Q4 2022 Wayfair Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Good morning, and welcome to Wayfarers fourth quarter 2022 earnings conference call.
All participants are in a listen only mode. After.
After the Speakers' presentation, we will conduct a question answer session.
Ask a question you will need to press star followed by the number one on your telephone keypad.
As a reminder, this conference call is being recorded.
I'd now like to turn the call over to James Wang Head of Investor Relations. Thank you. Please go ahead Sir.
Good morning, and thank you for joining us.
We will review our fourth quarter 2022 results with me are nearing Shah cofounder, Chief Executive Officer and co chairman.
Steve Conine cofounder and co chairman.
And Keith Gallagher, Chief Financial Officer, and Chief administrative officer.
We will all be available for Q&A following today's prepared remarks.
I would like to remind you that our call today will consist of forward looking statements, including but not limited to those regarding our future prospects.
New strategies industry trends, and our financial performance, including guidance for the first quarter of 2023.
All forward looking statements made on today's call are based on information available to us as of today's date.
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 2022, 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, 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 <unk>.
Thank you James and good morning, everyone. It's great to reconnect with you today to share the details of wafers fourth quarter 2022 results.
2022 was a challenging year for our entire industry in more ways than one.
It's an ambitious technology driven company is a challenge to manage all facets of growth in normal times never mind unusual ones.
One of the most important things we can do to be successful.
To rapidly knowledge when the facts on the ground change in real time and make the appropriate adjustments to business plans in response.
You've seen us do this several times over the past year with our cost efficiency initiatives and we feel confident when we look back several years from now we will view these pivots as difficult, but both necessary and wise.
This morning, we published our latest shareholder letter, which I would encourage you all to read on our Investor Relations site.
Stephen I walk through the evolution of our business over the past three years, explaining the ups and downs that the pandemic and its after effects have brought to our category into wafer.
We conclude with a look at the future and do so through the lens of our view around capital allocation we.
We hope you'll find it illuminating, especially in light of the current macro environment.
Our core focus is a return to our history as a company that operates in a lean and efficient manner.
We note in the letter that scarcity is actually a good thing for wafer.
Scarcity of resources drives faster alignment more productivity and better execution and we are beginning to see the payoff from those efforts in our Q4 results today.
We reported $3 1 billion of net revenue and 11 million orders in the fourth quarter.
While we always expect a sequential revenue increase in the holiday quarter.
Sequential order volume tells the full story or more than 25% order growth compared to Q3 is a testament to the improvements we continue to make in every part of our flywheel, which facilitates our future momentum.
We had a good holiday season with gross revenue over sacrifice matching what we did last year.
Over the Thanksgiving weekend, we sold the mattress every 92 seconds. So many that we stack them all and it would reach nearly 12 miles high.
Our success at the end of the year is a strong proof point that the three major principles behind our current strategy.
One driving cost efficiency to nailing, the basics and three earning customer and supplier loyalty are bearing fruit in the form of share capture.
To start let's dive deeper and how we are driving cost efficiency and the latest developments there.
Our journey on the path to cost efficiencies started last spring as we swiftly reacted to a changing macro environment and put a hiring freeze in place.
It became clear that 2022 was diverging from our original set of expectations and in August we made the difficult decision to part ways with nearly 10% of our corporate employee population.
As we then looked at our company priorities team composition and the cost structure in aggregate, we ultimately move fast on a comprehensive plan covering one 4 billion of cost actions across the entire business.
Our execution on this set of initiatives led to the hard but necessary decision to eliminate 1750 additional roles, including approximately 1200 roles or 18% of our corporate employees across the organization last month.
It's easy to get wrapped up in the financial implications of a reduction in head count and detached from the human element. So before I discuss the savings let me say this.
Steve and I are immensely grateful to have such a talented and enthusiastic team that we work with every day.
Across all of our stakeholders our employees are the most important because without them, we cannot effectively serve any of our other partners.
Want to take the opportunity once more to say to all current and former wafer team members. Thank you.
In total our labor reductions have driven over $750 million of annualized cost savings from when we started this effort in the second quarter of 2022.
On top of that we've made considerable progress across operational cost savings initiatives, which we anticipate will total more than $500 million of annualized savings once fully realized later this year. We discussed these initiatives a bit last November where I highlighted returns monetization is one of the many areas in which we're looking to drive more efficiency.
While the savings will accrue to our cost of goods sold line. These initiatives stretch across all areas of the organization. For example, we've kicked off a promising supplier transfer program, where select cases, we chose to pass on customer calls to suppliers to utilize our strong domain expertise to diagnose and resolve customer issues directly.
<unk> can easily identify the ideal resolution.
For example, sending a specific replacement part rather than needing a full replacement.
More quickly than one of our service representatives, resulting in a more efficient and less costly resolution for the customer and for wafer.
Another initiative is leveraging our enormous database of orders to understand the relative rate of damage and other incident risk for items based on delivery location and to factor that into the amount of exposure that items receive on our platform lowering cost and also improving the customer experience.
The final piece of our $1 $4 billion of global cost actions comes from over $150 million of annualized savings against our previously planned spend.
Put every element of our 2023 spending plans under the microscope in order to think more deliberately about the value. We were modeling for each new dollar spent and what we expect will continue to be a challenging customer environment. The combined result is a significant reduction across many of our remaining large cost areas.
Notably advertising capital expenditures and various G&A expenses.
To offer an example in the advertising realm, we typically designate portions of our marketing spend that are used for testing and iterating across new channels. This is an important part of our process to find the new breakthroughs that allow us to then scale up these new AD channels at positive ROI in the ever evolving digital advertising landscape.
However over time some of these tests budgets had grown to a level that was disproportionately large relative to the goal of being modest test budgets. This.
This type of prudent approach applied to all cost lines and added up to large savings.
One of the most important points that I want to ensure is not missed is that across everything we are doing to drive cost efficiency in the organization.
We're not sacrificing our large growth opportunities and we're doing this while we are also lowering retail prices.
We remain as excited as ever for all of the major initiatives that we're working towards including wafer professional our specialty retail brands are luxury platform Paragould catalog expansion efforts physical retail stores and international markets.
And how a return to our core operating philosophy will enable us to unlock these new growth vectors going forward.
As confident as we are and the steps we've taken to get back to our roots is important to remember that the macro environment is still very uncertain.
Consumer sentiment remains under pressure given the uneven state of the economy with multiple cross currents impacting the direction of interest rates housing data and the mix of wallet share to services over goods.
In spite of all of the noise, we remain empowered by the elements of wafer that make us unique and premier shopping destination for home.
And as a result, the strength of our market share trajectory.
Exiting 2022, we believe that we have now regained all of the share loss, we experienced during the second half of 2021, driven by a myriad of factors related to our core recipe.
The shareholder letter also explores this topic in more detail, but let me reiterate our belief that the key elements availability speed and price are responsible for our improving market share position.
Coming back to our three key principles I already touched on cost efficiency and Kate will provide additional details on the numbers a little later.
Now, let's revisit the concept of nailing the basics.
Inventory availability is just one example of how our offering has improved particularly year over year.
Exiting 2022 availability hit the highest point since the beginning of the pandemic setting the stage to propel the rest of the flywheel.
While this was primarily due to the easing of supply chain congestion and a demand slowdown in the spring of 2022.
Also driven this improvement across multiple dimensions, including executing more efficient induction of goods directly from Asia, and offering improved inventory visibility women castigate suppliers can more easily track their products.
To complement our in stock position on goods, we've achieved stronger results on our speed metrics in fact over the course of 2022, we shaved a full day off our average delivery speed tighter.
Tighter integration with carriers has enabled this acceleration while also helping diminish fulfillment costs.
Along with other factors the combination of better availability and faster speed helps to drive a better experience for our consumers on an everyday basis.
<unk> is another area to highlight under Neil the basics as we continue to build the brands assortment and customer reach with approximately 30% of <unk> customers.
To wafer.
We're also proud of our satisfaction scores for the brand best measured by net promoter score now at all time highs.
Taking a higher level view the steady traction we have been building in this brand since its launch in late 2017 through today is a testament to our ability to effectively deploy capital back into our business, we test iterate and develop our wafer family of brands and ways to expand our opportunities while also making sure that we drive healthy.
Hi.
In fact part of <unk> success has been a growing presence within our wafer professional business, which leads to our third key principle, earning customer and supplier loyalty every day.
The business the business opportunity is a meaningful piece of the overall Tam and our category estimated to be nearly a couple hundred billion dollars between North America and Western Europe the.
The differentiators of wafers business to consumer platform gives us unique advantages and our approach to the professional business and our ability to drive value for both customers and suppliers.
Wayfarer serves a wide array of customers on the professional side ranging from interior designers to contractors restaurants to offices to hospitality.
We are focused on illustrating the full value proposition, we can provide supporting the very first steps of a project through our specialized designers as we partner to concept outer space all the way to ensuring everything ordered arrives on site at the same time through our consolidated delivery.
We're also utilizing our data science models to target leads more effectively with visible traction on prospect Activations and other metrics.
The result of these advances is a business that saw strong year over year growth in 2022 as customers increasingly rely on wafer professional for the right combination of product and service.
While a small base of shoppers, we saw the number of customers that spend more than $20000 per year grew by 20% in 2022 as compared to 2021.
Our success within professional is a microcosm of our mission to drive customer and supplier loyalty with opportunities for further progress across the broad wafer ecosystem.
I want to wrap up by returning to where we started the difficulties we faced in 2022 catalyzed several meaningful changes for wafer enabling us to enter this new year is a lean execution focused organization.
23 will be a year of rigorous execution on the key priorities for the company, where we intend to build on the recent momentum highlighted in our cyber five in January press releases.
Although the short term macroeconomic picture is unpredictable we are optimistic in our ability to navigate the challenges based on a return to form in the core recipe and the flexibility of our business model compared to peers.
And regardless of what happens on the top line, we are reaffirming our commitment to reaching adjusted EBITDA profitability soon.
From there our focus is on consistently generating and ultimately scaling positive free cash flow.
Importantly, we consider these goals in the context of total shares outstanding with an emphasis on maximizing profitability and minimizing dilution.
Thank you and I'll now hand, it over to Kate for a review of our financials.
Thanks, Neera and good morning, everyone.
Before we take a look at our fourth quarter results I want to take a moment to echo something you said.
We are tremendously grateful that so many talented and driven individuals share our vision for creating the world's best place to shop for the home.
And so to everyone on the team I wanted to say, thank you as well.
Now, let's dive into the fourth quarter results after which I'll walk through the cost savings measures that <unk> discussed earlier in more financial detail before wrapping up with guidance and closing remarks.
Net revenue for the fourth quarter of 2022, with $3 1 billion down 5% year over year, but up 9% sequentially from the third quarter.
This was slightly better than we had anticipated when we spoke last November and earlier in Europe highlighted the strength in order volume, we saw that 11 million orders up more than 25% from Q3 more than offsetting a decline in <unk> of 13% from last quarter.
We're very excited to see inflationary pressures reverting and order volume reacting positively as expected.
Customers continue to show strong response to promotions and we had a robust holiday calendar starting with our second way day in October going all the way through the new year.
The fourth quarter saw the trends between our U S and international segment stay largely consistent with what we observed during Q3, which was an improvement in comparison to the first half of the year.
Net revenue in the U S outperformed the aggregate and was only down 2% compared to Q4 of 2021, while international was down 20% against last year at the macro pressure continues to weigh more heavily outside of the United States.
I'll now move further down the P&L as I do please note that the remaining financials include depreciation and amortization, but excludes equity based compensation related taxes and other adjustments I will use the same basis when discussing our outlook as well.
We saw another strong quarter on the gross profit line with gross margins at 28, 9% coming in at the high end of our guided range.
The drivers here remain largely unchanged from last quarter with more favorability in the transportation environment and strong levels of castigate penetration working to our advantage.
In fact, we ended 2022 with considerably more suppliers leveraging castigate than we had at the end of 2021.
As we saw for several quarters this year, our strength on the gross margin line persisted even in the presence of a considerably more promotional environment and suppliers continue to work through inventory stockpiles.
Customer service and merchant fees were 5% of net revenue.
Advertising came in at 13, 1% of net revenue.
As we've discussed at length in prior calls the advertising margin continues to be pressured by lower free and direct traffic.
Well this will recover as a function of the macro we remained steadfast behind the efficiency targets to try to every dollar that we spend here.
Finally, our selling operations technology general and administrative expenses totaled $508 million.
You are now seeing the full impact of the cost efficiency actions. We took in the second half of 2020 to manifest and as you know well there's considerably more that we've done.
All combined our Q4 adjusted EBITDA came in at negative $71 million or negative two 3% of net revenue.
You've heard us talk at length about the path to profitability as we look to get back to positive adjusted EBITDA and ultimately free cash flow and so it's worth calling out that we showed positive adjusted EBITDA in our U S segment of $11 million for the fourth quarter.
We ended the year with $1 3 billion of cash and highly liquid investments on our balance sheet and $1 8 billion of total liquidity, including our revolving credit facility.
Net cash from operations was a positive $98 million, while capital expenditures were $117 million, resulting in free cash flow during the quarter of negative $19 million.
During our third quarter call, we had discussed how the working capital dynamics of our business would lead to a cash inflow during the quarter with sequential revenue growth and we saw that play out in our networking capital line items during Q4.
Now before I turn to guidance I want to spend a moment walking through some of the cost savings initiatives that we announced last month and what you can expect from a financial perspective.
Starting with the labor savings, we have now taken action to drive approximately $750 million of annualized total savings compared to our baseline period of Q2 last year.
$450 million of that came as a function of the workforce reduction in January while the.
The majority of those cost benefits will occur in Q1 of 2023 Youll see this fully manifest on the P&L by the second quarter of 2023.
Across that annualized $450 million bucket about $290 million is related to cash compensation that impacts the customer service line and our SRT G&A line compared to where we ended 2022.
The remainder are reductions to steady state equity based compensation.
Turning to the operational cost effort as we've mentioned several times. These savings will ultimately come in the form of reductions to our cost of goods solodyn.
Last quarter, we talked about $200 million to annualized opportunity here, but previewed that there were several hundred million dollars more in total savings that we are working toward on top of that.
As part of the announcement in January you saw that we have now grown that figure to $500 million of annualized savings here all as part of the initiatives that <unk> touched on earlier.
While these savings will build over the course of 2023, we intend to reinvest a healthy portion back into the customer experience in the form of merchandising investments. The exact mix will be a function of the macro environment that we see play out over the course of the year.
The end result of all the action, we've taken so far as to pull up our timetable on reaching adjusted EBITDA breakeven as the first step on the path toward a self funded state.
Can see this path clearly laid out as part of a new slide in our refreshed investor presentation.
As we started to map out this journey last August we said that we'd be profitable by Q4 of 2023 at the latest with the actions. We've taken this past January we felt confident we'll reach this goal earlier than originally planned.
And while we believe we have taken the necessary steps to deliver on this commitment we are prepared to take additional actions depending on the state of the macro environment.
Now, let's turn to guidance for the first quarter.
Quarter to date growth revenue has been trending down about 10% year over year. However, we are seeing a return to traditional seasonality in the core business and we expect net revenue to end the quarter down in the high single digits.
On gross margins, we continue to guide you to the 28% to 29% range that we used for Q4 we.
We expect customer service and merchant fees to be around 5% of net revenue and advertising to be 12% to 13% for the first quarter. This guidance mirrors, what we said in Q4 as we largely see the same drivers impacting these lines right now.
We forecast SRT, G&A or opex, excluding equity based compensation related taxes and restructuring charges to come in between $475 and $485 million for the first quarter Youre seeing the majority of the labor cost savings flow during Q1, and the entire value will manifest in the Q2.
T G&A figure.
If you followed through the guidance Ive, just outlined that should translate to adjusted EBITDA margins in the negative low single digits for the first quarter.
Well, we don't guide on free cash flow I thought it'd be helpful to offer a reminder, around the working capital dynamics for our business.
Our negative cash conversion cycle means and in quarters, where revenue growth sequentially working capital proves to be a source of cash and vice versa, where revenue declines from the period prior.
I wanted to take a moment to highlight something near urgent Steve included in their shareholder letter.
Investors often ask us about our views on return on investment, especially in an environment, where capital is much less readily available then it was just a few years ago.
To some of our response a core part of our organizational DNA is taking a deliberate considered approach to every dollar we spend across the company.
And you see it is manifest in the improvement to unit economics that we've seen over the past several years.
We have confidence in our ability to reach breakeven adjusted EBITDA margins too aggressively ramp to a mid single digit adjusted EBITDA range, which we view as a philosophical floor.
And then continued to our target beyond 10% because of this very DNA and the team operating behind it.
Above all we are measuring our success by growing free cash flow, while at the same time limiting and ultimately offsetting delusion.
Thank you and now marriage, Steven I will take your questions.
As a reminder to ask a question you'll need to press star followed by the number one on your telephone keypad.
To withdraw your question. Please press star one again and.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up thank you.
Our first question comes from Christopher Whoever's from J P. M. Please go ahead your line is open.
Good morning. My first question is on the top line so.
Democratic situation right now with drawing start from you had a year ago. So far James looking up can you talk about when you started to anniversary that and then the bigger picture <unk>.
How <unk> how are you looking at are you looking at historical seasonality input and thinking about how you project beyond the first quarter.
Chris Thanks for the question as a nurse.
So.
A couple of thoughts on that so first.
We are seeing the traditional seasonal cadence playing out so far not just the start of this year, but sort of the shape of Q4 into Q1 and so in that sense.
We do feel like there, there's a trend there but to take a step back to to answer your question, where you started about the top line relative to available are getting better remember the timeline on that so availability got poor starting.
In 21 based on the production shutdowns and.
Could supply chain congestion et cetera, it's got better starting in the spring of 22.
Try to availability gets good and in fact, you know supply chain is is up to all of a sudden suppliers of ample availability.
Then in the summer basically the speed of delivery gets better and that's because suppliers for purchasing goods to maximize sales and then by the time you get to the fall or retail prices get good again, because the inflation that we particularly got hit with because we don't buy inventory advanced.
<unk> abated been pulled back out. So then when you look at this year. When you think about the cops if you're doing it year over year right now we're in a period, where last year, we had elevated demand. The first part of the your head elevated demand. This was a ton of on the crime last year et cetera, and so we're copying against that and now we're going to become the first half of last year kind of know through the spring you'll see that elevator.
Demand come out of the market and then you see a sort of be normal in the second half so the cops and the first half sort of habits copying off and increasingly less high demand environment, but still a high demand environment, then you've got a normal sort of demand environment second half the way we look at it as we sort of don't particularly start by looking at it year over year, we look at it seasonally and that's why it was the shape of Q4.
Or in the queue to attribute December January January and February .
The outdoor season is something that is meaningful for us that starts shortly and what we're seeing is we're seeing demand holding up quite nicely compared to that seasonal pattern and so this is what we saw and what we saw last year. However, last year, then as I mentioned in the spring demand macro weakened that we didn't foresee I don't think anyone foresaw. However.
In our case, we were able to use that to get the recipe back intact, which is why we started taking share starting in the fourth quarter <unk>.
Ever since then we're seeing a nice tight kind of seasonal pattern holding and so there's a wide range of outcomes that seasonal pattern old you know we're gonna we're pretty excited about that and that is kind of what we're seeing right now but on the profitability point, we feel like we can achieve the profitability of range of outcomes. So we're pretty happy about that as well.
Okay. That's very helpful. And then just one follow up on the S. O T. G&A side, you talked about 475 to 485, but you'll get the full run rate in the second quarter can you <unk>, how how much is left in sort of how do you think about the run rate beyond the first quarter. Thank you.
Yeah, Let me, let me Kate you wouldn't feel that yeah, hi, good morning, Chris. So I think it's important to remember that that savings that we're talking about being on the S. A T G and a line. We also expect to see some of that flow through the customer service emergency line, we took a head count out of both of those costs bucket.
You should see the majority of that actually flow through in Q1 as a reminder, Jan 20th was the date of our rash, though you know think about it a little more than two thirds of that 70% of that.
It'd be remainder of that quarter. This quarter didn't have the cost of those folks in it. So you'll see you know the entirety and Q2, but the majority of it will already be hitting you in hitting in Q1 and is in that guy.
Well the other thing I would notice that when you look at S. O T. G&A about half of that is related to compensation costs. What we're talking about here the remainder things like software <unk> any and there are some other puts and takes there that you could see any other costs buckets on that line item is you're looking to wanting to you too.
Got it thank you.
Our next question comes from Cardiff Snag All from Bank of America. Please go ahead. Your line is open.
Okay, great. Thank you very much for taking the questions just one other quick we focus on.
<unk>, so it'll it'll take just a little bit longer to flow through work cause it's operational stuff just one I just wanted to make sure I heard this correctly. It is a 500 milla gross cuts will be realized <unk> just number two could you give a little more detail in terms of the extent of.
Reinvestment and what's the savings.
Macro perspective kind of stay where they are you know would that upgrade to something like 50 per cent reinvestment or what what what's the sandwich Sir.
Sure Let me let me start thanks for the question, let me start with some thoughts and then let me let you take it you know answer and share some more thoughts as well I think the way to think about it is there's a lot of operational cost savings that we've identified that a very tangible and their projects that are underway.
And they generally are taking outweighs that basically does not impede the experience of suppliers or customers and so that's the big benefit and they'll basically to your point, if you pass through manifest as lower retail prices and if you keep it manifests as profit and the quantum as we've said over $500 million is the quantum we've sized it's meaningful and so we're.
We're very excited about that we have not made a pre determined decision on how to split will be and in fact that is one of the many leavers we used to manage the business and so we're we're executing on that <unk>.
Movement of unearthing those costs is moving very well, but in terms of how exactly we let it play through there is not an answer I I think that's fixed but I don't know if there's any.
I think that's fair and and I guess it would add a few point, though we seen gross margin improved nicely throughout the course of this past year. We do expect to continue to build on some of those game, but we want to hold the back of the operating lever for us and I I think it gives us actually a fair amount of dexterity in this environment, which is it an advantage in so.
We will make this decision you know sort of iteratively throughout the year and as we see an opportunity to invest in the customer experience. We can use it that way as we see an opportunity to flow through we can use it that way, but irrespective of that you've seen nice improvement in gross margin in 2022 and should expect to see some of that in 2023 as well.
Our next question comes from <unk> Iranian from Citigroup. Please go ahead. Your line is open.
Hi, good morning.
I wanted to sign up for the macro a little bit more just maybe we could expand a little bit more on the U S vs. Europe trends understood. Europe has has more challenges right now, but you know how could we read through.
Some of the positive.
Because we're seeing in the U S and then.
And then you know.
<unk> with that forward, we've talked about promotional activity over the holidays that.
We're going through in the early part of this year is that okay. You know what would be a big factor in how we're thinking about that.
Sure. Let me, let me feel that and then I don't know if a caterer, Steve want to chime in but.
First first thought I had on the macro the the international segment and the way. We report is everything outside the United States. So that also includes Canada, but I was in Canada as in the same situations UK in Germany, where the macro is significantly more.
More difficult and challenge than in the United States.
And in addition to that the comps so the elevated demand was heightened in those countries in the first half of last year relative to how the U S was heightened so they're all heightened but to different degrees. So there's a normalization period that you need to go through before you get to normalize cops on the back half where the shape of the curve looks a little different than those are different countries for the first half of the year.
So I think it's important to kind of highlight that the next thing is on the inflation inflation that came into good some was raw materials someone's labor a lot of it was.
Ocean freight and then what's happened is it's pretty clear that ocean free is substantially reversed so when focusing about replenishment costs significantly lower for.
For suppliers, then the cost basis that they brought goods and at last year.
What's happened is in the U S folks will get replenishment cost, it's substantially lower their dropping wholesales to basically work towards that number. So in fact, the shape over time as you can see suppliers in the U S keep dropping prices until they get to that replenishment cost with the margin. They want so the Jewish trajectory for prices is not discounting where it needs to.
Go up at some point is actually following the shape of the curve down there is still down to go.
In Canada, the U K and Germany, the story lines, a little different where the cost of energy and then the F X cost the foreign exchange costs, because goods coming out of Asia are denominated in the U S. Dollar those things have eroded a lot of the ocean freight savings so on imported goods there's <unk>.
<unk> savings on replenishment cost than there is in the U S and so there you are seeing the curve on cost and coming down also being slower so that combination of those dynamics just make the macro in those countries a little slower to play out than it is in the U S.
Then your point about promotional environment.
Encourage you think about the promotion environment as being more a marketing phenomena than a margin phenomenon and you see that in our gross margin and so what's happened and suppliers of had an excessive amount of goods. They they know that the replenishment cost is lower and they know that they can bring in goods at a much lower price and they know that getting there puts them in a position to be a winner intake sure because it can be much more <unk>.
Price so if they hold pricing based on their cost basis. They would end up being the last person to get there and they don't Wanna do that relative to their peers. So you're seeing them price to some degree relative to the replenishment cost and so that's where I caution keep coming down so his wife's it's already come down some well then what we're doing from a marketing phenomena as we're saying that hey customer.
They're just seeing negative headlines you know rates need to keep going up housing prices have fallen the most in a long time, there is a war that doesn't seem like it and you.
You can't find positive headlines very easily nowadays.
So the phenomenon of customers that they tend to then kind of sit on their hands and the lay offs that are happening in certain sectors. Certainly don't help that well. What then happens is if you tell them hey, there's the sale of it Scott great value. It turns out the top three quintiles of customers actually have an incredible amount of savings they still have significant excess savings from pre COVID-19 that message causes them to be curious.
They come check out what's available at least the items that they were getting excited about it they said the pricing being attractive than what happens is they find something I like and they buy it because they have the money and the sale of it gives them both curiosity come check it out and then the permission to buy it because the value won't last.
So I think that environment will last for for a period of time based on effectively held the headlines play out it's a period of time based on the psyche out there and we saw this after the financial crisis and so in 2000 1910, there was a lot of this and by the time you got a 2011 at really unabated, but it lasted awhile and we kind of know how to <unk>.
Measure for that because we don't want to keep that messaging once you get back to a normal environment, you don't want to create fatigue and on the other hand, you want to lead into what the customers want to here and so we're seeing that and so that that's playing out very well, we're seeing that and the customer reaction and the demand and particularly if you look at the order count which is basically a proxy for the number of customers engaged in buying.
From US you see it right there.
Alright, Thanks, and and a quick follow up Okay. We were pulling a lot of costs up in the system here.
<unk>, a big until your comments that you're prepared to take visual actions.
Like you said, depending on the environment, but you know how you think about.
[noise] across cause profile is now versus where it might be.
And where else there's room west to pull some letters.
If you do end up deciding to do that thanks.
Yeah. So we feel very good about our current cost cutting we take at about one $4 billion of cost out of the business actually over 1.4 billion and as we've done that we've looked across every line item of the piano and so that's from our gross margin line all the way down through <unk>.
And what we've tried to do and I think we've been really thoughtful about our removing places where we were inefficient you heard me speak about this in his remark that in some of the earlier question. We've taken out management layers. We've taken out places where teams are focused on lower order priority. We have not impacted any of our growth factors and I think that's very important to underscore.
In an environment, where you saw I need to further caught I think that will come in the form of sequencing things right now our work has been all around improving efficiency and we're excited about the the gains that we think will get from that efficiency improvement I Dunno nearest if you have anything to add the only thing I would add is just one since I tried to allude to this earlier.
But the <unk>.
Decisions were ready made the actions we've already taken the things that are underway actually get us to our profitability in free cash flow goals and a wide range of revenue outcomes already so I wouldn't say that we've underwritten a sort of a case that you've called bullish that needs to play out on the top line to get there. So we feel very good about where we sit.
Thank you.
Our next question comes from my <unk> from U B S. Please go ahead your line is open.
Thank you.
The reason why you're not providing a firm.
Timeline on EBITDA breakeven, whether it's for the second quarter of our third quarter is the reason.
That you know providing that is that because there is a lot of uncertainty in the macro so you told <unk> or other other moving pieces that could move to <unk>.
I mean, while you can say, there's always moving pieces I think we have a pretty firm view of how it'll play out I think we've just stuck with our traditional stance for eight years now are really not trying to provide a lot in the way of guidance. So we comment on the current quarter and then we really focus on sharing where we're headed and the trajectory the decisions, we're making a priori.
<unk>, we have and we just try not to spend a lot of time and I'm sure. This frustrating but.
Trying to tell folks out a model one quarter to quarter three quarter four quarter and I think we think that's better for focusing people on how the business will plowed over time.
Really the reason yeah until this is Kate I, just reiterate that we feel confident in our path to adjusted EBITDA breakeven.
And we are focused on those costs signed items clearly revenue could be an accelerant, one way or another but even without that we're committed to hitting it sooner than we had disclosed on the queue for a 19 three call in November and we're just reaffirming what we said in our press release in January .
Got it and then just a quick one on the free cash flow.
You can be treated that you could pretty soon it's going to be earlier than the fourth quarter should we expect free cash flow positive by at least the fourth quarter.
So again, we don't we don't guide to free cash flow positive, but let me give you a few thoughts on that that that may help how you frame the thinking so so first I'd point you to this quarter, where we were essentially free cash flow breakeven down only about $19 million free cash flow.
And some of that is due to the working capital seasonality of our business and we operate on a negative working capital cycle on sale in quarter on quarter of sequential positive growth working capital will be of use of cash.
Mentioned on the call Q4 to Q1, which is historically a period of quarter on quarter revenue decline.
Working capital will once again become a use of cash rather than a store. So as you model as a year, there's both the working capital dynamics and how that May play out based on our traditional seasonality and then there's the work we're doing too aggressively manage operating cash flow and continue to manage down those costs and so I would think about the two of those.
Things in conjunction if you think about free cash flow going forward.
Got it thanks, a lot and good luck with the rest of the year.
Our next question comes from fast fashion from Wedbush Securities. Please go ahead. Your line is open.
Thanks, a lot. Thank the morning on Thursday nights.
Prevent orange the customer, but we're also seeing still elevated customer churn how're you were thinking about customer churn rates in 2023 relative to the last couple of quarters here and 22.
Yes. Thanks for the question, we're actually seem very nice traction with our customers I I tried to reference that I mean, I think order count would be your proxy for customers being engaged where folks are basically.
You know buying right and that an order is the best proxy for a future order and so the way to think about that is when the recipe was not intact. It obviously was less compelling for customers to return now the recipe basically again to sequence it right availability got better in the spring last year speak up better in the summer and.
Fall the retail prices got better that got the full recipe intact and you know obviously, having very compelling retail prices key during that period of peak inflation supply chain scarcity, we were not able to have his component retail prices. We would like we do now and so you've seen in the fourth quarter, you have seen the customer count and the order account grow.
That's a trajectory that's continuing so if you play that out over time, I think you're gonna see the.
The numbers go in the direction that.
We certainly want to see them go yeah, I I think I'd clarify one thing I think you were looking at our active customer account as you remember that's in LTM figure. So what you'll see happen. There is customer cycle out that is our anniversary and some of those COVID-19 periods that were still elevated in the past 12 months.
I think you are actually seeing the declines their moderate in the fourth quarter and that's part of our newer spoke to you in the orders being elevated as you start to bring on some new customers. We also disclosed that in our investor presentation, which we update and released today on the Bill is on our total customer file of customers that have ever purchase from us at.
Being 80 million strong, obviously, our email list or greater than that and we continue to see this as a source of strength that particularly in environment <unk> marketing becomes important we can go back to this group and get them to shop again, so active customer numbers, a little wonky in the LTM basis. It it's on.
Got it yeah does that any millions that is interesting, but also implies that you've touched a majority of home furnishings purchasing households in the U S. And you think that that's spelled active brown to require those customer that as opposed to a customer service art experiencing wayfair won't come back.
We think there's actually a lot of folks. We also have not yet had purchased from us because remember the 80 million would include not just households are consumers. It would include the b b customers and the wafer professional businesses is is you know a smaller piece of our total business, but meaningful and it would include all the international geographies.
Both B C N b b as well.
Got it thank you.
Our next question comes from Stephen FARB Spam Guggenheim Partners. Please go ahead. Your line is open.
Good morning <unk>.
I wanted to start with international profitability and really just curious.
If you could take a step back for us and and maybe just reframe, how you're thinking about the near term and medium term opportunity for free for the free cash flow needs to support those initiatives.
Maybe can if you can help us frame, how the cost actions impact a segment disclosures right in essence, because we think about international profitability into the first quarter.
Sure soon thanks for the question Uhm.
The way the things so first of all the international segment is the compilation of Canada, Germany, and the UK and those three countries or each of different stages of maturity, Canada being the most mature household brands significant penetration there. The UK second household brand leadership roles, well very nice penetration not quite as high as Canada and then jerk.
Many would be the least mature of the three not quite a household brand status kind of on the way and then.
Each of those three are in a different macroeconomic environment all.
All three kind of kind of similar to one another more challenge the us stronger first half last year off the COVID-19 sort of.
Environment in the U S but.
Different that each other as well and so the trajectory of international profitability.
Each of those countries has a nice trajectory on.
To get there.
And then you add it up and you'll see that total segment. So it's not like one thing, but let me let me turn it over to Kate who maybe can answer your question about how to think about yeah. I would think about the the cost cutting that we did as being expansive across our entire portfolio of brands and geography.
So it wasn't as if anything was excluded from that work. So the cost cuts that we've talked about on for example on the compensation and the ramp those were related in Europe , as well, where we have a team on the ground we don't have a.
Large team on the ground in Canada. Similarly, the operational cost savings that we're making those are impacting our international businesses. We also spoke in our press release about savings relative to plan on our advertising spanning capital expenditures and again that was also apply to our European business and our international portfolio as a whole so when you.
Think about the cost savings you should think about them as being broad based and were scrutinizing every area of the business.
Thank you and then maybe just a quick follow up <unk> question.
Yeah, I I took you guys putting that slide in there in.
And the presentation of customer 580 million.
I'm not sure if you're trying to indicate something but maybe near you or you can sort of speak to your reactivation efforts of the lapped customer base and then I guess, most importantly, as we think about that L. T M number that gets disclosed.
Have we reached the point at where you can sort of predict or foresee internally or the return to active customer growth as that disclosure is defined.
Okay.
Yeah. So few that's the one that LTM number obviously, if you believe that.
On that order towns in the the recipe being in tact can leave things have turned it then takes a full 12 months before that number reflects a full year's worth right. So that's one thing. The second thing is that number the definition of the active customer numbers bought within the last 12 months, so there's different levels.
Levels of engagement, there's people, who not shown up on the site at all and then there's folks who visit on the site and so there's there's some stats and the investor deck as well in that so I think we said that the site an app visits last year were 3 billion visits.
So if you take the active customer number you divided by the visit number the number of visits you would get per customer would seem incredibly high which basically tells you that that's probably unlikely right, which means that there's a lot of people who visited who haven't yet bought and so if you say over the recipes back intact. They are doing things that seem to be working customers are reacting well.
Conclusion, I would think you would draw and there's a lot of other people were getting more engaged and become quaint gauged, who who haven't yet bought so the way to think about that is that that there's a cohort coming along which is not just in the active number yet, but it's more engaged in coming behind them. So.
There's I mean unreactive Asian, obviously, we think about that a lot. The COVID-19 period I had a very unusual shape to it with a two two of 20 being this huge spike up so there's a lot of people who've had different levels of engagement, but if you look at it in a more recent period you see this nice upswing of people, who bought which is in the number and people who have not yet bump it would be in the visits in the app.
[noise] visits type number.
Thank you.
Our next question comes from and I Andrey laugh from need them. Please go ahead. Your line is open.
Great. Thank you so much and good morning, guys Uhm.
Uhm well wanted to follow up on them Guide you said you were seeing normal seasonality, but the one you guide implies a trend that's below the historic seasonality for the business. So is the takeaway for us that January perhaps started off slow, but the trend has improved and fed him any comment.
[noise] President's day laid out for the business and thank you so much.
Alright, So let me answer let me just say a couple of thoughts and then I'll, let Kate upon.
So if you look at the year, if you forget about what happened last year, you look at the you're seeing a very nice seasonal pattern, which is strong since the beginning of the year. If you compare it year over year, the percentages shift and they shift not because of what's happened this year, but because of the shape of the COVID-19 related excess demand around the on the crunch bike last year.
So it's all in what frame it you want to put on that from a predictive standpoint, the seasonal cadence would tell you more than trying to you know.
Do the mathematical formula of the Covid Spike on Omicron, and the Downslope Obama cron and what happened next etc, Uhm stimulus et cetera, but.
Yeah, I I guess at this point you to I think what we thought was that we were seeing seasonality and our core business, though if you think about our our use their business.
And then the other thing that I would add is from a seasonality perspective, we do typically see the outdoor season started in March that is generally what is.
Guiding hiccup in March is beholden to the seasonality that we're seeing and then that's how we end up at the guide of negative high single digits versus where we are coordinating and I'll. Just say we also we were very happy with presence day, so that did go well.
Our next question comes from John Blackledge from Cowan. Please go ahead. Your line is open.
Oh, great. Thanks, two questions do you have.
[noise] expenses a per cent of revenues has been elevated the last few quarters and into one Q as well what kind of what are the drivers and how should that track over the course of the year and then the second question is Yoki you discuss the key drivers of the market share gains in four Q did you think they are kind of your kind of holding those sure games, thus far and one Q.
And there's a higher level, what kind of what would it take for wafer to get back to the pre COVID-19 incremental market share gains, which at times I think you disclose were as high as 20 or 30 per cent. Thank you.
Thanks, John .
So on your first question about the AD cost and I think you're looking at the ACN are so as a percentage of revenue being elevated.
I think the best way to think about that is that.
That percentage reflects a mix of free traffic, which has a zero cost. So this is people coming directly to wayfair people, who have the app and open at people, who click on an email et cetera, and pay traffic and this is like the paid media spend that you are all familiar with as well and in a period of time, where the category is not top of them.
Mind and since last summer that demand easing as we went into last summer was basically a function of discretionary spending shifting to travel leisure and entertainment and so you see that being above trend and you see this category being below trend.
And that's just reflective of this category and being less top of mind those are the categories being more top of mind, you'll see free tap traffic get softened the.
The pay traffic, though doesn't necessary gets often because we manage that very quantitatively around paybacks and in fact, if anything we've heightened the paybacks by cutting out some of the AD spend that was more speculative that would be the highest AC in our ads then which is one of the things we referenced in the $1.4 billion cost actions. So so what you're gonna see as a C N R.
Of course gets better just off cutting out that AD spend but frankly, the biggest thing that will make it better over time is that sort of category getting back to the mean and that sort of you know.
The free basically as a proxy of that recovery versus the engage base, but questions. How top of mine is a category and so that will play out and we're seeing as I mentioned, some nice signs in the business as I mentioned on the recipe and an attraction that seasonal gains.
On your second question about the market share in the fourth quarter.
I I would not say Mark as you got better in the 400, I'd say the Myrtia got better starting in the fourth quarter.
And so we believe that we're doing well we believe we're doing well this quarter. We just came up a lot of trade shows the beginning to your has a tremendous number of supplier trade shows and what we've heard from suppliers as the feedback that they saw as taking share starting in the fourth quarter. This is continue to take care of this year.
Leave we're seeing that credit card data and so we think that recipe being attacked and then all of the things we're doing around leading in to provide the customers would value, helping our suppliers deliver that value that it's working and so we feel very good about how that will continue to play out and as you roll forward, we're very confident in how our results will play out Uhm Kate anything.
You want to add to that no I think I think that covers it and I think that was our last question.
Thank you.
We are at a time for questions today, I would like to turn the call back over to the Wayfair team for closing remarks.
Thanks, everybody I'll endeavour to have my voice back for the next call and thank you all for joining today. Thanks, though thanks.
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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