Q1 2022 Wayfair Inc Earnings Call

Please wait the conference will begin shortly.

[music].

Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the wafer first quarter 2022 earnings 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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you'd like to withdraw your question again press the star one. Thank you Jane Gelfand head of Investor Relations Treasury and corporate development you may begin your conference.

Good morning, and thank you for joining us.

Today, We will review our first quarter 2022 results with me are nearing Shah cofounder, Chief Executive Officer, and co Chairman, Steve Conine Cofounder and co Chairman <unk>, Chief Technology Officer, and Michael Fleisher Chief financial.

Officer.

I'll 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 second quarter of 2022.

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

Our 10-K for 2021, our 10-Q for this quarter and our.

Subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made today.

Except as required by law, we undertake no obligation to publicly update or revise any of these statements 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.

<unk> 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 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 a webcast will be available for replay on our Investor Relations website.

I would now like to turn the call over to Merit.

Thank you Jane and good morning, everyone.

We're glad to reconnect with you today to share the details of wayfarers first quarter results.

More than two years ago, we made a swift transition to a remote working environment.

The early days of the pandemic.

Over the past several months, we welcome back thousands of weight variance to our corporate headquarters in Boston the.

The energy and excitement has been palpable as colleagues and friends reunited.

And many new faces made the jump from computer screen to designate.

Being together in person a few times a week is a strong enabler of one of the most important drivers behind wafer success.

Our collaborative culture.

Our talented hard working and low ego team is singularly focused on building the world's best destination for the home.

Despite the rapid changes over the last two years. This goal has remained steadfast and the response, we continue to see from our customers speaks to the value wafer brings to their lives.

Even in this admittedly softer period, our active customer count was $25 million in Q1, and we delivered $10 million orders generating nearly $3 billion.

Of revenue.

When we spoke in February I noted, we were seeing early signs of normalization in consumer behavior as the pension that pulled heavily towards ecommerce in 2020.

And swung back to physical retail in 2021 had begun to even out.

This is still the case, but in just the two months since a lot has transpired.

With rising prices across the retail universe in our midst troubling geopolitical events are mass customers in the U S and internationally appear understandably more focused on where they are spending their next dollar pound or euro.

Consumer spending is still climbing for retail overall, however, even with the relatively healthy individual balance sheets shoppers are nonetheless, diverting a larger share of their wallets to non discretionary categories and re prioritizing experiences like travel.

Reflecting these trends within our business, we're seeing more strength from luxury and professional customers vis vis mass shoppers and stronger overall performance in the U S relative to our international geographies.

Michael will get into the specifics, but for now I'll, just say that while the typical seasonal pattern of gradually building demand that we expected for the year is in fact playing out.

It's happening in a more muted fashion than our normal seasonal curve.

Factors like a slower start to spring weather make the exact curve hard to read but we are seeing positive traction.

Last week, we had our most successful way day ever a clear sign that customers remain very interested in the category.

Notably our way day event represented two of the four largest days in wafers entire history.

For context, the other two were during the pandemic.

We also expect year over year revenue growth to progressively accelerate over the course of 2022 aided by improving product availability speed of delivery and customer value as well as normalizing year ago comparisons.

Okay.

Given the volatility of the macro this environment only reinforces the value of having a long term focus, but also moving with agility and speed.

Features truly inherent to how wafer operates.

<unk> core competencies have always included our ability to leverage data to have a real time view of our customer and our strong partnership model with our suppliers.

These enable us to identify actionable insights and to be nimble in our approach regardless of the environment.

Our P&L has natural variability, which adjusts and stronger in softer periods in our platform and power suppliers to fine tune their offerings quickly to meet changing customer expectations.

Layers know that they can lean on.

To access a loyal and robust customer base in.

Internally, we are used to moving and pivoting quickly given the rate of change at wafer. These elements combined position us well in any environment to solve for the best long term outcomes for our customers suppliers and for wafer.

While rising energy prices are a headwind to shipping and fulfillment costs. Some of the biggest pain points from last year are dissipating.

Encouragingly, we are seeing a steady recovery and logistics globally since the low point of 2021 as areas of congestion continue to ease.

Product availability on the platform has improved by around 10 percentage points since the trough, while the delivery times have improved by more than 10% for small parcels and more than 20% for large parcels from where they were this time last year.

While we have not yet returned to a fully normal supply chain environment. We are generally seeing the pace of improvement accelerate suppliers are thinking more strategically about inventory management than they have over the last two years as the gap between supply and demand begins to close and we believe this will accrue to wafers benefit.

It is important to note that our business model excels when supply meets or exceeds demand.

As it does most of the time.

However, 2021 represented the opposite this.

This resulted in poor availability, a significant degradation of delivery speed and cost pressures.

These factors reverse is responsible for the share taking that had started earlier in 2022 and had a long runway ahead.

We are seeing strong interest in selling on <unk>.

Due in large part to the value that suppliers can derived from castle gate.

All the way from Asia consolidation and ocean freight forwarding to storage and fulfillment.

The last mile logistics.

We've nearly doubled the number of suppliers selling on the platform since 2019.

So many of our newer suppliers are only now discovering the true value that casualty can add to their business and we expect to increased uptake across all of our logistics services as the year goes on.

To facilitate this we are driving more education.

Simplifying the supplier onboarding process.

And bundling services to make it easier than ever for them to take advantage of castle gate.

Over time, this should unlock a wide range of benefits like better delivery speed higher conversion and improved cost efficiency.

As well as more reliable ocean and last mile capacity.

All of which lead to a win for customers suppliers and wafer.

Over the past several months, we've met with thousands of our partners across a series of industry events, where we heard a consistent feedback suppliers are just as focused as we are on the state of the consumer.

And theyre looking to double down on platforms, where they know their interests are best aligned there.

We're excited to lean into <unk> because of the partnership model, we bring offering them dedicated and live support augmented by an increasingly sophisticated set of technology tools, all geared around helping them grow their business.

Suppliers have multiple ways to standout on wafer. These include deeper castigate integration participating in house brands, and our <unk> business leaning into key promotional events and enhancing their presence through wafer media and merchandising solutions.

<unk> stands out as the best place to sell online because of our ability to integrate services across the full spectrum of supplier needs.

We're seeing growing interest across each of these dimensions.

The players are excited about all the ways, we can drive value for their business in the near term, while we simultaneously invest to bring new shoppers into the ecosystem over the long run.

One example of this is what we're doing with physical retail in just a few weeks with the opening of our first all modern store.

We're excited to begin to showcase our specialty retail brands and an entirely new set of formats.

And our teams have put a lot of thought and creativity into optimizing the in store shopping experience for customers.

This is the next stage of wafers Omnichannel journey.

Our first Josh <unk> main store will launch later this year and we are especially excited to open our first store under the way fare banner next year.

Our physical retail locations will be a gateway into the broader wafer ecosystem building on and complementing the richness of the online shopping experience with our world class logistics infrastructure underlying both.

Yet. Another example of US taking a decade long view of the business.

Even with the uncertainty that we're seeing in the environment. We have conviction that <unk> is uniquely positioned to command considerable share in the future because of the loyalty of our shoppers today the.

The runway of customers, yet to capture and our differentiated set of capabilities.

We've always run this business thinking about what is best for our customers and our suppliers.

That remains our focus today as we maintain the delicate balance between being nimble and responsive to the environment.

Continuing to manage the business for the long run.

Switching gears as you may have seen this morning today. We are also sharing that Michael Fleisher will be retiring next January .

And then Kate Gulliver is being named incoming Chief financial Officer, and Chief administrative officer.

Many of you have been students of wafer from the IPO in 2014, and therefore, no Michael well.

He's been a trusted partner to me and Steve for the past eight years, having joined the company when we had less than a $1 billion in revenue.

And overseeing its growth to the industry leader that it is today.

Under Michael's watch wafers capabilities have grown exponentially more sophisticated our employee population has expanded from less than 2000 to approximately 18000 today.

And together, we have weathered all sorts of dynamic environments, which are only made the company stronger.

It's perhaps less visible from the outside is a top tier talent Michaels nurtured across all parts of the organization.

At the top of that list is Kate Gulliver, who has worked alongside Michael for nearly as whole tenure.

Kate has long been part of Michael's thoughtful succession planning and will transition into the CFO and CIO role in November as he looks forward to retirement early next year.

She will lead all the areas that Michael currently overseas, which include finance legal talent real estate and corporate affairs.

Some of you know Kate is waivers first Investor Relations later, after which you went on to build out our talent organization as Chief people Officer.

Prior to wafer Kate was at Bain capital and Mckinsey.

Michael will be very missed Steve and I and the broader leadership team already have UK is an invaluable partner and have tremendous confidence in her ability to elevate wafer even further in her new capacity in the years to come.

Even as Michael remains fully engaged over the coming quarters. We're excited for you to spend more time with Kate as we get into the summer.

Turning now to our next speaker I'm very happy to introduce Fiona Tan, who recently became Chief Technology officer, after a year and a half of working in tandem with our predecessor, Jim Miller.

She's joining us today to discuss our tech organization and what we're building to take wafer to the next level of scale.

Thank you <unk> and good morning, everyone I'm excited to join you today to discuss our technology organization and how we are building the future of wait there.

To give you a brief background on myself I studied.

And Stanford and work at Oracle took a software.

And most recently Walmart, where I was the head of technology for the U S Division.

And wafer in the fall of 2020 as the global head of customer interconnect technology under our prior CTO Jim Miller.

<unk> spent the past year and a half working hand in hand with Jim as he began setting wafer optical from a $10 billion to $100 billion platform.

I wanted to start by giving you an overview of the organization and how it's evolved in recent years, and then talk specifically, but some of the most important areas, where we see tech is it driving competitive advantage for weight there.

Wafer technology team consists of more than 3000 software engineers product managers data scientists user experience and user interface designers and whole host of other roles that develop sustain and support the full stack technology and products that help run every function of wafer globally.

At the highest level our mission is to create world class experiences for all wafer shoppers suppliers and employees to do this we build the underlying technology enabled us to deliver those experiences in a manner that is durable scalable resilient and consistent.

You can broadly think about our organization across each of these major stakeholders with teams in each functional area dedicated to solving for the unique needs of each group.

In addition to the people we have working on all of our internal enterprise technology, such as our proprietary marketing Tech stack.

Have a diverse set of teams working on building a better customer experience.

<unk>, what we call store Fracked.

Customer service and more.

At the same time, we have groups dedicated to making with at the best possible platform for our supplier partners and focus on elements like merchandising supply chain and self service tools.

As we thought about readying wafer to grow into a $100 billion business, we set out to evolve our organization and simple very specific ways to facilitate that growth.

And then I need to say that we are nearly finished with our move to the cloud.

We also continue to work on re platforming from our legacy technology stack cloud Native micro services.

This will give us a clear path to scalability, while preserving the ability to be nimble in how we build out the platform in the future.

Alongside the progression of our technology stack, we've also been taking our team to the next level.

One of our big focus areas have been growing the seniority of the team and bringing on talent with domain expertise and experience in building products at scale.

We've brought in senior leaders for some of the most respected technology companies in the world, which is deepen our expertise in critical functions and act as a magnet for other talent.

As he started this evolution two years back 60% of our team members at less than two years of professional experience. We've now flip that ratio and that figure sits at less than 30% today.

The driving force and our ability to track and retain top talent has been the opening of four new development centers, New office locations with some of the top markets of technology talent across North America.

Since we announced these new centers, we have hired more than 400 team members to work across the San Francisco Bay area, Austin, and Seattle and Toronto.

I'd like to turn now to the underlying technology itself and how it influences the experiences to our customers and suppliers have as they buy and sell on weaker.

In particular, we are deeply focused on the benefits of machine learning and automation as we think about driving scale in the business let.

Let me walk you through a few examples of how these are applied across marketing catalog and logistics.

One of the biggest areas, we leveraged technology is in our marketing organization, which itself is made up of more than 200 quantitative market areas engineers and data scientists.

Team drive billions of customer interactions every week with a big focus on automation.

As an example, we leverage machine learning and accretion of over $36 million search keywords across three languages as he drives search engine optimization.

Beyond marketing, we use machine learning to curate the tens of millions of items across our catalog as well as to augment enrich and ensure accurate and complete product integration.

This enables us to respond to customer needs to filters and search making sure customers can shop with enhanced confidence in products in the style and price points that are right for them.

One last area to highlight is how we are applying machine learning into our logistics network. We are dynamically curating customer search to show products and not only fit the parameters of this surge but are also located in fulfillment centers closer to them.

Doing so can significantly.

<unk> products travel lowering costs and prices, reducing damage and driving higher conversion.

We also have strong teams thinking about what it will mean to shop for the home years from now.

For instance, we.

Next is our R&D team, specifically focused on exploring the future of the Internet and E Commerce.

We have been experimenting in this space for a long time in early Jan saw an opportunity to scale the creation of lifestyle imagery by digitizing photography <unk> modulator.

We believe this <unk> content will become a backbone for novel applications in VR and AR space.

Already made early steps and integrating these models into proprietary and third party exponential features.

The feature of the home is in the cloud and it won't be long for many consumers have a digital edition of the home, which they can decorate industrial space as a complement to highly decorate their home in the real world.

Wafer has long lead industry innovation around how customers shop for their homes.

Positioned to continue to do so and are very excited about what the future holds.

Thank you and now let me turn it over to Michael for a review of the financials.

Thank you Fiona and good morning, everyone.

Before I dive in I, just wanted to thank <unk> for the kind words.

Working with <unk> and Steve to build this tremendous company over the last eight plus years has been the privilege of a lifetime.

While I'm not going anywhere over the coming quarters I do want to say that this decision is purely the fulfillment of a personal commitment I made to myself and my family several years back.

I could not be more bullish on <unk> prospects and the talented team behind it.

Nor in Keith's future as CFO and CIO.

Keith has been a constant sounding board and partner to me over the last several years and has a proven capable and inspirational leader inside way fair.

I am so excited to work with Kate to facilitate a very smooth transition over the coming quarters and to reintroduce Eric to all of you in the process.

Now, let's take a look at the financial details for the first quarter before I move on to the outlook.

As you saw in our press release. This morning, Q1 total net revenue was $3 billion, representing a 14% decline year over year.

Q1 revenue landed somewhat below our quarter to date revenue commentary back in February .

We saw some encouraging trends as the quarter began suggesting a return to more typical shopping behavior with a strong President's day event.

While we knew that March would be a more difficult comparison with the added stimulus from last year.

We also saw new macroeconomic headwinds develop as geopolitical events serve to exacerbate inflationary pressures and subdued some customer sentiment, particularly in Europe .

On a segment basis U S. Net revenue declined 10% from Q1 last year, while international net revenue declined 31% year over year.

We once again saw wafer dot com in the U S outperformed the consolidated business for the full quarter down in the high single digits year over year.

The international segment once again faced difficult comps as we lapped over 80% year over year growth in Q1 of 2021.

We also saw European customer sentiment drop towards the back of the quarter as the war between Ukraine, and Russia unfolded.

Q1, kpis broadly reflected the macro trends that <unk> outlined earlier.

For the trailing 12 months, we had more than 25 million active customers, which was 23% lower year over year.

Order frequency over the last 12 months was $1 87, a decline year over year, but in line with levels, we saw right before the onset of the pandemic.

LTM net revenue per active customer grew about 13% year over year to $520 driven by higher <unk>.

Yes.

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 will use the same non-GAAP basis, when discussing our outlook as well.

Q1 gross margin was 26, 9%. This was largely in line with our guidance for the lower end of 27% to 28%.

As we mentioned in February inflation is weighing on our cost of sales, particularly on shipping and fulfillment as well as labor expenses.

Saw higher energy costs take hold particularly in the back part of the quarter, which is something we will have to deal with an offset over the coming periods.

Customer service and merchant fees were four 8% of net revenue in the first quarter a.

A bit higher quarter over quarter due to increased compensation costs, and a lower revenue base year over year.

Advertising as a percent of net revenue was 11, 2%.

We're seeing smart opportunities with good ROI and top of funnel and brand based advertising.

And taking advantage of these we're leveraging wafers household brand status and.

And driving higher awareness across the wide array of classes of home that we sell in order to penetrate wallet share.

Our selling operations technology, and G&A or Opex expenses totaled $525 million.

The increase quarter over quarter is a combination of compensation adjustments for existing employees.

Net head count growth.

I want to provide some context for the magnitude of the total head count jumped this quarter growing to approximately 18000 by the end of Q1.

The Lions share of this came from additions to our supply chain and customer service teams, which get accounted for in the cost of goods and customer service and merchant fees lines.

While our Opex employee count is also growing to support the business. Our intent is to increase these ranks at a more measured pace as we have previously described.

Putting this all together Q1, adjusted EBITDA was negative $113 million or negative three 8% of net revenue in.

In the U S. Adjusted EBITDA was negative $30 million for negative one 2% margin, while the international segment booked adjusted EBITDA of negative $83 million for a negative 18, 4% margin.

Moving on to the balance sheet and cash flow, we ended the quarter with $2 billion of cash and highly liquid investments.

In Q1 net cash from operating activities was negative $226 million and free cash flow was negative $331 million after factoring in a $105 million of capital expenditures.

As a reminder, the networking capital swing in our business is typically at its most negative from Q4 to Q1.

<unk> intends to turn positive as revenue builds quarter over quarter as the year progresses.

Let's now turn to the outlook.

As Eric mentioned earlier, there are a lot of moving parts influencing consumer behavior and sentiment these days.

War and widespread inflation should weigh on consumer spending.

But we still see the consumer in a relatively healthy place today.

As pandemic restrictions ease there is also shifting between ecommerce and brick and mortar and experiences and things.

We believe the pendulum will swing progressively towards equilibrium here over the course of 2022.

Simply we are still expecting revenue growth year over year to accelerate as the year goes on but we are watching this very carefully.

It is also encouraging that we are driving share capture in the U S. Thus far in 'twenty, two and expect that to continue.

All this said, it's very difficult to pinpoint when exactly things will truly normalize.

We monitor the business very closely and in a databased way and we will remain nimble and adjusting to changing conditions as necessary.

We have appropriate plans in place to properly balance our long term focus on the massive market opportunity.

In the shorter term realities of the environment in which we are operating.

As we have over the last few quarters, we will not provide formal topline guidance and will opt instead for transparency on what we're seeing thus far in Q2.

On a quarter to date basis, our gross revenue was down in the mid to high teens year over year.

Once again, the U S and particularly wafer dot com is trending more strongly than our international segment.

Comps do start to normalize from here and we're also seeing improving supply chain conditions and product availability.

For gross margin as we have for the last five quarters, we continue to target a 27% to 28% range for Q2.

Similar to last quarter, we believe the low end of our range is most likely with.

With the current state of cost inflation in transportation energy and labor.

We remain focused on passing through these higher costs where appropriate.

Managing the remainder within our own cost structure.

For now please model customer service and merchant fees as a percentage of net revenue within a four 5% to 5% range. This is an example of a line item, where we are choosing not to overreact to short term top line volatility and keep a high bar when customer experience.

Advertising as a percentage of net revenue should once again land in a 10% to 11% range.

We remain disciplined in our ROI based approach, so where we end up in this range will depend on the opportunities we see in the period.

And the resulting channel mix.

So T G&A or opex dollars, excluding stock based compensation and related taxes should equal approximately $555 million to $565 million in the second quarter.

As with the last quarter. The main driver here will continue to be compensation for our existing team and new employees joining way fair.

We remain extremely mindful of the delicate balance between hiring too quickly and resourcing, our long term opportunities and continue to monitor and actively manage this closely.

Q2, adjusted EBITDA will ultimately depend on how the topline progresses.

However, I will note that assuming the top line trends, we've seen quarter to date continue this would translate to a Q2 adjusted EBITDA margin that is similar to Q1 levels.

Let me touch now on a few housekeeping items. Please assume the following for Q2.

Equity based compensation and related tax expense of approximately $136 million to $140 million dip.

Depreciation and amortization of approximately $85 million to $90 million.

Interest expense of approximately $9 million.

Weighted average shares outstanding equal to approximately 105 million shares.

Finally, we forecast capex in a $130 million to $140 million range for Q2.

We remain focused on both our long term opportunity and running our business profitably.

The macro environment is so murky right now that it is difficult to know how 2022 will play out with the consumer and our top line.

As such we cannot commit to the business being adjusted EBITDA profitable for the full year, but.

But we will be responsive based on what we are seeing as we remain very focused on returning the business to adjusted EBITDA profitability.

<unk> to say, how our topline plays out over the balance of the year and how we choose to manage our expenses in response to that will drive the exact timing.

We fully intend to manage waste there to strike that right balance between growth profitability and smart long term investment and we have the balance sheet to allow us to strike this balance in a thoughtful way.

Zooming out we also have complete confidence in the structural profit economics of our business and the key drivers that should propel them higher recognizing that the investments we have made over multiple years are already mostly in place to do so.

I now want to wrap up by going back to where I began.

I have no doubt that wayfarers best years lie ahead, because I have seen firsthand what our talented team is capable of.

And the scale of untapped potential in our market.

The past two years have been some of the most challenging and rewarding not just in my nearly decade long tenure here at <unk>.

My entire career.

We have reinforced the importance of coming in every day with a balanced perspective, bringing creativity and resourcefulness to solve today's consumer and supplier problems.

While always keeping sight of what will serve them best longer term.

This is out in the urge and Steve have long run this business and how we feel will continue to operate both under my stewardship as well as kates.

Thank you all very much now nearing Fiona, Steve and I will be happy to take your questions.

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.

Ask that you. Please limit your questions to one question and one follow up.

First question comes from the line of Peter Keith from Piper Sandler Your line is open.

Hi, good morning, Thanks, so much Michael Congratulations it has been great working with you and getting to know you. So wish you nothing but the best.

Just to dig into a question and maybe I'll just turn it to <unk> you had mentioned in the script that.

Your business model excels when supply exceeds demand.

We believe that the inventory is shooting up with a number of suppliers and retailers.

I think we're entering that environment very quickly so could you unpack that a little bit for us and how your model benefits from improved supply and what are the risks that the promotional environment might get a bit more competitive as people try to clear out this excess inventory.

Sure Peter.

Thanks for your thanks for your questions.

Yes.

So first let me clarify its not that our model sells when supply exceeds demand can actually excels when supply is roughly equal to demand or supply exceeds demand. It's just that our model is very disadvantaged when supply is scarce relative to demand, but to be honest in a capitalist and moderate supply is almost never scares, but.

It was last year and it was during World War II. So Theres times, where it is is just super rare and why does it get hurt then we're the only major retailer who doesn't rate checks for inventory. So when supply is scarce as you can imagine if you're a producer you can't produce anywhere near enough relative to demand youre going to sell all of it to people who are writing checks and so.

Our model it just gets hurt a lot and it's not even just that we don't have the best items, but a sub function of that is then of course, we then take that inventory before position. It then we get the speed of delivery that that takes out cost date, which then drives the retail price. So that it's kind of like that has a knock on series of effects well now all of a sudden whats. So good about now what's different in the back.

Half of last year, where we lost share because of this well what's happening now is as you mentioned inventory is recovering not only that recovery is starting to recover aggressively because demand is actually fall in some in a macro perspective, we are already benefiting just as availability was getting better now availability is getting better at a very fast rate our speed of delivery is starting to get better at a fast rate those <unk>.

First with sharper retails, we see customers respond then as you mentioned some suppliers are having in excess of the amount of inventory relative to what they want what happens is our competitive retailers what they've done is they've bought their inventory for the next few months already and they bought it at a certain price and locked in that price theyre now load to discount.

They can put them in a bad cost position on a retail relative to cost well on our platform. The suppliers are setting their price everyday that prices are driving the retail price every day and for our supplier. If you have extra inventory you just want to turn it into cash or less focus on the exact profit margin on those items.

So what we see happen in the first place. They do this is with promotional events by the way. So we saw this happen on President's day, we're seeing we saw this happen on <unk>, we're seeing this happen and what's the lead up to Memorial day. These are obviously U S. Holiday same thing is true in the other countries, which is suppliers are leaning in aggressively they're leaning in aggressively to get share.

That's obviously, a great customer value proposition, we do our role in bringing that promise to customers. They then curious they come in and they check it out and this is why we had our best way to ever we had our best way because we have a large base of people who find wafer interesting. We put forward we put in front of them a great value proposition.

They then obviously reacted with two of our best for days and actually if you look at wafer to come with our two best days ever and what do we think is going to happen in the near term. We think frankly, our speed of delivery is set to continue to get better at an aggressive pace, even though it's already gotten better by a good amount of our availability to start to get better at an aggressive pace, even though it's already gotten better we have forward insight to that by the way.

Partly because of our ocean forwarding business that we started four years ago, the new Ocean Youre just kicked in starting May one we have doubled the capacity from last ocean. Here. This is a pretty good strategic advantage that actually lowers cost for our suppliers as well and so a promotional environment frankly is a good environment for us a normal environment very good environment for us promotional bright why is that a good environment for us well suppliers lean in.

They are competing with one another that's great value for the customer customers find it compelling may come in this is why we did well also by the way journey.

Financial crisis in the housing recession. So it's a very good setup and I think honestly a bunch of folks have noticed this in the year to date share taking that we've done in the credit card data all the third party data is starting to show that we're taking significant share and it's not on the back of the buying the business as you see from the gross margins holding steady it's entirely because of this dynamic.

Okay. That's helpful.

Just sticking on the topic of the competitive environment.

There is a broader view out there that the COVID-19 backdrop last two years for some of the large mass retailers to get a lot better with E comm and specifically a lot better in the home furnishings category. What are you seeing with the evolution of that competitive environment and do you agree with that thesis that maybe youre your mass competitors have become a bit more.

Kate.

I mean, there's no question that the largest retailers all recognize ecommerce is important so here, we're talking about not just Amazon, who obviously is an e-commerce specialist per talking about Walmart and target and home depot, Lowe's again, I'm sticking with the U S names, but each country has a kind of a comparable set.

That said they all focus on their core business. So when you think about home depot Lowe's They talk about the the flatbed trucks and the delivery network. There's a lot of focus on building materials, you're talking about Walmart and target and I've talked about grocery and home grocery delivery lead time about consumables replenishment.

Obviously, there they're trying to protect their share take share back from Amazon.

Everyone's focused on their core business.

I would say that home is no different than every other category, which is that for a general merchandise or they want to be in every category, but they have the same challenges that Amazon has which is if you sell double a batteries and you sell nails.

<unk>.

The picture to be one inch square on a big screen monitor or do you want to be eight inch square right. The truth is the nails at that size picture is not really compelling and so I think the key thing to think about is where home specialist that comes across in the selection and the merchandising we don't do our business. It just the opening price point, which is where those folks do their business and home we have a little.

<unk> network, that's optimized for the types of deliveries that we do with prevents damage at lower retails still drive speed of delivery in an exciting way that the others can't do for big bulky items and our suppliers understand that saw the supplier technology. We're building in all of the things we're trying to provide them to optimize this are really valued by them, because our suppliers by and large or not.

Very large multinationals where you're.

Introducing three new models for the holiday and Youre doing well.

200 containers of each of these are in small to mid sized businesses with a large diverse portfolio of products that deep.

Deep supply chain integration, we do with them to help we give them on the merchandising. These are very valuable services. So I do think youre going to keep seeing us take share in a disproportionate way in home because of our role in home you'll see all of those folks continue to do well in e-commerce broadly, but theyre sharing home will be they will all share the kind of a lower tranche in the market with us and.

I think that's the dynamic we saw prior to Covid that will be the dynamic we continue to see I do think folks who are like more of the independents or the smaller players or the smaller specialized big box guys, they're going to continue to struggle on the ecommerce front because it is a business that benefits those who have scale. When you think about the logistics network. When you think about customer acquisition. These are.

These are not costs, you can amortize out over a small base.

Okay, great. Thanks, so much for the insight I appreciate it and good luck. Thanks.

Thanks, Peter and thank you for the nice comments.

Your next question comes from the line of John Blackledge from Cowen Your line is open.

Great. Thanks for the question and Michael Congrats on your excellent work over the years.

And also congrats to Kate on the new role it will definitely be nice to work with her again.

So I have two questions on supply chain near its in your prepared remarks, you seem to suggest that supply chain issues are abating somewhat.

Is that right and just given conditions in recent Covid shutdowns in China are they are they potentially new headwinds to supply chain and then second question on gross margin. It was right around the low end of the range. How should we think about the puts and takes for gross gross margin in <unk> and the rest of the year. Thank you.

Sure. Thanks, John .

Yes, so I would say our supply chain challenges of our member supply chain for US is the combo. We talk about availability availability is not just a function of production, but a function of us getting access to the production of Ford position. It and then the second is obviously the transportation flow I would say those challenges are abating as demand has come off a little as our ocean freight capacity.

Has grown as we've gotten deeper in the planning cycle with our suppliers obviously.

The shutdowns in China will create a new kind of creates a low and then a burst of activity, but we think generally we're well.

Positioned to manage it and again a lot of what I'm describing is also on a relative basis to how it was before and a relative basis to our competition and we feel like we're in a great position on both of those fronts, which is why we can take share in that environment I am not suggesting that the supply chain is abating to the point, where it's just business as usual from 2018 to 2019 it.

<unk> a complicated activity, but I think the fact that for six years seven years, we've been at building out our own proprietary network ranging from ocean freight to proprietary last mile delivery to deep integration with parcel carriers to a large fulfillment center network over 20 million square feet of space deeply cube.

These are the things that are making us able to manage this on the gross margin question.

I would say there is.

The way to think about it is that range. The 27 to 20. We gave you is the range you should think about now the gross margin has moved around in that range and the reason it's moved around is what we've always said as we take our cost structure of an item the wholesale the transportation cost and our cost structure with the items, we apply the margin for that item and also.

Peer items say margin and Thats the retail.

So cost structure generally drives the retail now that said if there is a transitory change at a piece of the cost structure that we manage which the easiest way to think of basically the maintenance transportation.

If we think thats going to abate or change again soon we're not necessarily going to pass it through to only raise the price of the item a little bit to then drop it a little bit shortly thereafter, and so there's been a lot more movement on transportation Don as you would imagine over this period. So there have been periods of time, where we've sort of been on one side or the other side of that trade, but we have not wanted to just.

Retail is around any more than they have been moving and they've been moving a lot because there's been a lot of wholesale price changes, both up and down inflation broadly driving it up and then as you were mentioning suppliers getting more available we're seeing suppliers leaning in on promotional periods, obviously that drives it down so that's.

That's kind of why you are seeing it move around a little more than maybe normally expect but I think zoom out you Shouldnt expect it changed the only thing I'd add John on that is I do think we're in a period of sort of greater volatility around all of those costs product margin has remained very consistent but obviously theres a lot of movement. Both on the wholesale there as <unk> pointed out and then also.

All of the delivery cost.

So the reason, we're guiding everybody to the low end of that is.

Because there is going to be some volatility in it. We're obviously trying to manage it the best we can not only for our business for our customers right. There is like there is a balancing act there.

Thank you.

Thanks, John .

Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, Thanks, Good morning, and also congrats Michael on your retirement.

You called out success with way day last week can you share with us any additional insights perhaps category performance and how that May help you plan your topline performance over the next few quarters and then my second question you talked about a return to positive EBITDA.

Territory, how do we think about the building blocks within the P&L and I guess, which ones do you think you can expect to see inflect.

Sooner rather than later.

Sure.

Thanks Chuck.

On your first question from <unk> I would say what was exciting about way, Dave as we saw sort of broad based activity. So it was not concentrated any particular category and in fact, we mentioned the outdoor had a slower start to season, partially perhaps due to weather what's interesting is to be compared to the pre COVID-19 kind of curves 18 1917 those seasonal.

Curves it looks a lot like that.

'twenty one in particular had a stronger pull forward and what was interesting awayday outdoor did very well we saw broad based performance that we would expect including the seasonality sort of spikes that we would expect so we thought that that was pretty pretty compelling.

On your question about returning to EBITDA profitability and the trajectory and how do we think about then what I would say there is we feel very good about that and that's why we put it in the prepared remarks, and we are trying to highlight it for a few reasons. The first of which is as we've discussed we're holding gross margins of our unit economics are intact. So what happens is rare.

<unk> grows obviously the flow through substantial that ultimately is a very big driver of getting to EBITDA profitability and what's interesting is.

What I was in Europe last week I was in the UK for the major UK furniture trade shows in Germany.

And visited with quite a few folks I was at the high point in the hardware show in the U S. Just a few weeks ago. What we are hearing in March and in April .

Folks have seen their business significantly stepped down.

And particularly different retailer pockets, we're hearing about warehouses being full retailers really having trouble on sell through different things. We've had got hurt a lot of numbers.

And instead, what we've seen with our business, we've seen demand hold up quite strongly and you can even just hear from Michael's numbers about what we're seeing quarter to date, we're seeing sequential growth. We're seeing a sequential pattern. We mentioned, it's more muted than perhaps total pattern, we normally see but it's still very positive sequential pattern and we've seen that.

Play out so how do we think about profitability well, we believe we're going to keep taking share. So we think revenue will grow even though we're adding opex headcount, we're adding it at a moderate rate. So the opex as a percentage of revenue, which has risen as revenue normalized post COVID-19 that percentage will go down as revenue rises and then frankly it is an uncertain <unk>.

So obviously, we have a variety of plans intact in place to decide what to do depending on how the macro happens that we get to that EBITDA profitability, but we feel pretty good about how things are playing out so far what's happening week by week is playing out frankly in a very positive way and I think what's interesting is we've tried to call this out last quarter.

<unk> mentioned the degree to which we think the availability of the key items in the back half of 'twenty, one hurt us and we talked about how under stock purchasing some other things were painful.

We didn't have and we didn't have the key items and so on so forth well. What's interesting is we worked hard to recover from that as we're seeing the recovery, we're seeing it would be fairly substantial on the share taking and.

So even in what's going to be a choppy macro we feel pretty good about how that will play out and obviously, if the macro gets choppy or than we're underwriting we have a variety of things we can do to drive EBITDA.

Michael anything you want to add on that.

I actually think I think you covered it really well I would say the one thing that you have.

One thing I would add I guess is that.

All of the sort of structural opportunities for increased gross margin over time because of the investments we've made in the supply chain.

As well as across the service supplier services.

All of those still exist and so as the business returns to a more normal growth pattern I think youre going to start to see those flow through as well and I think that's an important driver not just near term, but certainly in the midterm and long term.

Great. Thank you.

Your next question comes from the line of Steven Forbes from Guggenheim. Your line is open.

Okay.

Good morning, and Michael also congrats on the planned retirement.

Nick.

Love to just hear your thoughts on Opex labor productivity.

And really why the recent ramp in <unk> expenses, it doesn't change the longer term margin walk.

And margin target for that respective line item.

Okay.

Sure happy to answer that so I think the biggest thing to keep in mind is that.

So the head count non opex headcount like you're talking about customer service or the fulfillment head count there very much tied to today's order volume today's order flow the number of orders going to our transportation network. The number of phone calls, we're getting tied to today's orders and so that you can say well how does that leverage over time. There is some leverage their technology on things are by and large.

Those are to some degree tied to the order flow will get a little better but titled Oracle when.

You look at Opex, it's really not tied to <unk> order flow. So if you look at the technology, we're building whether it be storefront technology around visualization or different ways for product navigation or whether you talk about the ocean freight.

Forwarding business and how we're going to add a lot more automation to that or you are talking about things. We're doing at Great example, would be physical retail physical retail will take a long time before substantial and yet there is a very substantial sized team working on it today, because you need the team to build the offering and you need that in order to have one store, but one store doesn't move our P&L, but then.

One day decade familiar many many stores that could be meaningful right. So the way to think about Opex is opex labor productivity is not relative to today's revenue is relative to the revenue X years from now.

And you cannot ramp opex fast and get it to work because the people need to get ramped up and that takes a meaningful period of time and we've found that to high percentage of people are new and don't have the historical knowledge you actually it's counterproductive you hurt yourselves and meaning we've said that we're never going to we don't want to have more than 50% of people with less than one year of 10.

Year.

And with turnover and with growth you can hit that we've hit that in the past and we've had problems and so last year with a great resignation, we didn't really grow opex for a number of quarters. We are starting to at the end of the year. We've now added some folks there are plan on adding to opex as a very moderate ramp so that we can actually make sure that we ramp people up we've actually had a burst of new.

People here, so we need to make sure we ramp them up. So we're just we're not going to pile on pile on pile on and creates problem. We've had in the past and so the way to think about it is it's a moderate ramp that lets you do things that really stimulate revenue in the future and so the percentage cost of Opex as a percentage of revenue goes down because if in fact.

Youre building high ROI initiatives, they stimulate revenue in a way that substantial and you've done that work years before right and so that's why you can't really get in the current time, but this is.

This is why we really think about it this way and as I mentioned, we have a variety of plans in place, meaning we're not there's no one ramp plan works, 100% committed to we we moderate what we're going to do based on a combination of things.

And the macro is obviously is the very very very large driver of that as well.

And then maybe just a quick follow up on that I'm not sure if it's possible like ordinary so just.

Help us maybe separate rider segment, the <unk> expenses.

Into different classifications, right sort of in the event that the macro were to deteriorate pretty significantly how.

How much flexibility is there right for you guys to really control the overall expense structure of the business.

Just given the current free cash flow profile.

Yeah, Let me, let Michael answer that for you.

Steve and thanks for the comment upfront to.

Look I think.

I don't want to get into sort of trying to parse all of these things into different pieces as near as mentioned the thing.

It's worth noting that there is a substantive piece of expense in that line that is future focused.

And obviously, you've got more you've got more flexibility on stuff that's future focused.

On the stuff that supporting our customers and sort of running the business day to day.

And so I do think there is a pretty high degree of flexibility there at.

At the same time, you want to be really careful and thoughtful when youre thinking about the tradeoff between the sort of short term.

And sort of what the long term opportunity is and obviously all the people we have working on future stuff were working against what we believe are really really important big long term unlocks to sort of future growth.

But I think there is a balancing act here.

One of the reasons you have a strong balance sheet is that you can sort of be thoughtful about that balancing act in tougher times, we're trying to do that.

But just to reiterate what <unk> said, we also have some we have plans in place to make sure that if the macro world doesn't play out the way we think it's going to do we know the actions we'll take.

Thank you best of luck.

Thanks, Steve.

And we have reached the end of our question and answer session I'll turn the call back over to the wafer gene for some closing remarks.

Well everyone. Thank you for joining for the conference call. We appreciate your interest as always.

Okay.

Look forward to talking to you next quarter.

Thanks, everyone. This.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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