Q2 2023 Wayfair Inc Earnings Call
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[music].
Okay.
Good morning, My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the wafer second quarter 2023 earnings release and conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one the onshore telephone keypad to withdraw your question Press Star one again.
I would now like to turn the conference over to James Lee Head of Investor Relations. Please go ahead.
Good morning, and thank you for joining US today, we will review our second quarter 2023 results.
With me are nearing shop, co founder and Chief Executive Officer, and co Chairman, Steve Conine Cofounder and co chairman.
And Kate Gulliver, 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 business strategies.
History trends and our financial performance.
Including guidance for the third 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.
Our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made today.
Except as required by law.
We undertake no obligation to publicly update or revise any of these statements whether as a result of any new information future events or otherwise.
Also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA adjust.
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 contain description of our non-GAAP financial measures and reconciliation 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 generic.
Thanks, James and good morning, everyone.
We're excited to reconnect with you today to share the details of our second quarter results.
Last year, we laid out a plan to strengthen our business that included a path to sustainable and growing profitability with several key milestones.
For the past few quarters, you've seen us execute against that plan.
Our costs focus on the basics and earn more customer and supplier loyalty.
And you've seen the tangible impact of this plan is our performance has continued to improve.
We used to share today that we passed one of our key milestones and are reporting positive adjusted EBITDA and positive free cash flow.
This is in combination with a return to momentum in our topline with positive year over year order growth and sequentially higher active customer count.
All while investing in initiatives for future growth.
This is how we ran the business for our first decade, and how we'll continue to do so going forward.
Profitable while investing for growth.
We think we are now in a very exciting place having scale, while remaining ambitious and entrepreneurial.
We plan to take full advantage of this.
Our work over the past year to drive more than $1 billion of run rate savings in our cost structure is playing out across our entire P&L, enabling our accelerated return to positive adjusted EBITDA and comes in tandem with our efforts to see improvement in our top level Kpis.
Order growth as a leading indicator of our other major kpis and even as average order values normalize towards pre COVID-19 levels due to deflation. We expect to see net revenue returned to positive year over year growth in the third quarter as our active customer count continues to decline sequentially.
We're going to handle this earnings call in a slightly different format than usual because as many of you know next week, we will be hosting our first investor day.
We would encourage all of our investors to tune into the live stream, which will begin at one PM Eastern time on Thursday August 10th.
Using this as an opportunity to introduce you to more members of our leadership team.
Deeper into the core pillars of our business.
And take you through the major growth initiatives for the years ahead.
Through that lens today, we're going to keep our prepared remarks concise to leave more time for questions about this quarter's results that we can turn our full attention to our long term strategy and key growth drivers next week.
Now, let me give you a view of where our business stands as we move through the summer.
Q2 proved to be a quarter or two continuing themes for wafer share.
Share capture and cost efficiency.
I'll start with the share capture piece and the results really speak for them.
Wafer meaningfully outperformed the competition this spring with net revenue down 3% year over year in Q2 compared.
To a category that continues to be down 10% to 20% for widely tracked estimates like credit card and E mail receipt data.
Our team spent significant time at various trade shows over the past few months and we have heard resounding feedback from our suppliers at the platform they want to lean into his way fair.
Benefits of our enormous marketing reach considerable merchandising investments and proprietary logistics capabilities make wafer and unparalleled partner to our suppliers.
This last fall, we have seen strong market share capture on the back of our core recipe the.
The combination of broad availability that delivery and sharp pricing continues to be a powerful flywheel to drive both customer and supplier engagement.
And across the board, we're setting new benchmarks on these metrics available.
Availability and speed Badging continued to climb in Q2.
And with further wholesale cost normalization as well as our operational cost savings efforts, we now consistently see ourselves as a price leader across our most popular items.
Our recipe is back intact.
We've been extremely encouraged by the recent data we're seeing on customer behavior.
It's noticeable upswing across all of our customer cohorts and sequential growth in our active customer count.
It's crucial to know that this improvement in order momentum is not a function of isolated success in any particular class or with a specific group of shoppers. There has been broad based across both our customer file.
And our catalog.
We see this as an important point of validation for our customer acquisition strategy, which looks to build lifetime shoppers to make wafer a core part of their shopping habits.
We approach or any customer loyalty through many vectors.
Our work around promotions is a great example.
In this environment, our promotional activity as a marketing lever that peaks customer curiosity and drive them to visit.
Once on the site they purchase a variety of promoted and non promoted products and factoring sale events in the second quarter non featured items drove over two thirds of our gross revenue.
It's worth noting that in our customer survey work, we're seeing no change the share of shoppers that indicated they would only shop wave here during the sale.
As we do across every facet of the business. We're continuously testing these leavers measuring the results and Iterating.
For example earlier this summer we ran a series of promotions to encourage shoppers who use our app. We saw remarkable engagement mobile app revenue is largest ever share and we saw App store rankings reached the highest they have been since the pandemic due to significant lifts in downloads.
This is just one exciting way, we're growing engagement with our App key loyalty and free traffic driver.
At the outset I mentioned two themes for this quarter share capture and cost efficiency.
And we've talked at length about share capture in the major driving factors.
I wanted to touch on cost efficiency briefly before passing it over to Kate who will talk through this theme in more detail.
The second quarter saw gross margins exceed 30%.
Milestone we've only previously accomplished during the pandemic period of 2020.
Three years ago, the improvement in gross margin and its impact on our unit economics is durable.
From the senior leadership team is driving us there every day.
Thank you with that let me turn it over to Kate review of our financials for the poor.
And your age and good morning, everyone has got a lot of exciting progress report from this corner, so let's jump into it.
That revenue for the quarter came in at $3.2 billion.
Down 3.4 per cent you over a year, but 14.3% from Q1 following a more traditional seasonal pattern.
Well, we had a slow start to the spring weather in the outdoor shopping season picked up rapidly as we move through the back part of the quarter and we saw both customers and suppliers leaning into several well received promotional events.
Spoke at length about the grocery saw an order volume both your over a year and a quarter over quarter, which came in conjunction with continued deflation in a O V. As the last some of the peak periods of inflation last year.
Hotline success, we saw in Q2 was driven in large part by the U S segment, which sign that revenue come in 15.3% higher than Q1.
Well now a little further down to P&L.
As I do please note that the remaining financial includes depreciation and amortization, but exclude equity based compensation related taxes and other adjustments.
I will use the same basis, when discussing our outlook as well.
Gross margin had an outstanding corner coming in at 31.1%.
Nearest discussed comes not from an unusual surge in demand, but from structural improvements we've been driving across our operations.
We're pleased with the results are operational cost savings initiatives have produced so far but do you want to note that this quarter exceeded even our own expectations with some timing benefits flowing through in the period.
It's worth reiterating that we have been thoughtful about the share of the savings we reinvest in the top line as we navigate the consumer environment and will continue to take a very technical and dynamic approach to balancing this mix through the remainder of 2023.
Before moving to advertising quickly mentioned customer service emergencies, which showed ninth leverage this quarter coming in at 4.3 per cent of net revenue a reflection of our cost reduction efforts from earlier in the year.
Advertising had another strong quarter at 11.1% of net revenue for the period.
As we've discussed at length over many orders were being prudent about driving higher efficiency from our P channels in the face of depressed free and direct traffic.
One of the ways, we can improve our efficiency through channel tests, and we ran several in the second quarter.
<unk> provide key insights and former channel makes going forward. They also drove outperformance on the advertising line in queue to an old correspondingly leaves some revenue on the table for the third quarter as we held back spending in various channel segment.
It's the perfect example of this sophistication, we bring to advertising, which was one of the areas will focus on during our Investor Day next week.
You can look forward to a much deeper dive and how we think about managing our channel mix and efficiency targets as part of that event.
Finally are selling operations technology in general and administrative expenses totaled $473 million in that period.
Well, we are seeing nice quarter on quarter progress in this line item and significant year over year reduction as a result of our cost actions over the past 12 months.
We continue to monitor this hot area closely.
This quarter, we did see some lower than anticipated attrition.
<unk> your term headwinds on the whole this is something we're pleased with where.
Seeing considerable excitement among our team members in the past few months.
The success, we've had with our customers and suppliers resonate throughout the business.
Total revenue strength in conjunction with the considerable cost action, we've taken across our entire P&L led to adjusted EBITDA of $128 million for the second quarter of 4% margin on net revenue.
R. U S segment, the adjusted EBITDA come in at $161 million for 5.8 per cent margin.
International losses showed further compression.
$33 million of adjusted EBITDA.
We ended the corner with 1.3 billion of cash and highly liquid investments on our balance sheet.
Oh for 1.8 billion, a total of quiddity, when including a revolving credit facility capacities.
Net cash from operations with $217 million, all set by $89 million of capital expenditures, which resulted in free cash flow of $128 million for the quarter.
We're thrilled with this progress as you know our free cash flow is driven by three components adjust.
I just did EBITA working capital in Capex.
Just leave it out with a strong contributor of this quarter as working capital we saw healthy sequential revenue growth, which is the driver of casually tour business, given our negative cash conversion cycle.
Get into guidance momentarily, but in the lens a typical seasonality, we would not expect working capital to contribute meaningfully to cash flow in the third quarter.
Let's now turn to guidance for two three.
Quarter to date gross revenue has been trending positive low single digits you're over here.
And we would expect net revenue growth in the mid single digits for the full quarter.
<unk> waved by the impact of the advertising channel tests I mentioned previously.
Sure before we intend to continue to invest some of our cost savings in the customer experience.
We maximize multi quarter of gross profit dollars.
Therefore, we expect gross margin between 29.5% to 30.5% for the corner as we balance the ongoing structural improvements in gross margin and optimize for investment into the customer experience.
Moving on to customer service emergencies.
And once again E between four and 5% of net revenue.
We would expect advertising to be between 11, and a half and 12.5% of net revenue a bit above Q2, given the factors I mentioned before around our testing cadence in the early summer.
Continued efforts to drive efficiency across our channel Max.
We forecast S O T G N a or opex, excluding equity based compensation and related taxes to come in between 460 and $470 million.
<unk> followed the trajectory we laid out last quarter adjusted for the tiny impact of the lower attrition rates and the second court.
If your phone guidance outlined above we would expect to have positive adjusted EBITDA margin in the low single digit range for two three.
It's implied the third quarter margin slightly lower than queue to give any overperformance on gross margin advertising in the quarter, which shows a clear trajectory towards a sustainable mid single digit adjusted EBITDA margin and positive free cash flow we've outlined in the past.
To that last point, you should expect a more modest even $10 in Q3, and some sequential compression on that revenue translates to a free cash flow figure that is roughly breakeven plus or minus.
Now, let me touch on a few housekeeping items for the third quarter. Please stay on the following.
Equity based compensation and related taxes of roughly $150 million to $170 million.
Depreciation and amortization of approximately $102 million to $107 million net.
Net interest expensive approximately $5 million to $6 million weighted average shares outstanding of approximately 116 million and Capex and and 80 to 90 million dollar range.
And they wrap up I wanted to take a moment to recognize how far we've come.
A year ago, we first discuss the shape of what our path to profitability would look like.
Did you plan for breakeven adjusted EBITDA by the end of 2023.
Today, we've achieved that goal driving over 1.4 billion of cost actions across the business to reach our profitability milestone months earlier than planned.
Last August we reported and adjusted EBITDA loss of $108 million.
This quarter on a revenue basis. It is approximately three per cent smaller we've driven $128 million a positive adjusted EBITDA.
Of course are tremendous progress wouldn't be possible without the dedication and commitment of everyone on the way for a team.
As we've outlined before we remain committed to driving meaningful growth.
Proving profitability in free cash flow generation and are excited about the future.
Thank you and now <unk>, Steven I will take your questions.
But this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please limit yourselves to one question and one follow up will pause for a moment you can probably two of the roster.
Okay. The first question is from the line of Christopher Whoever's with a J P. Morgan. Please go ahead.
Thanks, and good morning, everybody.
So my first question is do you think about the Promotionality that you had in the first half of the year, we get a lot of questions on whether that Promotionality is driving.
Any sort of unsustainable market share gains can it can you talk about that especially in the context of how you were thinking about balancing some of the gross margin investment versus the up for me is that you saw in the second quarter.
[noise] sure Christine Thanks for the question.
<unk>.
Mm mm promotions I think the.
I think the weird thing about it is promotions are really more of a marketing message then.
They're not like a pricing strategy.
When you think about like you're coming about being unsustainable. So the the way things to think about is.
In this period, where promotions have been a more frequent occurrence.
William is still not the items on promotion just like it is at a normal time, where the promotional Katie This is a little less strong and there's a difference in the frequency of promotions is lissa bill needing to discount to drive volume a little more about what marketing messages resonate with the customer. So when you think about sustainability, we think the the moment we have the businesses.
Very sustainable and we also think that prices as we kind of get to a fully normal environment will actually be lower than they are today, because the inflation that's coming out still has a little ways to go before it's fully open. So when you kind of pick them out from our customer value proposition standpoint, I think your question gets it like Harry offered prices that you're not going to go off in the future. We don't think.
That's the case, so we we feel quite quite good about it the other thing on market share I would just 0.2 ways.
Market share gains were getting pretty much across the board so they're not coming on the back of any particular customer or any particular product category or segment, it's very broad based and I think what it shows is that our recipes back in tact, which is the breath of selection fast delivery. The you know the kind of availability of the best sellers.
These are things that were under strain and that Covid period, where you know supply chain congestion was there a lot of inflation was there and what we're seeing is that is a recipe for you in Texas is a cycle that we just use the compounder business over the 20 years and that's what's driving the success here.
And then my follow up question is as you flip your early to free cashflow in the second quarter.
Okay can you help us think about how you think about use of cash and how do you think about the debt structure in the balance sheet structure over a longer term basis.
Yeah. Thank you good morning, Chris.
So if you got there obviously, we are very I'm excited by the free cash flow generation this quarter and we intend to continue to be it is sort of sustainable free cash flow generation place going forward as far as the overall capital structure as as I think you're aware, we have a number of converts to <unk>.
Convert is at 2024 convert of about 117 million remaining we feel very good about our ability to manage through that the next converted that 2025 convert of about 755 million remaining and as we go forward, we think there'll be multiple structures for us to manage that convert as well.
Can we look at the balance you would feel very good about our position today and we intend to you know keeping free casual generative and adding that back.
The next question is from the lines of a Maria rips with Canaccord. Please go ahead.
Great. Good morning, and thanks, so much for taking my questions first can maybe just talk about the competitive dynamics that are happening in the space given instead of all the recent developments it seems like you've been clearly gaining market share. So how old is she sort of the competitive landscape developing here going forward.
Thanks Maria.
Yeah. So I think it's <unk> referred to in the past we have many competitors. So this is a very fragmented category and inside home. There's even many sub categories that would have a different set of competitors. What are you looking at a segment of furniture or are you looking at something like lighting or plumbing you you you're different competitors will come to mind that you go through the different categories. We're excited that were taken.
Sure sure very broadly so it's not coming from any particular set of competitors, but I think the big thing in the landscape, which city commerce is dead.
Primarily the larger platforms are the ones that are able to really compete and so when we look of competitors in the United States. The main competitors, we would watch the closest or the larger ones you know the Amazon Walmart and target home depot, and Lowes Mmm Costco cause it was supposed to have a scale to participate in offering advanced logistics scale.
To reach the customers and these are things that if you are much smaller that we've.
We've talked about you know having to you know run about 3000 engineers product manager state of scientists are you talking about.
25 ish million square feet of logistics of space, we have and all the different types of specialized operations rerun, including our own proprietary large parcel delivery. These are things that you just can't do without scale and I think these are things that offer the customer experience that they are increasingly getting accustomed to require or desire in order to buy from you. So.
Each competitor that we watch focused on different segments of the business. They take advantage of their scale would do that whether they're delivering building materials to job sites, whether the jewelry and groceries to consumers we focus on home and so we've reviews are scale for that type of specialized capabilities I think the smaller folks are the ones that are losing Sharon away, that's going to be ongoing because.
It gets harder and e-commerce to provide that value prop. If you don't have the kinds of assets I just referenced.
Got it that that's very very helpful. And then if it doesn't gross margin could you maybe just talk about how much of the information will savings you have achieved b instead of reinvested back into price and how.
How would that may have influenced the topline Oklahoma.
And how should we think about the per cent reinvested kind of on a go forward basis.
Yeah, Let me just share a couple of quick that's gonna pass it over to Kate to get into the mortgage the specifics on the numeric. So that you just to ask for.
The one thing I would highlight is we laid out an ambitious plan and as we go along the plan that we keep adding to it. So we you know there's.
The operational cost savings of interim is there's there's still more to come and I would say that from a price standpoint. We're also part of the reason we're doing really well as we are very competitive on the key items that we offer and that a lot of that is because we're back to a normal environment, where we have the strength to do that but maybe you have anything you want to add.
Yeah, I I think George cover most of it on our philosophy here. So Maria as you know last quarter, we reference of that $500 million that we had originally outlined we said we'd already achieved half of that my last quarter are sort of coming out of that corner. Obviously, you saw ongoing improvement in in fact in acceleration on that growth.
Large on line so you know.
I think you can infer from that that we picked up continued operational cost savings and in fact, a little bit faster than we intended to as we think about you know the reinvestment. We're really balancing is flow through on that to the bottom line with improvements in the customer experience overall and that's really the ninth of January .
Multi quarter gross profit dollars and that's how we're thinking about that ongoing investment in you of course, you know see that a little bit in in the guide on gross margin, which is obviously that takes into account some of that investment.
Your next questions for the line of John Blackledge with a T. D. Cowan. Please go ahead.
Great. Thanks, two questions first could you just talk about the drivers of the order.
And is that sustainable over the next several quarters and just any general color on the consumer demand for the whole category and second question on J I just potential uses of <unk> to drive the bus going forward.
Thanks, John Uhm.
Start with the order blue so the order growth dynamic I think it's what I was referring to earlier about us being in a position where the recipes back in tact and the offering the breath of selection and stock availability the fast delivery the competitive prices that flywheels their customers are reacting to it and then what's even more exciting and that is where.
Seeing it in the repeat metrics, we're seeing their engagement postal order the coming back post or to the buying again working that's a cycle that compounds.
Everything in the business would imply that that should be <unk>.
Something that grows over time, because then the customers to come back that's a condoning factories, you added more engaged customers and as I mentioned on the pricing standpoint, the prices can get even sharper suppliers are able to fully move to kind of the future cost.
Much more like what it was pre COVID-19.
Et cetera, so that that's sort of the dynamic and that's why did you see the momentum and the business, we see a growing.
Okay on the order order grocery thing you'd want it yeah, I think that those are the key pieces I mean, it's really the dynamic I believe we foreshadowed a few quarters ago, which is is uhm deflation continue to come out of the prices and as our availability and speed got better we would ultimately be seeing you know order gross mm.
All set some of that deflation is customers were able to re engage in a category.
I think your next question with <unk> Yeah, Yeah.
Yeah, a couple of thoughts in that so there's a.
There's a number of use cases, Jenny I that were actually already take advantage of in building capabilities on and honing a lot of which has to do with reducing workload or making work much more efficient.
An example of something that we actually every pilot it is.
We have thousands of customer service agents, who talk with our customers, but also engage with their customers on chat and answer questions via email. So has it been like chat email one of the things that we've done is run a pilot where we have software that basically creates what it believes the answer to be.
And then with that answer an agent can review it very quickly.
Edited as they think is needed and instead it back so that the cost savings method that actually increases the quality of the answers we found that it actually the customer satisfaction. The aggregate response go up uhm, while in fact the cost.
Of course since we're giving question goes down and there was like four or five use cases like that that we already have underway. Some of the other ones have to do with how we draft a product descriptions that we do product tagging and so there's a variety of things that we do that we have tremendous amounts of people or a cost for both of them, we can reduce well improving efficiency and accuracy then there's a set it back to us.
Ginny I get to sort of how it could change the customer experience in the future.
I think those are the ones that are little more pilot stage. It a little more R&D is involved we announced one of the things. We're working on just the other day. It was just to clarify and so I. Just encourage you to you know if you're curious whether to just check that out because we <unk>. There's a link available to that and you can you can just try it yourself and it gives you a taste and a feel of what's available and where things are headed.
And then we think that will take longer to play up in some of the cost savings type things that we think we can ramp more quickly, but we think that the power of so what you could do a journey is very significant and I think it plays to our strength, where we've been very actively using data science for years and this is sort of the the latest incarnation of that but it placed with strength that we've had and so.
We feel like we're in a very good position too.
Continue to be a technology leader and you know aggressive adopter of technology.
Thank you.
Your next question is from the line of Alexandra Stagger with Goldman Sachs. Please go ahead.
Great. Thank you for taking my questions I do want to ask about international So why you're obviously sign nice improvement in the U S. International gross mm is still lagging. So wondering if there's anything you were calling out whether you refocus your international efforts are prioritize some initiatives that led to the lower revenue growth.
Or is this more a sign of a weakening consumer demand in international versus the us. Thank you.
Alright. Thanks, Thanks, So I'm, saying, what I would say an international so surface to two parts to answer that question. One certainly is the macros different by country.
There are I would say some of the markets that we're in and or international segments, certainly a weaker macro than in the United States. So I think that's a piece of it I think the other piece of it though is when we laid out the $1.4 billion in cost actions one of the Buck and talked about for example, with some of the things we're doing around advertising and we're gonna make sure that any advertising we did we kept it really.
Titans I'd paybacks and some of the some of the more speculative advertising, we cut back and what are the other things we talked about as I can.
Being tight on unit economics, and so in some of the international segments I would say that we've.
Taken a position to strengthen our unit economics, which comes with a cost of near term revenue.
But we think fundamentally sets up those businesses in the longer term three much stronger.
You see that when you were at the EBITDA. The international So that you can see that has improved dramatically and so some of those things while they would hurt on revenue they would be quite good from a profit standpoint, and so you take a longer term view as Chris much better outcome and so that's the other thing I think you need to make sure you keep in mind, it's not just the story of the macro.
Great. Thank you were very helpful.
Your next question is from the line of Kurt <unk> with Bank of America. Please go ahead.
Good morning, Thanks for taking the question. So the first one I guess would be on the pieces actor.
<unk> I just saw the first symptoms of.
Over a quarter growth in two.
Two years.
Where is it coming from is it news reactivated and how should we think about the pace you know go into the the rest of the year.
[noise]. Thanks for the question Yeah, we're very excited about that momentum and you know I think if you do.
Do you think about orders you know.
You know the order growth is significant in that shows you that there's a lot of customers are getting to your point somewhere new and summer Reengage, but you see them coming and then when I was addressing earlier or something that you can't see in the metrics button is happening and we're very excited which is the repeat metrics underneath for someone who buys you know what percentage of them by again in the next 30 days or 90 days these types of.
Repeat rate.
Those are actually strengthening quite nicely and that's a really good leading indicator of where the businesses headed and.
And it's kind of for two reasons, one is that Chris a compounding cycle. So mathematically that's how growth really get strong stay strong increases but also it shows you. The the the the kind of how well are we doing it impressing the customer because in other words you know if you have a great selection, great price ingrate delivery great merchandising.
By but then ultimately once they buy they get the product at their house, it's been delivered to them. They didn't have the product and they're using the products. Only then if they're really happy with it by again and so we kind of those repeat raise kind of pick everything and kind of show you where the customers than voting how happy are they are they then acting on that and we're seeing that strengthening.
Okay, I don't know yeah, I would just I I think that that speak to it I'm very well I would add that as a reminder of the active customer numbers and L. T N active number and so you're gonna see the orders number as we are seeing improved ahead of that active customer number you'll see that sequential growth, which you know to your point we saw this <unk>.
<unk> and those indicators will come first and then it'll take a little bit of time to sort of grow through and get to that positive active customer number but overall, we're very encouraged by the trends, particularly around order volume isn't your dad underlying repeat behaviour.
Okay, and then just as a quick follow up uhm. So the commentary in terms of to the relative shared <unk> Uhm. We're definitely helpful. I guess you don't have to go.
And a quarter or maybe going to reach you at any evidence that you're seeing a pick up in the category or.
Sort of a continuation of you guys really outperformance.
The primary driver is two two.
Yeah, I I would say.
Pizza so.
Just on what we see from a market share standpoint, and what we see overall demand category. We're seeing it kind of we don't really see the category, particularly strengthening we see a kind of bumping along we believe we see that in both the credit card data that we have access to but also you know for example last few days I was at the Las Vegas market and talk to a lot of suppliers and what we're hearing from them.
We're hearing from them that were picking up sure. It's broad based and then any given supplier will give us some flavor about named specific named competitors and what we're hearing would be consistent with what we believe we're seeing the credit card data and then what they were telling us about their overall demand trends will be consistent witches demand is relatively weak pumping alone, we're a stand out and taken share.
And it's very broad base.
Oh, okay.
[laughter].
Your next question is from the line of Steven Forbes with Guggenheim Security. So please go ahead.
Good morning irritate.
I wanted to maybe start with <unk>.
Service calculated penetration. So curious if you can give us any color and where do you expect the end of the year in terms of penetration of small and large parsi.
And it looked a current thoughts are around capacity.
Castlegate as you look out the 20th 125.
Yeah. Thanks for the question what I would say is castlegate penetration as we go through time, where where we're quite excited about where we think it will go based on what we're hearing from suppliers interest to flow goods in as they increasingly flown yugo's out of Asia. So we've been an editor of time, where suppliers are kind of working their way through excess stuff.
But they're now getting to a point, where they are bringing in their best sellers and I mentioned, the Las Vegas market recently, I'd say that substantial a number of the suppliers are now bring in large new product introductions for the first time in three years. So it's sort of like I'm moving forward thing going on in the business, which is particularly exciting I think plays to our strengths.
But also from the standpoint of flowing fresh goes out of Asia that that will speak to increase in Catholic penetration.
From a capacity standpoint, what I would say as you know we built that network out over the last few years to have a very good footprint, but with a lot of unutilized space because the idea we had as we wanted to have the footprint and then as we get more volume through it will then get utilized which will then be a situation, where we will only need to add new locations down the road when we.
We have capacity constraints, which is not the case right now.
Yeah, I I I would add to that you know, we've obviously shared the Catholic penetration sat in the past it one metric on our overall logistics improvements and and ongoing efficiency that we're seeing there, which you can clearly seen that gross margin line and we'll certainly speak next week at our Investor day, more broadly to our logistics network.
Eric any efficiency and the value that transfer our customers and our supplier calculated is an important piece of that and we didn't have the date of course, the penetration as a component, but there are multiple factors at play here.
I appreciate that maybe just a quick follow up maybe we'll get this next week, but.
Yeah, I I keep thinking back to the total logistics cost right.
Referencing the urge you to pass around 20 cents of every dollar.
So curious you'd you'd sort of talk to <unk>.
<unk> would you say are today.
And and where you sort of see them going as various aspects of the supply chain normalizer.
Yeah. So.
I don't know if.
I don't know like a Chris number two twenties, now X or anything like that but I guess the way to think about it is.
That logistics across we've been focusing on optimizing it uhm the biggest factors that would optimize it or basically when you think about cascade penetration as if goods coming directly from wherever they are manufactured and get forward position from the gecko. That's the single biggest driver taking out logistics class because all the excess miles that would need to happen and the destination country really getting <unk>.
That's the most expensive leg is the final my leg. The second most expensive thing is also is around on that final mild how can you optimize it past just the miles and so this is where we get into what we do and some of our buildings run sortation and where you could take out things like hub touches you can also for.
Large parts of those that would deliver ourselves how do we.
Optimize that's it then again, whether you do 17 deliveries in a daze 16 or something like that if it can be very big driver of course. So if you think about the activities we have around the fulfillment that our footprint around the consolidation and that things were doing abroad.
Facilitate the ocean for it to be very efficient at loading to begin with and then what we're doing on our last Mount delivery network. These things kind of add up to tackling those costs and then.
One of the things I mentioned is where we have capacity past, what we use it so as volumes increase there's a tremendous opportunity to drive down costing and that will happen is the volumes grow in the volume in that network on a proprietary business grows.
Your next questions from the line of Jonathan <unk> with Jeffries. Please go ahead.
Good morning, and thanks for taking my questions one of your online competitors as highlighting elevated tree down over the last couple of bun with customers, who used to buy better skews find more good skews.
Would you say tree down was more pronounced in two to relative to one Q and how much did that impact your a O b this quarter. Thanks.
Yeah. Thanks, gentlemen, I would say that we are definitely we definitely see trade down trade down <unk>.
Recessionary cycle trade down is very common in.
We kind of saw that cycle play out of 2000 9010, it's a very it's actually relatively easy to kind of quantify that cycle on track. It that said the bulk of what's driving the it'll be is that deflation, it's that ocean free in particular inflation coming back out.
There's also a little bit they had to do with raw materials as a matter of production costs and so that's the primary driver available. The vast majority of it trade down is a piece on the movie, but it's not it's not it's not the bulk of it yeah I would I would just add that I think also tray down as an area, where our broad selection benefits us and so the customer can continue shopping with.
And if a budget is tighter or she can still find that product with us and we certainly saw that behavior play out in two.
2009, 2010 period as well.
That's helpful and just my follow up question paid I think you alluded to some investments in customer experience contributing to a lower gross margin three Q relative to two Q can you elaborate on on some of those enhancements and the returns you expect to see from them.
Yeah three question so.
We talk about investing in the customer experience I think is important to note that the cross multiple factors right. So often Phillips will go to price price as a component, but so is delivery speed delivery experience you just spoke about the last mile delivery efforts that we make the returns experienced incidents management et cetera all.
All of those we think drive an overall better customer experience and that leads to ongoing repeat behaviour do when we think about quantifying the value of those investments. We're looking at as I mentioned previously it's multi quarter growth in gross profit dollars and ongoing improvements there from driving that customer experience.
As a result, yes, we are going to be reinvesting. Some this quarter. We landed at 31, one the midpoint of our guide is about 30, but we've continued to step up that gross margin and I think you'll see you know ongoing improvements throughout the year and and going forward and gross margin previously outlined that path to sort of a mid thirties gross margin and we're very pleased with the <unk>.
That were making their.
Your next questions from the lines of Anna and dreamy with Needham. Please go ahead.
Great. Thank you so much good morning, and congrats on nice momentum in the business.
Uhm.
<unk>.
[laughter], we had a couple of a quick one I wanted to follow up on the monthly Caden during the second quarter. So you guys provided an update in early June for the business to be downloaded single. So was June overall positive put the company I just wanted to make sure that math is correct and obviously a lot of initiatives are working but you can.
Great, but anything specific that drove improvement too low tingles that you're currently running and can you help a bridge how we should think about getting to mid single for the third quarter.
Quick turn and pass it over to Kate to answer your question, but it's the thing I would one thing just to make sure you keep in mind is is the concept of compounding right. So you get customers. They are interested they buy their happy and then they come back and there's a bunch of things you can see there that show you that compounding you see.
Repeat ticking up.
Are are the wafer App for example increased download usage that's it.
Typically the App is used by people, who are increasingly loyal and engaged and so there's a bunch of different metrics. I think you have access to where you would see that and done that concert of compounding is really help the growth occurs but let me, let me pass or vacate for your <unk> the specific yeah.
That covers how you can think about the second quarter. Obviously, we don't provide month on month break out as you move into the third quarter. I think your question is how do we get from low single digits everything today to that mid single digits. One sensor that uhm I point, you too is that marketing task that straddles two quarters to detect itself occurred.
In the second quarter that means it's hold back on some sang in the second quarter and less in revenue dollars on the table that would if he had any in the in the early part of the third quarter.
So that's a little bit of how you might see some of that and then of course ongoing momentum that we would expect to see because of this underlying factors and you already mentioned you know orders, obviously began future customers and future orders and as we've seen that order volume growth. We will continue to see that fly will improve.
Okay terrific. That's super helpful. N K just as a follow up this was very helpful. In a gross margin, but did you guys quantify the timing benefit in the second quarter and thank you again.
Yeah, we we we did not we did take things a bit faster than originally anticipated and we're excited about the ongoing tight execution from the team there.
Your next questions from the line of you called <unk> with Citigroup. Please go ahead.
[noise] [noise] excuse me good morning, everyone.
Maybe just the <unk>.
A couple of these points.
First of all <unk> on the gross margin geared to see <unk> I understand kind of puts and takes with the reinvestment on on the upside and what drove upsize with what you were expecting this quarter or or just in general the strength can you talk about which which pieces were the largest contributors about what's been coming and.
Better than expected and then on the on the advertising again, I'm really interesting to see and hear about the kind of like the the pullback spot on the testing can you share a little bit more about what that was what you saw that let you to pull back you know some of the things that you're looking for there and how does it go.
That is we kind of move forward. Thanks.
Yeah. Thanks.
Kate will probably be able to answer your questions with a one point I just want to make before Passover to <unk>.
A lot of the gross margin improvement you could go back to that $1.4 billion cost action plan, we kind of talk through a bunch of component of what we were planning to do I think a lot of what you're seeing in the results as an outcome of a lot of the things. We said we were gonna do that we've been since done and that that are kind of driving a lot of the improved performance.
And then you know on advertising I guess, the point I would make theirs.
The testing we do is really to get data that then we used to hold the data science models that drives the spend in a way where we have high confidence that we know what our library getting and so it's something that we just need to regularly do to kind of home. These models and because of the unusual behavior. During COVID-19. The last set of tests were run in 2009.
<unk>, which is quite a long time ago, you typically would run the much more frequently than than than a four year period, but that's sort of the last normal period, we had and so what we're doing is make sure. We home. These models, so even though that hurt performance from a revenue standpoint, you too because you're not spending a bunch of advertising that you believe is productive it's the only way to get the data back that holds the model and so.
It's more kind of an ongoing thing you would do to just make sure that you're able to be.
Very specific and accurate and how you advertise.
Yeah, So circling back to your gross margin question I'm, sorry, what was the largest driver there.
<unk> the outline before theirs over 70 different initiatives that we are pursuing on the operational cost savings in operational efficiency and what you're really seeing as the combination of those initiatives hitting a big faster than we anticipated and that's what drove you know that that cue too gross margin one thing I would point out is that man.
Those are structural improvements that we've made instead of those savings are enduring and will be ongoing they're sort of like you know guide at the mid point being a 30 versus the 31 that we hate is really just because of that reinvestment in the customer experience, we expected improvements to hold on.
<unk> the advertising tests now I'd Echo everything you. Just said you know this is these are important things for us to do to be able to have that ongoing conviction and how we spend we think about and inefficiency on a channel by channel basis, as you've heard us speak about before and testing is it sort of traditional inappropriate thing for us to do with.
I need to be back on the offensive unable to actually do those cats in a normal cadence and that gives us the conviction to you just to you know spend effectively into those channels going forward of course that the result is that you do leave a little bit of a revenue on the table when you run out of cash.
Your next question is from the line of two Maheshwari with UBS. Please go ahead.
Good morning, this is Michael <unk>.
<unk>. Thank you so much for taking our question.
<unk> I want to give you an opportunity to respond to some of the pushback from his skeptics that we've been hearing one of their argument is many of the vendors really globally are still heavy on inventory. So <unk>, they're using third party marketplaces.
Channel two two still <unk> their inventory and dispose of excess inventory. In addition, they're benefiting from lower cost, which is allowing them to be a bit more promotional which is driving some improvement.
How would you respond to that.
[noise] well in terms of deflation that's happening I I think that is happening I do think the free costs are not likely to revert to those kind of pandemic type prices that were there. So I I don't think that's a temporal thing and I don't think that's really promotional I think thats items, reflecting kind of inborn normalized cost that will continue.
<unk>, that's being I think that's true for everybody right. So that's like kind of a normal market phenomenon that I I don't think is specific to any particular retailer.
In terms of excess inventory is at its peak of excess inventory was December of 2022 and suppliers have been working down that inventories. Since then we have a number of suppliers who are back to very healthy stock levels and we have some who are still trying to work through that excess stock we have not really seen suppliers.
Discounting in general past the price of what they can price goods that on an ongoing basis. So in other words, there's a replacement cost of your food that item today from Asia, what would that cause we're seeing suppliers price, perhaps all the way down to that level, even if they have access that they brought in a higher cost basis or still be above that level with a plan to get down to that level as they can float.
More and more fresh good so we're not seeing anything that would.
Say any of the supplier behavior is something that's very temporal what we're seeing is that they're reverting to normal and I think what you're seeing is that just like in 2019 or 2018 2017 is a competitive field of retailers out there. There's a lot of folks doing different things and the folks you provide the customer with the best experience when.
That's a little different than the behavior in 2000, 2000, 2021, where it was a very booming market. There was excess demand as a lot of stimulus spending there's less supply chain congestion. There was all kinds of different pricing. That's a more unusual period and then I think that we've now got that in the rearview mirror.
Okay.
Follow up question is you've got wonderful preview on two of the most important element of of the domestic economy, right now, which is a tumor and housing market.
If you could provide a little insight what you're seeing from a category perspective to to to illuminate what what consumers are interested in buying what we are purchase cycles are already Normalising. For example, there are signs that flooring as a category remains under pressure yet appliance demand is starting to stabilize.
So what are the themes or trends are you seeing that indicate.
Indicate where the consumer stands right now from a category perspective.
Yeah. Thanks for that question [laughter].
I mean, what what I would say what we're seeing you know obviously you can see in our numbers were seeing nice demand that demand is pretty across the board. Obviously, we are larger player in some categories and in other categories. So something like appliances. As you mentioned in flooring. These will be some of the newer categories. We entered into over the last number of years as opposed to.
You know we started our company in 2002 with a focus on entertainment furniture. So that's already been by far the longest and so our market position varies in terms of how much market share we have and so I think as a result, some of these newer categories were smaller in it. So we can grow as well from smaller base those bear categories.
In where much commercial but we can still grow because you know of such a large position. We have so I don't know that we can see in our numbers the category overall.
Performance that you're alluding to we hear about Soviet from our suppliers over here anecdotally, but at the same kind of data you would have access to.
Today's final question will come from the lineup for calling Sebastian with Bird. Please go ahead.
Oh, great great. Thanks for putting me in good morning, just wanted to follow up on <unk> and and the impact from deflation a little bit more maybe to understand specifically, what you'd expect to happen in the financial profile the business with with gross margins operating margins. If we do see a scenario where there is a reversion maybe.
[noise] back to historical levels and then maybe in your part of this maybe say for next week, but you know following up on a journey I Questionary I in general, but but on the expense structure I mean, given some of the cross currents around the internal efficiency gains you mentioned, but also external facing product development and and maybe hire.
Structure costs associated with the what what should we think about in terms of the impact I'm from those investments and R&D of technology. Thank you.
Thanks.
<unk>.
The a O V question of deflation I think.
I've Kinda mentioned before I think really the main thing that's happened is.
So ocean freight which is the primary driver again has returned back to sort of pre COVID-19 levels suppliers as they work through their good to get to you were good Sir then bringing those goods over with kind of the costing looking much more like it did pre COVID-19 than it did during during COVID-19 and they're reflecting that in the wholesale prices, which then get reflected into the retail prices you.
Can see for more margin effectively or you know of course versus kind of like our take right you're seeing that.
That that's holding fine and you're seeing that having a competitive offer really drive customer engagement, what you're seeing in sort of the order account number and the sequential increase inactive customers and then if you roll. It forward you get that effect that I've described a couple of times around that compounding, which happens with engage customers coming back and that's C N and repeat metrics that I think is the one piece that's hard for.
You to see you see it play out over time and results, but you know you you wouldn't have those repeat metrics, but that's how we can we see it and it's working well so I think the margins become Ah you know.
Margins you can see are you an economics are strong and you know.
What you're seeing is that our volume is growing and it's growing and what's a really tough market today and so you can imagine the market stabilizes and then increases over time as you roll out over the years like it makes it easier for us to grow even faster yeah. Our margins are healthy and growing even with C. E O V compression.
I would not expect you know a drag on the margin from <unk> compression as we're seeing that of course upset with orders, which is a more positive thing for flywheel.
And then on your <unk> AI question I think the only thing that I would.
Where we can become more efficient that's a form of cost savings and you know we talked to you know if you think back to that 1.4 billion cost actions plan. There are a lot of different cost savings. We said we're going after you can say create another set of activities that are using Jenny I could help us go after and that obviously makes us more efficient lets us offer sharper retail prices lets us invest in different areas. That's all very.
Productive that infrastructure costs question, you had in there about the kind of technology spin I you know I wouldn't don't think about US is really incurring that in the same way that the folks who have the big L O lands and provide those as a service. So in this case, you know Google or open AI would be two that we work with for example, they have it.
Very large capital investment they make that they didn't get back by letting your users they're models as a service in your than putting your own layers on top of it using your own first part of the data which is the reason why we and the other large platform is going to benefit the the smaller platforms don't which is the depth and breadth of your first party data, which is really the difference in how.
Well you can design a journey I type application.
But you you your cost is not particularly high because again, you're you're you're paying for you are paying for your usage was a modest amount and so there's always different pieces of our software application, we're adding capabilities and there was always there appears your optimizing lower costs and so I don't kitchen, maybe a dresser, but I think it Ah clusters, there's nothing for you to worry about their I guess when that point, yes, I I I think.
And that's at.
Nothing to worry about in the near term and the cost structure over time and the cost structure and you know of course that it should be ongoing cost savings and you already mentioned earlier.
As we wrap up we just want to remind you all of our Investor Day next Thursday, we look forward to seeing many of you there.
Thank you for joining us. This morning, yeah. Thank you look forward to seeing hopefully a bunch of your next Thursday take care.
Thank you all for joining today's conference call. We appreciate your participation you may now disconnect.
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