Q3 2022 Wayfair Inc Earnings Call
[music].
Good day and welcome to the way Fair third quarter 2022 earnings release Conference call. Please note today's conference is being recorded all lines have been placed on mute to prevent any background noise. After.
The speaker's 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 would like to withdraw your question Press Star followed by the number one again. Thank you at this time I will turn the conference over to James Lamb <unk> head of Investor Relations. Mr. Lang you may begin your conference.
Good morning, and thank you for joining US today, we will review our third quarter 2022 results with me are <unk> Shah Cofounder, Chief Executive Officer, and co Chairman, Steve Conine co founder and co chairman.
Kate Gulliver, Chief Financial Officer, and Chief administrative officer.
We'll all be available for Q&A following today's prepared remarks.
I would like to remind you that we will make forward looking statements. During this call regarding future events and financial performance, including guidance for the fourth quarter of 2022.
We cannot guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions.
Our 10-K for 2021, our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the companys actual results to differ materially from those projected in any forward looking statements made today.
Sept as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information future events or otherwise.
Also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow.
These non-GAAP financial measures should not be considered 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 IR website.
I would now like to turn the call over to Eric.
Thank you James and good morning, everyone. We're glad to reconnect with you today to share the details of wayfarers third quarter results.
This past August marked our 20 <unk> anniversary it was in the summer of 2002 that Steve and I first started this business out of a nursery and Steve's home.
We were still nearly a decade away from adopting the wafer name at that point, but since the beginning we had a vision of creating a premier online shopping destination for the home.
We thought big and bold every step along the way and.
For nearly a decade, we were able to self fund our growth as we reinvested operating profits back into the business in.
In 2011, we rebranded as Wayfarer and for the first time raise outside capital as we look to scale up our growth.
In the decades since we've grown the business by nearly Twentyfold and made meaningful investments in building out our catalog customer file geographic presence logistics platform.
Sure.
With the size and scale. We've achieved we are now in a position where we can operate the business for both profitability and growth.
And we're well on our way to returning to a state of self funding once more.
Last quarter, we talked about controlling the controllable and orienting weight there in this environment around three key principles.
Driving cost efficiency.
The only the basics and earning customer and supplier loyalty everyday.
Kate and I will talk through what we're doing on each of these fronts and I want to begin at the top.
When we spoke in August we framed what our path to profitability would look like.
And told you that there will be more detail to come in the not too distant future you.
You saw the first evidenced a couple of weeks later as we made the decision to eliminate nearly 900 corporate roles across the organization.
Our goal here was to reduce redundancies and remove excess management layers as part of an organization wide effort to streamline our operations.
At the same time, we talked about additional reductions coming from our spend on third party labor. These.
These two components represent just one set of actions and the cost efficiency.
We are executing.
Simultaneously, we kicked off a separate set that involves operational initiatives such as returns monetization scam reduction incident prevention logistics optimization and more.
Let me provide just one example, but further illustrating returns modernization.
When we process. They returned today there are complexities involved with the cost us on the product back and how we can merchandise and resell it after the return.
We see an opportunity to improve the accuracy of our grading to increase open box sales through platform and pricing improvements.
And the decrease shipping expenses by changing how we manage logistics.
This initiative alone should result in tens of millions of dollars of savings and is one of numerous operational improvements we are working on.
Altogether, we expect the actions we've taken so far to drive over $500 million of savings in our P&L.
And as you'll hear from shortly there is more coming.
Our goal across the board remains the same as it has been for most of the year returning to adjusted EBITDA breakeven quickly in 2023 before targeting positive free cash flow shortly thereafter.
From there we will drive towards a mid single digit adjusted EBITDA margin level that we will philosophically treat as a lower bound of profitability for the business as.
As we discussed last quarter. This thresholds will allow us to cover off other costs, such as stock based compensation as well as capex associated with logistics investments and capitalized software.
As we look to the future. This foundation will enable us to not only drive continued investment into the big and bold ideas that we have planned for wafers next 20 years.
But also deliver profitability in a consistent manner.
I want to turn now to the notion of nailing, the basics, which means showcasing products that interest the customer providing a great experience on the site and delivering perfect orders that arrive quickly.
He had these commitments are elements, such as assortment availability and speed of delivery all of which have improved significantly from where we were a year ago.
In particular, several speed metrics reached records in Q3, including days to deliver and speed badge penetration.
And other part knowing the basics is ensuring we have a clear and relevant promotional calendar to engage our shoppers, which is especially important now given what we're seeing in the consumer environment.
Inflation persist quite broadly.
And with spending pressure across the spectrum of discretionary goods, we continue to see shoppers being very discerning about where their next dollars are going.
For much of the summer months that discretionary spend shifted from goods to services with pressure felt across a wide array of retail sectors, including ours.
While interest in the broad home category remains we're seeing shoppers being more deliberate with their spending patterns as they seek out great value and wait for promotions.
As a result promotional activity across the industry remains high and customers are responding very positively.
To support our suppliers, we have put together a very strong fall calendar of events.
Last week, we ran a successful second way day, which came right on the back of our five days of deals event.
And then just a few weeks from now we'll get to the traditional cyber five tentpole events.
Each of these promotions as an opportunity to provide value to our customers and our suppliers.
Importantly, without compromising our gross margins given our inventory light model.
In today's environment. It is more important than ever for us to remain focused on our next key principle driving customer and supplier loyalty.
So let me give you a few examples of how we're doing this.
One of the biggest factors in driving customer loyalty is having a great experience at all stages of the shopping journey.
Even after their order has been delivered to.
To do this we have made an effort to equip our service professionals with an even wider toolkit of solutions to make things right for our shoppers if there's occasionally happens an issue arises.
These enhancements are generating a very strong response.
In fact over the last handful of months, we've seen repeat rates amongst customers, who are important issue actually match repeat rates of customers who do not.
Our relentless focus on creating the best possible shopping experience is a key enabler of earning customer loyalty and we're pleased to see these efforts validated by internal data as well as external accolades.
We're honored to share that our customer service team has been recognized by Newsweek and their best in customer service 2023 rankings.
We also know our customers care about the environment.
As do we and we are continuing to innovate with programs to address sustainability.
On October 20th we launched our shop sustainably program wafer as third party certified sustainable product offering.
We know who has the largest number of third party sustainability certifications and the home industry as well as they refresh set of options to filter for attributes like water efficiency fair trade and more.
We're very proud of shop sustainably because doing the right thing for our communities and our customers isn't a function of whether the economy is good or bad, but it's something we think of as our responsibility.
On the other side of loyalty equation, we have our suppliers.
Since earlier this year, we've been encouraging suppliers to lean into casual game.
And we've seen continued strong momentum.
Castigate drives multiple advantages for suppliers faster.
Faster conversion through quick delivery.
Lower retail prices due to ship cost savings.
Better visibility on site reduce damage rates.
And more <unk>.
After the supply chain shortages of last year suppliers are re engaging and Cascade penetration is now back to 25% of volume in the U S.
And climbing.
The benefits that <unk> provides to suppliers resulted in tangible value to customers as well as creating a positive flywheel that will further drive loyalty for both groups into the future.
I wanted to wrap up by returning to where we let off.
On the first of our key principles cost efficiency.
We are as a management team and as an organization universally focused on taking the steps needed to reach adjusted EBITDA and cash flow neutrality in short order.
We've taken a hard look at our cost structure holistically to identify areas of improvement and take action aggressively our execution against these initiatives is thoughtful and deliberate to ensure that we can make progress towards our profitability targets without compromising the potential in front of us.
I will reiterate it once more to be clear.
We intend to reach adjusted EBITDA breakeven independent of what the macro brings our way and from there to move forward to a mid single digit margin target, which will allow us to cover our expense base, while at the same time funding our future growth.
Over our 20 year history, we've seen several economic cycles.
One thing that Steve and I have learned is that moments like this presents an opportunity to set ourselves up for continued success as a category leader.
One irony is that this is when we're at our best.
We built this business with no outside capital and be very well funded competitors.
We know how to win by being both lean.
And focused.
Thank you and now I'm excited to turn it over to Kate for a review of our financials.
Thanks, Neera and good morning, everyone before I dive into third quarter results I wanted to take a moment to emphasize the point that you just made it.
The key principles of cost efficiency nailing, the basics and earning customer and supplier loyalty has become driving tenants across our organization in particular, our cost efficiency has a mandate to put each dollar spend under close scrutiny.
We started by closely examining our operating expenses related to head count across two dimensions employees and third party labor like contractors and consultants with savings that accrue primarily within the <unk> line.
These programs are already delivering meaningful savings beginning in Q4.
Concurrently we have been driving a myriad of operational cost savings that will primarily benefit the cost of goods sold line.
Several of these initiatives represent areas of cost discipline.
Forced to the backburner given the frenzy of the Covid impacted period now.
Now is the right time to Reengage across a series of best practices with savings that we'll build over 2023.
Combined we are in motion on incentive actions that represent annualized cost savings of approximately $500 million.
Of which roughly 60% is related to head count and third party labor costs and 40% from operational initiatives.
This magnitude greater than our anticipated adjusted EBITDA losses. This year, but we are not finished in tandem. We are currently accident, an additional savings of several hundred million dollars.
And we will provide details on during our next call.
Turning now to our third quarter results as you saw on the press release Q3 total net revenue was $2 $8 billion.
9% year over year decline and a 14% sequential decline from the second quarter. This is largely in line with the quarter to date performance that we had previewed in early August .
As we noted at that time, a weakening macro environment contributed to a breaks in a typical seasonal pattern in which we would expect revenue to be sequentially flat from the second to the third quarter.
As it has for some time now net revenue in the U S business outperformed the aggregate at a negative 6% year over year decline, while our international market, especially in Europe continued to be disproportionately impacted by macro headwinds and geopolitical uncertainty.
While the operating environment incrementally worsened over the course of Q3, we continued to see customers respond to promotional events in a positive way and are optimistic for what the holiday season will hold this year.
I will 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.
The benefits of castigate adoption are most visible on our gross margin line, which climbed nicely again in Q3 to 29, 1%.
The combination of faster castigate penetration and further relief on transportation costs, some of which we had previously absorbed rather than pass onto customers all helped us to exceed our guided range of 27% to 28% new.
And you already mentioned it briefly earlier, but we're often asked by investors how promotional intensity impacts our margin structure and the simple answer is not by much as suppliers on the site choose to lean in with sharper wholesales, we pass those savings on to the end customer our margins stay resilient, while also ensuring that our retail prices stay competitive okay.
Ross the landscape.
Advertising as a percentage of net revenue came in at 12, 4% for the third quarter above our guided range. There continue to be various mix effects impacting <unk> anr, we went into great detail about these last quarter and much of what we saw in Q3 reflected similar trends to Q2, where once again higher paid versus free traffic.
<unk> is a temporary headwind to this metric.
We continue to monitor our paid marketing spend very closely to ensure that we remain within our ROI and payback parameters across each channel.
Customer service and merchant fees were five 2% of net revenue just above our guided range. We saw some inflation head count across this line item earlier in the quarter.
And while we made adjustments to that base subsequently it still had an impact on the dollar cost for Q3.
We expect to see this return to closer to historical levels in the fourth quarter.
Finally, our selling operations technology, and G&A expenses totaled $543 million.
Just under our guided range with the reduction in force at the end of August a small portion of the savings begin to accrue over the remainder of the quarter and as we will discuss shortly you should expect to see a more fully realize that a savings in Q4.
All combined our Q3 adjusted EBITDA came in at a negative $124 million or a negative 4% of net revenue in line with our guided range.
Ended the quarter with $1 3 billion of cash and highly liquid investments.
Net cash from operations was a negative $431 million and capital expenditures totaled $107 million below our guidance as our cost cutting initiatives started to play out leading to free cash flow of negative $538 million for Q3.
As many of you know, we typically enjoy in networking capital benefit when revenue growth sequentially due to the favorable timing differences between receivables and payables inherent in our business model.
However, this dynamic invert and periods of sequentially declining revenue like we saw in Q3, resulting in a cash outflow in.
In fact more than half of the loss in cash flow from operations. This quarter was due to a drag from networking capital.
With Q4, historically, representing a sequential uptick in revenue, we would expect our networking capital to once again positively contribute to cash flow.
As many of you saw in September we issued $690 million of convertible notes as part of our liquidity management transaction, we saw an opportunity to use the proceeds to repurchase over $600 million outstanding convertible notes for a considerable discount meaningfully reducing our 2020 for maturity from $575 million.
Approximately $200 million as.
As well as beginning to chip away at our notes due in 2025 and give ourselves even more flexibility as we think about navigating the next few years.
With that let's now turn to the outlook.
Quarter to date gross revenue has been trending down in the low single digits year over year.
Excluding the impact of weight Ecu gross revenue was down approximately 10% year over year.
Given the uncertainty around the consumer behavior. This holiday season, we would suggest you model year over year revenue growth down in the high single digit range.
Shifting to gross margins. We now believe it is appropriate to move our guidance range up to 28% to 29% for the fourth quarter.
Many of the drivers of gross margin outperformance in Q3 are expected to continue but the typical holiday mix shift will weigh a bit on gross margins in Q4, So we expect to see some pressure sequentially.
As I previewed earlier, we would expect customer service and merchant fees around 5% of net revenue and advertising to be 12% to 13%. During Q4 as we continue to see the same set of macro pressures impact the mix of traffic across our channels.
We forecast S O T G&A or opex, excluding stock based compensation and related taxes.
Come in between $495 million and $505 million for the fourth quarter.
The full impact from the reduction in force as well as the third party labor cuts are now flowing through.
If you follow through to the guidance I outlined that would translate to adjusted EBITDA margins in the negative low single digit range for the quarter.
Now, let me quickly touch on a few housekeeping items for Q4. Please assume the following equity based compensation and related taxes of $153 million to $160 million depreciation and amortization of approximately $93 million to $98 million net.
Net interest expense of approximately $9 million to $10 million weighted average shares outstanding equal to approximately 108 million shares and capex and $100 million to $110 million range.
In closing I would like to reemphasize, how unified and focused we are on the three key pillars. We've touched on throughout this call cost efficiency nailing, the basics and earning customer and supplier loyalty.
We have a tight plan to continue to drive cost out of the system in a way that is meaningful and proactive while also allowing for flexibility into the future.
Future, we see it break for ways here.
We're excited for the next 20 years with a laser focus on what needs to be done in 2023 at the first step on that path.
Now neared, 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. Please press Star then the number one on your telephone keypad.
Please limit questions to one question and one follow up we'll pause for just a moment to compile the Q&A roster.
Yes.
Okay.
Your first question comes from the line of Brian Nagel with Oppenheimer.
Hi, good morning, Thanks for taking my questions.
Yeah.
So my first question.
You talked a lot about just the advertising expenses elevated.
We saw if you were to read.
And then it sounds like Youre Christian Thank you for the question I have is.
When should that normalize.
I think Richard normalized.
Our 'twenty.
So it's important.
'twenty three and then the follow up question on the program I guess this is more of a duration, we talked again about council gate.
The penetration of around 25%.
So just maybe a longer term strategic question, where should that number be.
Yes.
Where's that infrastructure, so to say designed to be I guess from a more touchy feely standpoint, if I'm a customer of yours or partner of yours now not using can also be why is that.
It's a pretty good all right.
Yes.
Thanks, Brian .
Let me actually jump in and start off on the AD cost question and then taken certainly chime in on that and then we'll go to your calculated question second.
I think the.
Main thing I think to make sure you understand about that add cost to ACN or percentage number is there is a set of things that move that number around.
And a lot of them have to do with mix and one of the things. That's happening right. Now is that if you think about that composition of that number you have a significant amount of traffic that effectively had zero AD cost and Thats, where we have a household brand we have tens of millions of customers. We have the people download the app and depending.
On how top of mind, the home category as they come in they shop wafer.
Then we also have what we do in the paid channels and this is where we manage each channel to a type payback. We've kept all the channels that payback. So we've not extended any and all of those channels are coming in at the payback numbers, we want and there we're going out and we're targeting and running ads in a in a way to draw people in now what happens in times, where the category is top of mind.
Q2 of 2020 for example, Youre just getting tons of that direct free traffic and thats going to average this number down.
But in times, where frankly, the categories not as top of mind, which to be honest. This category, particularly online is not a top of mind right now things like travel and leisure and entertainment and taking share on the discretionary dollar what happens is just that free traffic is a little less those numbers.
We don't need to move very much for the ECP and our percentage to move up or down even though every channels that payback. So what I describe as the single biggest factor that's moving that percentage around right now.
We don't particularly view that is problematic and the reason we don't do that is problematic is that we've seen the cycle before and we know where it will referred to as the environment Normalizes that said there is a component of the spend that is in buckets that are either very hard to measure or high <unk> or an experimental phase.
Where they're not as a percentage, we want to get them to before well scaled them and we're running different experiments and tests to figure out how to get it there and so that bucket is something that frankly, we have been.
Looking at and we're getting tighter with and so that will allow us to basically reduce AD cost without really reducing as much revenue because we're taking off the things that are the most expensive things for the least prove it and things and.
And so that's kind of the way to think about it and why the AD cost number maybe is where it is but also how we can manage it particularly anything you want to add on that yeah. I think that covers that I think as <unk> mentioned, obviously as the mix shift continues to happen. We may see some of that 12% to 13% as we guided to but over time, we're obviously managing very closely some of that longer.
<unk> payback and bringing that isn't necessary.
Okay.
Let me just jump on your second question to castigate penetration.
Yes, so as you noted it's at 25%.
Which basically means that it's recovering quite nicely from the low it hit last year when inventory was super scarce.
And it's on its way to we think records and then break those record. It is a great offering and so we actually have quite a large number of suppliers in it.
I think the way to think about it is why would a supplier KNOP unit it might not be in it either they might be sort of stays where they are just testing and so they might be it in a very small way relative to potential there are some suppliers, who may not be in it yet and part of that is we obviously focus on having these conversations with our CAGR mandatory with suppliers who.
Actively work with we also have a long tail suppliers, who work with us through partner hold our extranet, our systems and a lot of the caskets self service functionality is relatively new and we continue to bolster that so theres a lot of suppliers you get onboard as it becomes easier to do it in a self service manner, and then depending on where our suppliers origin points are there.
Leads that we have been able to really optimize the way we do ocean freight consolidation and then there are certain locations. We do not yet have the inbound flow setup for so that just makes it a little harder for supplier to use cash that they have to handle the inbound flow on their own and as you noticed past year and a half has been a really complicated period, because they went from sort of too much demand too little inventory.
<unk>, so that was sort of that would work against casualty and penetration and suppliers couldn't even flow enough. Good for the orders. They have because obviously you saw a penetration numbers get hurt. So you can imagine new suppliers are not sign up for gasoline in that period right. Now when you go into a period, where there's effectively excess amounts of inventory. So now you have suppliers, who are either have been in cascade and others.
And I want to drive sales, but you also now have less flex like Okay, Hey, I now want to figure how to grow my business in a tough environment I want to try to applegate I want to do things that I wasn't willing to do weren't willing to do last year, because I just didn't have that need. So I think we're in a phase of more castigate adoption suppliers using it more heavily we're adding a lot more optimization.
Two it is we're building up the technology around the inbound flows. So this is all the reasons. It will grow in terms of what level will it get to we havent discuss an exact percentage out there, but what we have talked about is we built a really good logistics footprint. So that phase of opening up buildings just for footprint fake is over.
We do have some buildings coming overtime that basically help us fill in some gaps in places where we need basically capacity. So that we can bring more goods in.
And then frankly as the demand environment normalizes, we will be able to see turns in our network go up which means that the flow of goods through our buildings without more buildings will increase just because right now the way that you see a supply or having an inventory overhang will they would have an inventory overhang that's in their own building, but and cascade as well because of the demand forecast change for everybody. So that's what I think the way to think about it.
Hopefully that's helpful.
I appreciate it thanks for all the detail.
Your next question comes from the line of Steven Forbes with Guggenheim Securities.
Good morning, Eric Steve Kate I want.
To start with the outlook for overall logistic cost Sameer.
Curious are you curious if you could help frame how you see inbound and outbound just the cost environment in general as we look out to 2023.
And sort of frame it around what has traditionally been right at about 20% of overall net sales.
Combination of the two D. Do you see relief right as we look out over the next 12 to 24 months.
Yep.
Steve Great question.
I'd say, if you think about the 20% we referenced that a number of times in the past and what that was if you took every aspect of the end to end logistics. It was roundabout 20 of every revenue dollar.
That was sort of before what happened last year more than the cost cut really mushroomed up so would've risked rose significantly from that level and now if you look at what's happening things like Ocean freight have come back down fairly significantly.
And so it's back down to a level that would sort of put it put you back in that 2000.
Percent some of the things like over the road trucking or coming down there is still somewhat elevated to this aspects have come down more than other aspects, but I think broadly what you should think about it as like supply chain costs are reentering that kind of a normal historical range that 20.
That wasn't true last year and so it is a deflationary force.
And frankly supply demand is right now there's excess supply relative to demand that will normalize back out. So now all of a sudden all the things we're doing to really add efficiency and elegance around having products travel less miles by Ford position them in the right place to begin with that offers the customer with the speed that you to delivery. It offers.
The customer.
Lower retail price because the ship costs get factored into the retail so they see a better price and we also see less damage.
And.
That is taking share and so that's that's a customer value proposition that we're optimizing for that also it's averaging down that shipping cost over time, which is the reason we've been building out the logistics, yes, Steve I'd, probably just add that as we spoke to on the call. In addition to sort of see some of the logistics costs coming in mind. We also have taken a series of actions.
Around our operational costs and that combined is helping us see improvement on that gross margin line, 29% this quarter and we have confidence in that continuing to grow throughout 2023 due to those combination of actions.
Thank you and maybe just a quick follow up.
Staying on that same topic.
I guess.
Think about the impact.
Lower overall logistic cost in the past or the consumer.
Just help us sort of frame the 2023 outlook for average order value directional wise is it is it probably fair to say that we should expect average order value to be down.
Or is it too early to tell.
Mix changes potentially et cetera.
Yes, I think.
I think there is.
Yeah. The short answer of I think <unk> does drops on the question is like how much that's where it gets hard to exactly quantify the how much but there's definitely some inflation, that's already reversed and youre seeing suppliers.
Sort of being proactive around that from a cost to bring this item in the futures lower I have too much right now why don't I start pricing at closer to what the future cost can be so that I can move through it faster. So there is relief in the form of <unk>.
Reflecting these costs coming down absolutely.
In terms of how that flows through to revenue it gets a little tricky because of the <unk> falls actually conversion rates and orders pick up and so you actually don't net lose all of the <unk>.
And our flow through to revenue so depending on what you are trying to think about it will be impacting there is there is that offset that that plays out too.
Helpful. Thank you best of luck.
Thank you.
Your next question comes from the line of Jonathan <unk> with Jefferies.
Just on the half billion dollars.
<unk>.
Coming out of the business.
With no outside capital.
And we did that by being very lean and so when we kind of looked at our cost structure with a fresh set of eyes. There's just a lot of things there that we just saw that frankly jeez, while we're just busy managing the dramatic growth from the $9 billion overnight up over 50.
50% because of Covid.
There's a period of extended period of time, where maybe not everything was equally focused on as much as they should be in terms of months I should just one example is a number of those areas, but the way to think about what the these things do is.
But.
Impact of customers is.
Effectively.
Either neutral or positive and why do I say that well either we're taking out cause that's not providing customer benefits.
Neutral if you think about that doesn't hurt the customer arts positive. If you think about the fact that in some cases. It allows you to lower retails are some of the cost authorization for doing transportation actually increases beat him delivery. So we're like net doing things that are making retails better making speed better taking out cost, where we think it's adding adding.
Adding to value books, so we're not looking at the cost coming on the back of customers. In fact, we're looking at the proposition increasing and what we're doing is we're sort of.
We're sort of streamlining and cleaning up some things that that you could argue maybe you should've done earlier.
Okay anything you want to add on yeah, I just want to make sure. We clarified that $500 million is what where when you are to a sort of just referencing on the gross margin line about 40% of that $500 million. When you think about it operational cost savings and improvements that will flow through and that gross margin.
And then that several hundred million dollars more peace will come back in February with some more details on that for you.
Provide more contact than.
That that's helpful. Thanks for the clarity there and then my second question just done that the second way day I think this is the first year you held up a second had been here is this just a reflection of the current inventory environment.
Or are you kind of changing the philosophy in terms of how you're you're working with suppliers going forward should we expect to see kind of more.
Regular holidays periods.
Into perpetuity, obviously, you clarified that it doesn't impact kind of gross margin all that much but just kind of curious what we should expect.
In terms of promotional holidays going forward.
As the inventory situation changes bank.
Yeah, great depth.
I think it's important to point, we've always had.
With every other mass retailer frankly, a pretty solid calendar.
There are other major shopping auditory President's day Labor Day Memorial day cyber five so we have a calendar through the year wait a.
Same thing give back which we rented as five days of deals. This year. So we have a calendar.
Way to think about it is you can flex it up or down depending on the environment and so right now to your point, there's excess inventory and customers are even though they have plenty of money, they're a little more sitting on the sidelines and that's kind of reflection, we look at the customer sentiment and so promotion when you do in those environments flesh out the promotional kind of calendar.
And it works well, but what you don't do as you don't keep it there forever. So that is the environment normalizes, we bring it back to the normal promotional calendar that we have and then there's periods somewhat rare, but like during COVID-19 promotions just didn't carry the same bank, but they normally do because people were just buying what they wanted every day. So there is a little bit of those times work places the other way to all of those.
Somewhat rare so just think of it as the bulk of the timing of your normal calendar. That's what you would normally seen us do which still has a fair amount of sales.
Sales incident, and then during a period like this will be a relatively short period of time, but you flex up and this is the way they chew as an example of flexing up but don't think that's normal environment then.
Great. Thanks for the color best of luck.
Thank you. Thank you.
Your next question comes from the line of Maria ribs with Canaccord.
Great. Thanks, so much for taking my questions can you just talk about your fulfillment capacity in the U S. At this point and where you are from the utilization standpoint.
Do you see the possible need to optimize your footprint instead of the Mister <unk> continues to be soft in the near term and you focus on cost optimization initiatives, especially as Keith highlighted.
The next layer of additional savings.
Yeah.
I think the way to think about our footprint is.
So we have a good for print it's fairly heavily utilized right now, but it's not necessarily turns level that we and our suppliers would target and that's just a function of this inventory cycle that you're sort of is going to be hearing about from everybody everywhere you already been hearing about which is just folks flowed in demand against the demand profile that since.
Slowed they have too much inventory or imbalance on what inventory they have and they are all networking through it. So if you think of the buildings is with two factors affect how much goes to the building one of course is it full or not and the second at what right does it move in and out the amount of stuff in the building is quite good the rate at which is moving it announced lower than we would all like.
That is why why do you have a way to her while you do these things require suppliers leaning in our personal they they want to they want to right size their inventory they want to get back into balance they want to clear up the excess inventory they know that giving customers value right. Now is really the only thing that will kind of dramatically changed our share work. So that's happening.
When you think about the buildings I think it's important to realize that the buildings actually reduce our costs versus increase our costs because without since you can't when I talk about logistics optimization and taken cost out the way you do that that the easiest way to say about that is this excess miles because if you break something is that you bring it into toward a L. A b a 70 per.
<unk> of the people on the East coast of the US items are sitting in California, then.
They've gotta move really long distance on that final mile leg, which is your most expensive leg to the customer now all of a sudden if you say hey, I'm going to put some guys off the gecko I'll put some in Dallas and I'll put some in Jacksonville, and some in New Jersey, and some in Chicago et cetera.
In relation to what roughly demand balance is all of a sudden the customer sees a faster speed, but frankly or shipping cost goes down dramatically because that inbound leg is not very expensive relative to the outbound leg.
And but obviously without a building in that place to put the goods that you can't you can't do what I just said our suppliers typically have one warehouse a small percentage up to warehouses and it's a it's a negligible percentage up more than that so what happens the supplier doesn't have the infrastructure to do this on their own. This is part of like half of it so appealing to them.
It's that they get the benefit of the port positioning their goods get the speed bag that retails for their goods can drop and that that's a big value proposition for customers right drives demand for those items. Those items are higher could bring you move up in the store. So it's a self fulfilling positive cycle and so.
Driving volume through the buildings is actually a key piece of the strategy to take up cost.
Yeah I was just Emery you mentioned, how do we think about.
Filled out of the seeds in relation to our class savings initiatives in that core goal for twenty-three and as far as the capital expenditures related Eft's, we're very focused on building that when we needed not in advance of when we need it until we intend to be very moderated.
And thoughtful about any incremental capital expenditure there.
Got it. Thank you that's very helpful and then secondly.
Thank you Steve customer behavior may be more recently it would give you some clues data from account should return to growth. He has some time in the near term.
Yeah, I mean, I think what we're seeing in customer behavior is that customers are responding well and.
And as we would have expected to what we're doing in relation to the macro environment. So look at the macro environment and we see customer sediment low.
We see excess goods, we know the playbook for that that's why we have a way to cetera. So we know how to run that playbooks run that playbook of these exciting events, we're seeing suppliers participate in a great way, we know how to market those up to customers and we are seeing that respond so they're coming in there buying we're seeing that work incredibly well as you've seen gross margin is holding up so.
We're not doing as we're not.
Doing it by just kind of think with what we're doing it.
We're investing in running that playbook.
Pliers understand how to reset playbook customers respond well to that playbook.
Perfect playbook for this environment, and it's working really well and that's kind of why we also gave you some seal on the impact way they when we talked about the revenue levels.
I think that this environment is going to be here for a little while like it's not something that's going to go away and the amount of excess inventories can also take a little bit of time to work through so this is that you can think about this environment lasting.
I would probably say a small number of quarters, but it's not it's not weeks for shorter months, yeah. The longterm our view of the potential of the total Pam our position and that where he can't penetration should land that has not changed so while there may be some volatility in the near term or long term outlook has not moved.
Great. Thank you so much for the call.
Your next question comes from the line of Greg B like Evercore ISI.
Greg Your line is open.
The question has been withdrawn. Your next question comes from the line of Alexandra Steiger with Goldman Sachs.
Thank you so much for taking my question is excellent I wanted to follow up on on the active customer gross question here.
Given the scale and reached your chief chairing the pandemic, how do you think about the potential customers the activation to support forward growth and how large do you see reactivation as an opportunity relative.
Can you customer growth going forward. Thank you so much.
Yes, Thanks Alexander.
Yeah, I think reactivation of people.
Is actually a.
Frankly, a big opportunity right and so if you think about it.
We have over time.
Built a large kind.
Kind of following.
Amongst customers.
Number whichever app number of which are on our email list, which visit regularly.
Right now you have a macro phenomenon where basically.
Customer does this category is just not the top of mind thing in their swings that happened in the.
Revert to the mean over time, we're doing a lot to make sure that we are positioning is the go to home retailer the largest specialist in home that we are getting those customers coming back to us as the category becomes back work further top of mind and then their specific things on the marketing side, we're doing to help drive that as well and we have.
Benefit because a lot of what's happened on the AD landscape out there is it makes it very hard for someone who doesn't already have that customer file to effectively market at a reasonable cost.
We have because of the first party data in the directory inches, we have the ability to reach directly to these customers and that's a pretty that's a very major benefit only the largest companies have that benefit today because of what's changed in the privacy landscape and then with some of the technologies are targeting out there and so reactivating customers that have not purchased in the recent past.
We can be viewed as a huge opportunity there's a lot of things we're working on along those lines.
Your next question comes from the lineup Anna <unk> with Nina.
Great. Thank you to like him. Good morning. Thank you guys for all the color very.
Very helpful. At <unk>, you mentioned that environment that worse as the third quarter progressed, but consumer obviously continues to respond.
Sure My innocence, but what was the monthly caden.
During the third quarter, and then secondly could you talk a bit more about international continues to be a pretty meaningful drafts.
Now these new macro is difficult.
You think getting closer to breakeven is realistic twenty-three and international bucket and what are some of the expense opportunities in the business that you could implement you'll get there. Thank you so much.
Yeah great.
Let me start to answer Turner Kartvel S K to jump into.
The environment getting worse in Q3, I'm not sure exactly what the comment we made.
Yeah, Hey, we don't typically disclosed monthly trends.
Certainly I think although we have said and and what I would reiterated that we do see the customer coming in during promotional activities right now.
And.
Tend to be highlights for us at this moment.
And the broader macro contact obviously is a little bit uncertain right now, but I would say I would say like I don't think the environment worsening I think it's more like been steady.
Not improving honestly steady is maybe the way I would phrase it.
Give you the context, what I'm, what I'm, saying.
On the international there's no question that of the four countries.
We have written five countries today technically it was four four major ones in terms of UK, Germany, Canada, and the United States.
And that the United States economically is holding up the best of those four.
And that's that.
Effectively a macro that you see that in the macro data.
And then of course, we see in our micro data.
Now every country has a different set of issues, it's working through and and all of them we believe that.
Online sale home goods is below the normal trend that will revert to but as we mentioned the timing of how exactly that per plays out is very hard to to estimate. So what are we doing there was a big focus on micro Tailwinds, where we can drive share up and we're executing on those and we are actually seeing those working.
Then to your question on costs. We've also we're talking about the $500 million and we talked about $700 million more on top of the $500 million, we're taking out a tremendous amount of costs, which we think positions us incredibly well.
So if you think about.
The netting like if you if you are getting tighter on costs a lot of that's driving down retails as well and then at the same time, you think that there's micro tailwinds, where you can take share based on things you're doing.
Now of course, you have the macro what's quality for a period of time, but the netting of all that we think it's quite a positive story and so we think that'll play out quite well in terms of how to think about international I think really the <unk>.
Country level every country's working through a different set of things and obviously their companies were smaller and so I think the opportunity for the tailwinds to be faster. There is higher when we have smaller share, but honestly the macro conditions of these countries quite different and some of them are quite challenging right now.
And as we said, we intend to get to EBITDA profitability, regardless of the top line that in aggregate, we're very focused on that goal.
We see no structural reason why the international sector over time can't perform as well as the U S sector and certainly when we talk about that $500 million cost savings and that several hundred million more that's across our entire business. That's not focused on one geography.
Alright, that's helpful guys. Thanks, so much.
Thank you.
Who will take one more question and our final question comes from the line of John Blackledge with Cohen.
Oh, great. Thanks to questions first on the competitive positioning I think <unk> revenues down kind of like.
Single digits.
Third quarter, how do you think weaker is doing relative U S home market through the third quarter, you think wafers competitive positioning has changed at all versus pre pandemic and then the second question in the past you said returning customers typically typically cost 47%.
19% of revenue does that still hold their just given the batgirl environment is more expensive to get a returning customer. Thank you.
Yeah. Thanks.
So.
First part of your question a competitive positioning in the U S. A I think the U S is down I think 6%.
And I think what we're seeing in the U S is that.
Our competitive positioning.
Super High low work best positioning is the same as it has been our competitors are the same so competitors. There's a long tail competitors, we have a few sort of larger competitors and then a long tail folks in the category.
I do think when we're talking about the microbe Tailwinds, though I do think there are some things that through the cycle of Covid kind of hurt us and so I tried to talk about kind of the big three three times, but they are basically product availability got pretty bad for a period of time the speed positioning for the fourth of the charity's good got quite bad and then the retail Scott quite bad off the combination of Hell.
Inflation was pass through and the lack of forward positioning. So if you think about that that kind of our roads and offer well where are we now we are now <unk>.
Reasonably far into a cycle, which is reversing those things. So speed is we've got to all time highs on speed and has continued to climb at a fast rate availability is recovered quite nicely that actually has some nice headroom ahead of it.
We have very good insight into and retail prices have been falling quite nicely and like if you look up on our site you look at what we're offering right now for holiday compared to others I think it would be like Oh, well, it's cooked feel quite good so they're sort of these things are playing out quite well. So we feel very good about our position both as a whole retailer bespoke things we're doing.
And then specifically on these core elements of the offer and particularly where we are relative to where we were a year ago.
Due to the kind of these external forces that were far out of our control.
The economics that returning customers returning customers are definitely show you a lot of leverage in fact, it the way it works is.
The cost to go from one order of two orders is.
Isn't obviously, it's low and that's kind of where I think we said we're talking about will repeat on average the seven per cent of the way to think about is like one to two is a number percentage and then presented <unk>. The second and third order than that presented dropped again when you open the third or the fourth order. So as you as someone come to think of it as like his loyalty letters they climb up the ladder they get increasingly less expensive.
Okay from an AD cost standpoint for that next order.
Thank the thing that's complicating the AD cost outlook right now that makes it murky is the thing I tried to talk about earlier. This is free channel pay channel mix shift, which is effectively a byproduct of the macro environment.
And you will just like you've seen it go one way to see it reversed back.
I think that's what it makes it harder for you to see the AD economics underneath and so.
Just to remind you that because I think that's it.
That I think it's kind of both the thing that's causing it to not be as clear.
[noise]. Thank you.
Okay, great well I think with that I think we're wrapping up the call Sir.
Thank everybody for joining us this morning, and I Hope you all have a great holiday season. Thank you all.
This concludes today's conference you may disconnect at this time.
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