see our buy now pay later offerings grow and availability and competitiveness.
Yes.
Across the investments and partnerships. We are building our Northstar is creating the most accessible shopping experience for our customers, while providing rewarding benefits that include increasingly personalizing their experience even at checkout through payment solutions and extending loyalty benefits to wherever they prefer to shop online.
Online or in future of physical retail locations.
We want to make sure we reward our customers for their loyalty as they come back again and again.
Thank you and I'll now turn the call over to Mike for a review of our financials.
Thank you, Steve and good morning, everyone.
Let's take a look at the financial details for the fourth quarter before discussing the outlook.
As you saw on our press release. This morning, Q4 total net revenue was $3 3 billion.
Representing an 11, 4% decline year over year.
Q4, largely played out in line with our quarter to date revenue commentary back in November .
Even though we did begin the holiday promotional season earlier than normal in order to mitigate potential bottlenecks during the cyber five period.
Supply chain challenges across the industry continued to persist throughout the quarter.
On a segment basis U S. Net revenue declined eight 8% from Q4 last year, while international net revenue declined by 23% year over year, and 24, 4% on a constant currency basis.
It's difficult to precisely measure the performance of the online market in real time. However.
However, we do believe our trends largely mirrored broader e-commerce softness in the period.
As was the case back in Q3, <unk> Dot com in the U S outperformed the consolidated business for the quarter.
While the specialty retail brands in the U S remained a drag.
As a reminder, we are in the process of more tightly curated the specialty retail catalogs and are therefore going through a period of large negative year over year declines.
The international business faced difficult comps in Q4 due in part to more stringent lockdowns that were in place last year.
Turning to Q4 kpis at the consolidated level.
In the trailing 12 months, we had more than 27 million active customers.
12, 5% lower than last year.
Order frequency over the last 12 months was $1 89.
<unk> declined year over year.
These are continuation of the same trend we've seen over the last couple of quarters give.
Given the outsized year ago comparison.
LTM net revenue per active customer grew about 11% year over year to $501.
Driven by higher <unk>.
But somewhat offset by a moderate decline in order frequency.
In times like these when inflation is pervasive in the economy, we work with suppliers to hold down cost increases to the extent possible and where necessary also passed some of these increases onto retail prices. This.
This is what you are seeing put upward pressure on <unk>.
I'll now move further down the P&L as I do.
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.
I'll use the same non-GAAP basis, when discussing our outlook as well.
Q4 gross margin was 27, 2% in.
In line with our guidance of 27% to 28% and our comment that it would land towards the lower end of the range.
Lower volumes year over year, as well as inflation driven by supply chain bottlenecks and a tight labor market remain pressure points on the gross margin line.
Customer service and merchant fees were four 4% of net revenue in the fourth quarter, just slightly above our guidance due to increased compensation costs.
Advertising as a percent of net revenue was 10, 6%.
While digital advertising markets are also seeing some price inflation, we are staying disciplined by adhering to our ROI framework across our various marketing channels.
We also continue to innovate with new channels and are being very deliberate around where we invest across the marketing funnel to unlock the best efficiencies.
Our selling operations technology, and G&A or Opex expenses.
$481 million lending just on top of our outlook.
As we previewed last quarter the magnitude of the sequential step up as a result of compensation adjustments starting to take effect in Q4.
Our team also made some progress against our hiring plan and we continued our transition to the cloud, which essentially move some of our legacy data center capex spend to Opex.
Putting this all together Q4, adjusted EBITDA was negative $4 million. This was in line with our guidance for a roughly breakeven results.
In the U S. Adjusted EBITDA was $65 million or a two 4% margin.
While the international segment booked adjusted EBITDA of negative $69 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 Q4 net cash from operating activities was $89 million and free cash flow was $15 million after factoring in $74 million of capital expenditures.
Before I turn to the details of our outlook, let me frame for you our latest thinking on the macro and how we're managing the business within that.
The macro environment remains dynamic and candidly extremely difficult to read.
So household savings remain robust our customers are seeing widespread inflation impact their lives and pressure their wallets.
They also have more choices around where to direct their dollars as pandemic restrictions ease.
Though we are watching the state of the consumer closely at this point, we believe that interest and demand for our category and for wafer remain healthy.
We just have to be patient for the pendulum of behavior that <unk> described earlier to reach equilibrium infrastructural ecommerce tailwind to become more visible again later this year.
Let's now turn to Q1.
On an orders placed basis quarter to date, our consolidated gross revenue is down in the low teens year over year.
Besides the various macro crosswinds, which we're working through today Q1 also presents a more difficult growth comparison in Q4.
With the year ago period bolstered by stimulus early in the quarter and stringent lockdowns internationally.
Like you we are tracking the implied CAGR versus 2019.
These are in the positive high teens quarter to date and are modestly better than what we saw towards the end of 2021.
Anecdotal supplier feedback also suggests stronger relative performance recently for both E Commerce and way fair.
All of which is encouraging.
As we move forward, we're planning for revenue trends that mirror pre pandemic seasonal sequential curves implying.
Implying greater revenue dollars in Q2 versus Q1.
Similar sized Q2, and Q3 and a larger Q4 due to holiday timing.
Though it's early this is what we're seeing play out so far in this quarter.
Turning now to Q1 gross margins, we continue to view, 27%, 28% is a sustainable gross margin range for the time being with clear plans in place to drive expansion above this range over the coming years for.
For now however, the low end of this range continues to be most appropriate to target for Q1.
Particularly in light of the inflationary pressures the whole industry is dealing with.
Moving down the P&L, we forecast customer service and merchant fees as a percentage of net revenues at four 5% plus or minus.
Advertising as a percent of net revenue will move around depending on the opportunities we see in the period and the resulting channel mix based on what we're seeing thus far the top end of our typical 10% to 11% range is reasonable to assume for Q1.
So T G&A or opex dollars, excluding stock based compensation related taxes should be approximately $510 million to $520 million in Q1.
The main driver here, both year over year and quarter over quarter is compensation, primarily for our existing team, but also for new employees as well.
Net head count additions in the back half of 2021 were slower than planned due to economy wide attrition trends all part of this so called great resignation. However.
However, we now have good momentum in net hiring and expect a more steady pace from here.
Assuming the top line trends, we've seen quarter to date continue this.
This would translate to a negative low single digit adjusted EBITDA margin for the quarter.
We are in great shape to handle any quarterly volatility and provided a normal seasonal revenue cadence to the year that I mentioned above we expect for the full year to be modestly profitable on an adjusted EBITDA basis.
Touching now on a few housekeeping items. Please assume the following for Q1.
Equity based compensation and related tax expense of approximately $112 million to $116 million depreciation.
Depreciation and amortization of approximately $82 million to $87 million.
Interest expense of approximately $8 million to $9 million.
Weighted average shares outstanding equal to approximately 106 million shares.
Finally, we forecast capex in a $95 million to $105 million range in Q1.
We do expect higher capex for the full year overall as we build out the new retail store formats and continue to invest in our logistics footprint.
Specifically, we expect to have two new U S based fulfillment centers opening in 2022.
All in Q1 will be a larger cash outflow period for US. This is typical and has to do with the timing of supplier payments post holiday.
And with networking capital dynamics, given Q1 is a seasonally smaller period relative to the holiday enhanced Q4.
Over the last couple of years, we have clearly demonstrated the attractive inherent economics of our business.
This should not be in question, even as we consciously choose to accept some quarterly volatility on the bottom line.
Just to put things in perspective, our full year 2021, net revenue was 50% greater than in 2019, and yet our head count is down slightly over that period of time.
This is a tremendous achievement that speaks to the resiliency and talent of our organization not to mention the scalability of the investments we have made over many years in technology infrastructure and process.
From this point, we intend to add people to our team and a more ongoing normalized way to.
To support both our near term and long term growth and profitability initiatives.
Our goal is to onboard people at a reasonable pace in order to get the executing efficiently without putting undue stress on the organization.
Put another way we are deliberately continuing to pursue high ROI initiatives that we know will set us up for success over many years to come.
Even as we do so and if our top line assumptions play out we expect 2022 to be a modestly profitable year for way fair in adjusted EBITDA terms.
This is what <unk> described when he referenced our ability to grow the profitable and invest at the same time.
However, if revenue normalization in the form of a more typical seasonal build quarter over quarter is slow to materialize you should expect us to take a close look at our plans and course correct, if we think necessary.
Importantly.
We have the benefit of a strong balance sheet to keep us focused on the long term and on striking the right balance for way fair whatever the macro environment may be.
Thank you all very much now near <unk>, Steve and I will be happy to take your questions.
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Thank you everyone for joining us. This morning, we're having a couple of technical difficulties, but I also wanted to just take a second and say thank you for.
Joining us on what is obviously, a very difficult day for the world.
At large.
The events in the Ukraine around our mines and far outweigh what we're here to talk about this morning.
But obviously, we're we're of course here and happy to take your questions. So I'll ask the operator to compile the queue and get us to the first question. Thanks.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit your questions to one question and one follow up question. Your first question comes from the line of Peter Keith from Piper Sandler Your line is open.
Alright, thanks, so much good morning, everyone.
I wanted to just ask about some of the near term performance. Michael you guys talked about improving in the quarter to date period too.
High teens, two year sales CAGR, so kind of a two part question number one.
The teens right you are running below kind of your longer term goal to get to over $100 billion by 2030. So a why do you think you are running below that level here and then secondarily you are seeing some near term <unk> so could.
Could you elaborate on what's maybe driving that sequential acceleration.
Okay.
Operator.
Hey, Peter Sorry, it's Michael where we are.
Go ahead.
Having some technical difficulties.
Is that.
It is.
Currently muted and we're trying to undo Tim.
So apologies for that let me ask let me try to answer your question and then Eric can jump in after me.
I think there's a couple of things here first.
We are we are seeing as I mentioned before we're seeing.
Sequential improvement and and we are seeing ourselves on a normal sequential pattern now.
I want to be clear, we're in a very murky environment right. We're seeing that in January and February we watch this on a weekly basis.
And so we are seeing coming out of Q4 into Q1.
Very much the more our more normal pattern of how the sequential performance.
Is going.
And so I would say that that piece number one in terms of the sort of the longer term when I think when you think about that sort of like 2030 goal et cetera.
We continue to be in a period between post COVID-19 inflation.
Everything else that's going on in the World right now.
Hard to exactly understand how the consumer is going to perform and so I. Just think we're trying to we're trying to be thoughtful and measured there.
I will say, though that to your point, if we're running in the high teens CAGR from 2019 basis.
Pretty close to.
Where we think.
You would need to believe in order to get to the long term and thats in this sort of really murky sort of tough environment, maybe I'll pass it over to Nir, if we solve the tech problem.
Can you guys hear me now.
Yes.
Okay, Great I'm not sure what the issue was it.
I think Peter one of the things.
And I missed part of Michael's answer.
These technical problems, but basically I think the macro.
Is setting a lot of what the current growth rate is in some degree because of what traffic is there and whats channel mix on the traffic is.
When you talk about some of the improvements youre seeing what I will say is that on one hand to see continued gains and growth rate. When you look at how it is going to play out sequentially, you, obviously need the macro to get back to kind of a stable.
<unk>, which we think is headed there, but frankly there is a lot. We are working on as well that are very specific things. We are doing that drive the business for US. One is when you think about suppliers for finishing goods through the castle gate networks, which drives up the speed badging on the site.
Lower retail prices because a lot of the last mile transportation cost comes out which is the most expensive transportation leg.
That's a pretty big driver of conversion that tips and new customers drives to repeat flywheel.
We're seeing that that will progress nicely. This year, and we have kind of a leading indicator on that because as you are aware on ocean freight forwarding business has grown in scale that ocean years, an MIT runs mid year and so it made through April here and as we talk to suppliers about what capacity. They want what we've seen is that the interest of <unk>.
And the network is very high and we have a lot of slow plans that show that that will be playing out and then there's a lot of other things that we don't always talk about but you know we've been investing in new classes and so as an example, large appliances as a category.
It's really a small number of players.
And somewhat of an oligopoly manner. There is a huge opportunity to do a great job there with storytelling, helping customers find the right products, there's a lot of technical complexity delivery and logistics matter service matters.
And we're having great progress there the red carpet merchandising with the flagship brands those are really progressing very nicely increasingly exclusive increasingly taking share in our business.
Vertical.
Focus of the <unk> business <unk> business, a couple of billion dollars business well as we've grown it's obviously the account managers and what we've done with customers has worked very well we've increased the offering but now the vertical experiences that we're building out as a nice accelerant gold in the luxury space, we're still a small player there thats growing quite nicely.
Huge amount of headway there the goods that we carry there from a few hundred brands that typically were only available to the designers interior.
Designed trade channels is really incredible selection of goods, bringing those direct to customers and making them available online with the customization. That's there with the breadth of selection. That's there. So thank you so I'm going to stop rambling, but theres a lot of things that will continue to drive up the growth rate specific to us outside of the macro and the macro we think will also help.
Okay. That's helpful and maybe I'll just pivot to margin.
Typically I would ask about castle gate.
We think there's a notable competitive advantage yet the dollar volume through castigate has come down on a two year basis, and Eric you talked about providing some financial and operational incentives to suppliers. So in doing so will that provide some margin dilution.
The near term in order to get suppliers to can make more inventory.
Alright.
Here's the way to here's the way to think about that so the way, we historically approached it with suppliers.
It was very political and it was very technically correct, but it was complicated by that what do I mean, well the ocean freight costs ex the drayage costs why.
The brokerage fees dish cargo insurance is that.
Induction charge, depending on the location is desk.
Holiday should fees or that.
So it was very complicated to understand your costing what we did is we basically simplified it we said hey, let's move the goods into castle gate upstream induct them into our consolidation operations, here's the here's what youre going to pay in May.
Think of it is covering that ocean freight drayage that inbound cost if they would have otherwise paid someone else and in today's world. It's even hard to access and even if you are willing to pay and the rates that we offer are still pretty compelling. So that's a very easy ask and what we've done is we've bundled in.
So one kind of price the different fees to make it easy for them to understand what the opportunity is but what we're doing is we're managing it on a total cost of ownership basis, because just charges that suppliers never pay that we paid like the outbound shipping and so what we do is we look at the total cost we manage the complexity the suppliers are paying us for the logistics services, but in a simple <unk>.
<unk> and <unk>.
Bundling it this way, we're actually making a lot easier for suppliers to lean in but not in a way that is margin dilutive. What we're doing is we're basically making sure that end to end benefits in the end to end costs are reflected versus what we're getting and suppliers basically paying us.
Mentioned is for the logistics costs, and obviously, we'd undertaken some of our own cost. So don't think of it as being margin dilutive more than trying to simplify the offering.
Okay. That's very helpful. Thanks, so much and good luck.
Your next question comes from the line of Brian Nagel from Oppenheimer <unk> Company. Your line is open.
Hi, good morning.
Good morning, Brian .
A couple of questions I'm going to emergent together.
You talked about this with MS shifting backdrop post COVID-19 consumers going back I think you made the comment going back to their prepaid debit ways that meet certain extent shopping more physical stores. So.
The questions I have is if you look at the wafer a bottle and all the tools at your disposal are there levers you could you are there you could pull here in the near term so to say.
Drive even better recognition on the part of the consumer as well.
Potential normalization is happening and then secondly, we've talked from time to time about wafer testing physical stores.
I go back to you within the context of the wafer Crystal ball, but that's still very very small item, but is that are you looking more at that now because there is something more underway noise you see consumers once again gravitating towards some type of physical presence.
Yes.
Yes sure Thanks, Mike.
On your first question when you talked about customers sort of reverting to pre pandemic behavior.
We think there is a pendulum beginning of COVID-19 it swung.
Very very strongly to online and on our way out of Covid. It swinging the other way, we think it's now coming back towards the middle.
Don't know that there are levers, we can pull specifically that move it back to the middle any any quicker, but I will just remind you.
In our business over 75% of the business is repeat so we have a very large base of customers. They made 4 billion visits last year, they're very engaged we have directly to communicate with them, whether that's E mail or through the app. They are very interested in what we're doing and so.
We are able to drive our business, obviously, the pendulum getting back to the middle of this very helpful as well.
We have different segments <unk>.
<unk> business apparel, those are growing quite quite nicely.
The wafer business is mass business its doing well its resilience its going to be more affected by this pendulum swings that the high end right now with some of what youre seeing with inflation and the like but it's doing pretty well.
<unk> Dot com it was down mid single digits in Q4, so we're seeing momentum building there.
Yes.
Specialty retail brands.
Moving us to very tightly curate catalogs, we're seeing really nice progress, where we finished that duration or duration notes, obviously in a time, where availability is low and where frankly you are taking out some well performing skus to really get to a tighter assortment thats all specialty quality that the comp is very negative, but that's part of the plan because we're nearing the end of the repositioning.
More than Youll see really fast growth and then the international geography standards, a pendulum swing. So you have a mixed set of things that are kind of buffeting around and so I don't know if Steve or we can do to kind of get to the end of SaaS or I would say, we're I think we're headed there anyways fairly quickly and you had talked about physical stores I just want to highlight on physical stores. This is something we've been working on for years.
No.
Anthemic really does not have a role to play in how we think about that about five years ago, we tested pop ups for a couple of years than we had a 5000 square foot store in Natick mall outside of Boston, and we really saw a very good performance there and we've learned a lot from that we then decided to embarked on an effort to really build what we think where the optimal store.
For each of our concepts and so to that end, we've got some of the stores opening for our specialty retail brands. This year.
Larger format. We're excited about the wafer that will open up next year, but the work so that started year and a half ago started a long time ago and so the way to think about that is this is just at the next step in creating an omnichannel experience that takes advantage of everything we have we have a distribution network. We have a delivery network that can deliver goods very quickly.
We have a great offering we have the inventory so that's sitting in the supply chain. We've got a very large customer list that we can communicate with so if you think about building our physical stores network. We basically have everything you need other than the stores themselves. So as we build the stores. It's just another way to engage with our customers. Some of the things we provide whether it be design services or just customers having a check.
It starts with products or some of our more complex categories. Just a great thing to add is another way customers can engage with us and so we're pretty excited about how it will play out it's just it'll be something kind of like our logistics network. It can be a big deal, but it plays out slowly over time because.
It's time to open them and optimize them before you really build more but it's a it's another exciting thing we have underway. In addition to lots of other things as I mentioned earlier. So we're excited about where we're headed.
Thanks, guys I appreciate all the color.
Your next question comes from the line of John Blackledge from Cowen Your line is open.
Great. Thank you two questions first on the competitive environment.
Aside from the lingering COVID-19 comps could you discuss the current competitive landscape and as we hopefully emerge from the pandemic do you think that competitors have gained some ground over the past few years on weight. There and then secondly on the on Castigate, Michael mentioned that wafer will add two more castigate facilities in the U S in <unk>.
22 could you just discuss timing of opening and where those facilities are.
Thank you.
Yeah sure John Thanks for the questions.
The competitive front, what I would say is.
I think during the last couple of years, we've been able to.
Even more firmly and advance our position as the leader in home and I think kind of customers who've known us for that we built a household brand going into.
Into the pandemic, we already had there, but I would say that it's all that's happened. During this time period is it's accelerated it and the other thing that I think has happened is it's become very clear the role that logistics plays in providing an optimal ecommerce experience and what you hear companies talk about advanced logistics. The only companies that you really just talk about it a lot.
Our Walmart target home depot, Amazon and Us and I think that that's kind of a key point because without advanced logistics, it's very hard to provide that optimal experience and frankly, it's very hard to control one of the major cost inputs and so I think when you start talking about customer expectations of kind of.
One day delivery same day delivery at competitive costs with great reverse logistics and a great experience convenient schedule delivery and in our case Youre talking about a lot two person deliveries in assembly and putting things in the backyard or putting them in a bedroom or what have you.
It matters a lot. So I would say competitively we feel very good about where we are and we think actually as a results play out youre going to see that our ability to kind of.
Keep up being an outsized winner in this category is going to be very strong.
On your task a question about the two fulfillment centers to answering locations. One is in Baltimore or just outside of these cities I guess, one is just outside of Baltimore and one is just outside of Chicago.
The one in Baltimore has just recently opened and the one in Chicago will open later in the year. So I think those are doses specific question Jan and then the thing you didn't ask but I just want to comment on this.
Where we are in the development and evolution of building out to castigate fulfillment center footprint is that at this point, we do not need to build it out for locations. So we're building it out at this point for capacity. So we have an estimate of how much capacity, we need and we're building them out in order to handle that capacity so one of them.
That will play out over time, you should see the amount percentage utilization of our network should actually grow. Despite the fact that we're going to open more facilities over time.
Thank you on that.
Just let me add on that point.
The thing I don't think we've sort of said clearly we do expect to have increasing penetration of goods flowing through or castigate network. So we're opening incremental warehouses because of the.
The volume that is floating urge mentioned, we have forward visibility on that with ocean freight and so obviously as we run more as a catch.
Catherine penetration grows we run more through that part of it.
Gives us the confidence in our 2007% to 28% gross margin.
Targets overtime and.
Sort of how we're building the business going forward.
Thanks.
Your next question comes from the line of Steven Forbes from Guggenheim. Your line is open.
Good morning.
You mentioned wafer dot com I think was down mid single digits in the fourth quarter can you provide more specific color.
<unk> dot com during I guess quarter to date in the first quarter and then just provide sort of specifics on when the business will cycle the catalog changes within the specialty banners.
Sure, Steve Let me try to add a little color. So kind of what I described VIP in parallel is growing nicely wayfarer dot com doing better than the total fun and then the drags being international and Srp's. Those statements are still true in the first quarter. So.
Don't provide exact specific numbers for each of those but those are those are those statements are all true and the smbs.
They are a relatively small share of the total business, but because of the repositioning and the changes we're making.
Theyre down substantially but what will happen is as you get into the back half of this year you are actually going to see that flip and then youll see them actually be comping up very positively. That's one of the things that makes comps right now really difficult is actually the shape of the year last year, where you have COVID-19 tailwind in the first half and yet normalization happening in the second half they make the call.
Issuer look unusual and I think Michael is saying Hey, if you will for just a normal seasonal pattern don't even account for all of the things that we're specifically doing that should drive outsize performance you actually get to a very nice positive comps in the second half of this year and so one of the things that you have when you talk about the first quarters.
Youre Anniversarying these steep COVID-19 comps from last year, two rounds of stimulus et cetera, but we're not that many months away from where that all that all is behind us.
Thank you and then just a follow up as you think about inflationary pressures.
And inflation challenges among your customer cohort groups and so forth any any sort of color on how you're sort of thinking about managing and mitigating. These inflationary pressures what are you seeing price elasticity of demand coming back into any of the categories are.
How are you sort of planning for the challenges that may come more cut along with inflationary pressures.
Yes.
That's a great question. So what has happened so far is the inflation has been.
Sure enough and of a magnitude large enough that suppliers are passed it on to us and we intend to pass it onto customers you would expect inflation of that magnitude that demand to some degree.
To be honest, we have not seen that happen conversion has held up.
And so why do we think is driving that the only thing we can come up with is like in America. For example, if you look at it folks have two trillion dollars more on their savings accounts now than they did pre pandemic.
That just sheer amount of money, we believe is causing this amount of inflation to be digestible.
When we look out into the future and one of the things we have on our platform as we do have the benefit of having a lot of different suppliers and so there is a competitive tension between them. So that they're not looking to take advantage of the inflation in fact their load to pass it through or they don't want to lose their position.
When we start thinking about how this will play out over time.
We're in an advantage position relative to some we've talked a lot about ocean freight and the opportunity there.
Not only can we reliably move goods at a competitive cost, but frankly, we take out a lot of other expense when we talked about that last mile transportation leg, and so that actually drives lower retail. So that's going to be an advantage, we're going to be able to pass through to customers and as we've talked about a few times, we expect to castigate penetration to ramp nicely through this year, we have a sense for visibility on.
And that can actually be a nice boon for customers. When you talk about fighting inflation. So we think thats pretty exciting.
And then the last thing I would just say, which is not specific to inflation, but.
On this call for years, we've talked a lot about and we did this back when our gross margin was in the 24% to 5% range. Those four pillars that can unlock a lot of gross margin benefits. When we talked about 1000 plus basis point runway from that 24 to 25 and the four big pillars, one was logistics savings and other was basically wholesale economics of suppliers.
Benefits from volume the third was merchandising gains that we can make with our red carpet merchandising and our flagship brands and the fourth was growing our supplier services, which is the logistics services in the advertising and merchandising services that we sell to suppliers.
There is still a long runway on those things ahead of us as well and what we said is as we unlock those gross margin gains our plan is to keep some so you can see gross margin rise and give some back and what give some back means is that customers will see lower prices are we would offer value added services included and so thats. The other thing that's going to play out over time, and we're seeing good momentum.
On that as well.
Thank you.
Your next question comes from the line of Andrew Baum from Needham Your line is open.
Great. Thanks.
Morning, everyone. Thanks for all the color we have two quick questions. So the number of active customers took a pretty big step down in the fourth quarter. How do you think about new customer growth in 'twenty, two and what are you seeing from your 2020 cohorts in terms of retention and buying behavior and as a follow up.
On gross margins you mentioned, the low end of the 2728% range.
Appropriate for the first quarter whats implied for gross margin in your guidance for the year to date adjusted EBITDA slightly profitable. Thank you so much.
Great. Let me, let me start and thanks for the question, let me start with answers and then maybe I'll, let Michael.
Jump in with any any any additional thoughts yet on the active customer Ken I just wanted to clarify that the active customer count would be any customers, who placed an order within the last 12 months. So when we talk about the 4 billion visits they are coming from a large large number of customers.
In excess of the active customer number, but if they haven't made a purchase in that period. They drop out of that number even if they are very engaged and so the active customer number youre still seeing a normalization happening from the peak of Covid, so that $27 million number what youre <unk>.
Noting as its down from $29 million a quarter before I'll just remind you in Q1 of 2020 as we entered Covid, we had $21 million. So it's up 30% up $6 million from then and then again the number that are engaged is a far larger number but that's the number that made the $4 billion just in total so we feel pretty good about the trajectory. The next thing I would just say it's.
When you talked about growing the active customer count that customer count.
There is far more customers to get that we have already and we know that we do survey work right early to understand their awareness of us and their preference for US one of the things Andrew.
The shareholder letter, which we just released today as well if you read that when things I just talked about.
Ernest.
Mongst people, who have purchased from US and then that resulting in their likelihood to come back is incredibly high.
That awareness from those who don't have not yet purchased from US is very very different and so in CPG people talk a lot about trial. There is a new type of cookie and so.
Totally great to have someone on a street corner handing out little sample packets, because they wanted to try it because you try it you might decide you'd like and if you like it you will then go back.
Buy it over and over again and this is the opportunity we have where.
Folks try us so they visit the site they find something they like they buy it they get that item.
That really.
Really create that's the beginning of that flywheel, where they are coming back over and over again and there's just so much runway on the repeat side and as you know repeats over three quarters of the business. It's the reason we grow so quickly. So we think there's just a lot of room with all the enhancements, we're making that the conversion will keep rising as people were visiting the site is macro traffic grows.
Going to keep getting new customer sales. So we don't we don't think that that is at all risks, we think that just keeps playing out over time.
The second part, which you ask a quick question on about gross margin in the guide for the first quarter. We had the same range. We've had for a while 27 to 2000 and as I highlighted that rates will go up over time and that range is up from the 24 to 25, we were at for quite some time.
Your question was what is it for the year I'm going to let Michael field, what is it for the year, because we generally don't give guidance, but what I will say is what it is over time is it is going to actually keep rising quite nicely.
But where we are right now with what we were highlighting and that has to do with the fact that even though we pass on inflation. What we don't do is pass on transitory costs that we think will correct and so in times, where we absorbed some of that for a short period of time that can hit that number a little bit which is why we this quarter. We set at the low end of that range, but Michael do you want to chime in on the year.
Yes, thanks, Neil Thanks, Anna for the question.
Just to be clear, we only guide the current quarter.
With the 27% to 28% range in the low end of that range, which I think is appropriate we've already answered that question.
In terms of as we think about it throughout the year. What we're trying to do is give people some perspective that we're comfortable with the 27% to 8% range throughout this year I do think as you obviously its all revenue dependent right. It's a highly tied to sort of what's going to happen on the top line of authority described one that it's murky, but two that we've got a lot of confidence base.
And what we've been seeing.
But I do think that if that plays out the way, we anticipate I do think we'll be towards the.
Work, our way towards the upper end of our 27% to 8% range towards the back half of the year and that's certainly how we think the year will play out but we are.
We're way far away from sort of giving any specific guidance about the year or the long term or anything of that nature.
Okay. That's fair. Thank you so much and best of luck.
Thanks, Adam Thank you.
And we have reached the end of our question and answer session I'll turn the call back over to the wafer team for some closing remarks.
Well I just want to.
Just say thank you to everyone for your interest in wafer and.
We're excited to continue this journey with you and there is just such a large opportunity. We're excited to be telling you about everything we're doing to tackle it.
Thank you very much.
This concludes today's conference call. Thank you for your participation you may now.
Please wait the conference will begin shortly.
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