Q3 2024 Wayfair Inc Earnings Call
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[music].
Speaker Change: Good day and welcome to the wife at third quarter 2024 earnings release and conference call.
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Speaker Change: After the Speakers' remarks, there will be a question and answer session.
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Speaker Change: I'd now like to welcome James Head of Investor Relations to begin the conference James I have it here.
James Head: Good morning, and thank you for joining US today, we will review our third quarter 2024 results.
With me are nearing Shah cofounder, Chief Executive Officer, and co chairman.
Steve Conine co founder and co chairman.
And Kate Gulliver, Chief Financial Officer, and Chief administrative officer, we.
James Head: We will all be available for Q&A following today's prepared remarks.
James Head: 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.
James Head: History trends and our financial performance, including guidance for the fourth quarter of 2024.
James Head: All forward looking statements made on today's call are based on information available to us as of today's date.
James Head: We cannot guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions.
James Head: Our 10-K for 2023, 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.
James Head: 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.
James Head: 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.
James Head: Adjusted EBITDA margin and free cash flow.
James Head: 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 any non-GAAP measures to the nearest comparable GAAP measures.
James Head: This call is being recorded.
James Head: The webcast will be available for replay on our IR website.
Speaker Change: I would now like to turn the call over to marriage.
Speaker Change: Thanks, James and good morning, everyone I'm excited to share our third quarter results with you today Q.
Speaker Change: Q3 marked another proof point of resilience for wafer with further market share capture in the face of sustained challenges in the category.
Speaker Change: Again, we navigated a dynamic consumer environment, while driving further discipline on costs to achieve a mid single digit adjusted EBITDA margin for the second quarter in a row.
Speaker Change: That's just one piece of the picture as I've mentioned, many times before our North Star is driving adjusted EBITDA in excess of equity based compensation and Capex and we're pleased to be making noteworthy improvements across each one of these totaling almost $100 million year over year in Q3.
Speaker Change: The third quarter exhibited a continuation of choppy macro trends, we've seen across 2024.
Speaker Change: Consumers remain trepidation and their spending patterns and are demonstrating more price leftist D than we saw in the early months of the year.
Speaker Change: While we were pleased with the response, we saw over weighted at the start of the quarter, which we ran as an extended event for the first time this fall.
Speaker Change: It has become clear even as we exited September that we are seeing a broader pullback by shoppers in the lead up to the election.
Speaker Change: Pension is focused away from the home right now and when customers are in the market is increasingly for lower investments lower consideration purchases versus larger ticket items that represent our traditional area of strength.
Speaker Change: We remain optimistic that pieces are coming together to support a category recovery in the quarters to come.
Speaker Change: While it will take some time to play out this improvement is poised to provide some relief in what has become a historic slowdown in the housing market.
Speaker Change: Redfin published an analysis at the end of Q3, noting that just 25 of every 1000 U S homes changed hands in the first eight months of the year the.
Speaker Change: The lowest level they sell on their study running back to 2012 and more than 30% below the turnover levels back in 2019.
Now as we've said for many quarters, we are not running the business with the expectation of a recovery in any specific timeframe.
Speaker Change: For more than two years, we've done two things simultaneously.
Speaker Change: Driving cost efficiency and spending discipline to run the business profitably in a recessionary environment.
Speaker Change: And setting ourselves up to be a considerable beneficiary when the category does return to growth.
Speaker Change: You've seen the former quite clearly with what is now nine sequential quarters of compression in our fixed costs and a third quarter result that is the lowest S. O T. G&A, we've had since 2021.
Speaker Change: The ladder, you've seen us demonstrate across several vectors.
Speaker Change: For much of 2023, our mantra focused on the core recipe, bringing the best combination of competitive pricing fast delivery and broad availability together into an offering that wins customer orders day in and day out.
<unk> 2024, we went a step further by concentrating on strategies to drive mind share and frequency, including the three major initiatives, we've spoken to several times.
Speaker Change: Even if customers aren't shopping for their homes at the moment when that time does come we'll want to make sure wafer as their first destination.
These efforts include many things such as our brand refresh back in March and the launch of our first large format wafer branded store over Memorial day weekend.
Speaker Change: When your initiatives is our loyalty offering, which just began rolling out last week.
Speaker Change: For $29 per year wafer rewards customers will unlock exceptional value and experiences with benefits, including 5% back on purchases free shipping on all orders.
Speaker Change: Access to exclusive shopping events special offers and a dedicated members only support line.
Speaker Change: We know how much investors love, Matt. So let me walk you through the business model of wafer rewards at a high level.
Speaker Change: Our average customer typically shops on wafer about twice a year spending around $300 per order.
Speaker Change: Priced at $29 per year, 5% fact benefit would be roughly breakeven for our average shopper.
Speaker Change: Our goal is to push customers out of that tours for your bucket into the three orders per year bucket or even higher.
Speaker Change: While we have more than 20 million active customers, who have placed at least a single order over the past 12 months.
Speaker Change: About a 10th of those our shoppers that are made for more orders in the same timeframe.
Speaker Change: We see an important opportunity to grow that figure given shoppers typically purchased in the category six to eight times per year.
Speaker Change: There is a flywheel, we see from customers that grow their shopping occasions on wafer as they increasingly spend more time on the site.
Speaker Change: Browse a broader selection of the catalog and are more likely to shop through our app.
These behaviors are self reinforcing and we see that the path for a shopper to move from three to four orders per year is even quicker than the path from two to three.
Speaker Change: Customers, who shop, four or more times on wafer in any 12 month period, not only spend more.
Speaker Change: So nearly a third more likely to come to us via a free traffic. So growing that cohort is highly beneficial to margins.
Speaker Change: With the benefits of wafer rewards if that average customer now makes an incremental third order on way fare versus a competitor we've grown our share of wallet by 50%.
Speaker Change: Those three orders of $300 apiece are worth $900 of total revenue 45 of which goes back to the customer thanks to the program.
Speaker Change: Accounting for the annual fee, we've now nicely grown revenue per customer per year profitably.
That doesn't even include the efficiency on advertising as wafer rewards customers are that much more likely to return on a direct basis.
Speaker Change: There is tremendous potential here to drive more frequency amongst our existing as well as new shoppers.
Speaker Change: We're excited about all the different ways customers will be able to interact with the new program from deal hunting and our member exclusive sales to saving up rewards over time for big aspirational upgrades.
Speaker Change: One of the areas, we're excited to stimulate as in the frequency portion of our catalog like kitchenware and tabletop decor embedding where the benefit value really stands out.
Speaker Change: We plan to lean into this treat yourself angle of the program and encourage customers to use their rewards for all those upgrades and finishing touches they've been dreaming up but may not have had the budget for.
Speaker Change: We're also eager to bring the program to new movers and project shoppers like renovators or Remodelers. These.
Speaker Change: These are customers with high category needs, who can draw a lot of value from the program.
Speaker Change: We've been focusing on these audiences for some time across our marketing and sales organizations and we're excited to incorporate the value proposition of wafer rewards in those outreach to better attract therefore business.
Speaker Change: You've likely seen some of this marketing outreach since the launch of our brand refresh as.
As we discussed right. After the debut in the spring. This was years in the making and we've been extremely pleased at the results we've seen in the months since.
Speaker Change: Much of our work has been focused higher and the customer acquisition funnel as we've increased our investment in television social media and streaming audio and video.
Speaker Change: Since Q1, we've seen nice improvements and qualified recall ratings, which measures how well customers recall seeing any advertising from weak fare across any channel.
Speaker Change: This is an important high level view of how our advertising is resonating with consumers and to what degree they recall key details like our product message and identity.
Speaker Change: In fact, we are now ranked in the top 10 among major retailers.
Speaker Change: When we launched the waiver Hood, we've talked about driving creative content that could exist across our portfolio of advertising channels and serve as a foundation for many years of marketing campaigns to come.
Speaker Change: In fact in the past few weeks, we rolled out our first major update to the waiver Hood with our holiday chapter and are in active development on more content for 2025.
Speaker Change: We've seen very healthy ROI on the first iteration of the campaign with strong results. When it comes to brand linkage and awareness as customers are quickly coming to recognize the waiver hood as a symbol of wafer.
Speaker Change: This has translated to positive movement in our core metrics direct traffic and even more importantly revenue our direct visits.
Speaker Change: Back in the spring I noted how the launch of the campaign came alongside a refreshed view of our channel mix as we get more holistically in the parts of the advertising funnel, where we had been lagging behind.
Speaker Change: It should come as no surprise that Influencer marketing has grown to be an incredibly important way that customers are exposed to the category share.
Speaker Change: <unk> are now routinely looking towards creators across Youtube Instagram <unk> ticked up and more for inspiration on their next home purchases.
Speaker Change: Our reach Influencer marketing today is quite small relative to potential and we're excited to scale. It.
Speaker Change: Feedback from the creator community, we've made significant investments in improving the terms and technology supporting our program creators.
Speaker Change: Creators are eager to work with <unk>, because we treat them with the same mindset, we treat our suppliers.
Speaker Change: We succeed when they succeed. This plan is working we have dramatically increased our monthly piece of content produced by the nearly 4000 and growing creators we've partnered with.
Speaker Change: Over the summer we've amplified our influencer content and are seeing promising return on AD spend for the dollars we've tested.
Speaker Change: In fact, we've seen payback windows that are on par with what we find on lower funnel social ads, all while attracting what we expect to be higher lifetime value customers.
Speaker Change: We have a dense product roadmap that will allow us to scale breadth and depth of activities with influencers and partnership with our suppliers across the major platforms.
Speaker Change: This will open the door to working with an even wider field of creative talent as we get into 2025.
Speaker Change: The ROI here is clear to us, but we want to make it clear to you we're still operating within our rigorous payback thresholds that extend up to one year, but are often much quicker.
As I mentioned at the outset, we remain laser focused on driving healthy profitability, while setting ourselves up for success as the category rebounds.
Speaker Change: That has been the core goal across all three of our major initiatives in 2024.
Speaker Change: To foster customer loyalty and spur repeat business, while driving economic value.
Speaker Change: By leaning into marketing strategies that build brand affinity and introducing programs like wafer rewards to enhance the customer experience. We're not just aiming for short term gains, but building long lasting relationships with our customers that will be accretive on both the top and bottom lines.
Thank you we hope you all have a festive holiday season, and now let me pass it to Kate to go through our financials.
Kate: Thanks marriage, and good morning, everyone, let's dive into our third quarter results beginning with the top line.
Kate: Net revenue was down 2% year over year in Q3 or down about seven 5% on a sequential basis.
Kate: In line with the sequential pattern, we saw in 2023.
Kate: This is driven by orders down six 1% versus the year ago period modestly offset by <unk>, which was up four 4% year on year and down 1% sequentially.
Kate: Again in line with what we would typically expect to see in a seasonal cadence moving from the second to the third quarter of the year.
Kate: Let me now continue to walk down the P&L as I do please note that the remaining financials include depreciation and amortization, but exclude equity based compensation related taxes and other adjustments.
Kate: I will use the same basis, when discussing our outlook as well.
Kate: Gross margin for the quarter was 33% of net revenue back in August we talked at length about the changing dynamics, we've seen in customer price sensitivity and the opportunity we identify to lean in on take rate to drive incremental order capture.
Kate: We heard many questions from investors around how this differs from funding promotion. So let me take a moment to address that because he Andrew are fundamentally comes down to magnitude.
Kate: For years now we've seen robust interest by suppliers to participate and promotional events youll see headline items with prices that are 20%, 30% off or more.
Kate: These discounts are aligned in partnership with our suppliers and are funded through a reduction in their wholesale price, which we then reflect I lowering retail while our gross margin remains resilient throughout <unk>.
Kate: That's part of the reason why we've been happy to ramp up the number of promotional events and grow existing events likely David way day last month promotional remains a critical marketing tool to drive customer engagement at a moment in time when the focus is just not centered on the home and supplier demand to participate in promotions remains quite high.
Kate: Now when we talk about making our own investment into lower take rate. The scale is very different from the discounting youll see from suppliers and promotion.
The magnitude of the investment here is in the tens of basis points at the consolidated level, hence targeting gross margin in the lower half of our 30% to 31% range.
Kate: Across our nearly 10 million orders per quarter, we're able to collect a tremendous amount of data on price elasticity and Ken with a highly tuned degree precision determine exactly which classes and geographies with the in order to lift from a very modest reduction in the take rate.
Kate: As we've said for some time, it's considerably more valuable to multi quarter gross profit and adjusted EBITDA dollars to have an incremental order come in at a gross margin in the low end of that range. The miss out on that order because we are keeping our gross margins at the top and we're pleased with the results. We're seeing so far is it made this price investment and you should expect that this will.
Kate: Continue as we exit this year and enter 2025.
Speaker Change: Of course, the other question we hear from investors is why make this investment if you still are seeing orders and revenue contract year over year.
Speaker Change: Our response to that is to one more point to the share picture.
Speaker Change: <unk> said earlier, our ability to outpace growth of the category, while still driving a strong margin profile for the business allows us to capture share now and sets us up for significant strength when customers begin to shop for the home and a more robust fashion once more.
Speaker Change: Now moving further down the P&L customer service and merchant fees were three 7% of net revenue while advertising was 12, 3% that was slightly higher than where our advertising margin had been in recent quarters. As a result of the renewed investment opportunities in Europe outlined we're excited for the major unlocks we are seeing across the.
Speaker Change: Advertising funnel, but are keeping a steady hand on the wheel as we ensure that each dollar spent with strict adherence to our payback windows.
Speaker Change: Our selling operations technology general and administrative expenses totaled $388 million in the third quarter, a more than $70 million improvement versus the third quarter of last year and $274 million improvement on a trailing 12 month basis.
Speaker Change: As I talked about investing in gross margin and advertising earlier those of you who followed way here for years May have had flashbacks to our history of investment cycle at the expense of profitability.
Speaker Change: What we've made clear over the past two years is that wafer has now fundamentally a different company than we were in the past we were at a level of scale and maturity, where we can both invest for growth and drive profitability at the same time, so when I talk about compressing take rate are leaning into advertising.
Speaker Change: Due to their quick payback you can see that we are funding these investments through further discipline as we manage our fixed cost base.
Speaker Change: Paradigm, we will continue to uphold.
Speaker Change: Ultimately, we are focused on growing adjusted EBITDA less capex and equity based compensation measured in dollars or plans that are underway are progressing well and this is part of why we are comfortable committing to 2025, adjusted EBITDA dollars being higher than 2024.
Altogether, we generated $119 million of adjusted EBITDA in the third quarter for a margin of four 1% of net revenue.
Speaker Change: As <unk> mentioned earlier this was our second consecutive quarter of mid single digit adjusted EBITDA margin and we have now proven we can operate at this level despite year over year revenue contraction.
Speaker Change: We ended the quarter with $1 3 billion of cash and equivalents and $1 9 billion of total liquidity when factoring in our undrawn revolving credit facility.
Speaker Change: This was of course before we bolstered our cash balance further with the close of our non Bureau high yield debt offering in early October we.
Speaker Change: We saw investor demand many times larger than the $800 million that we raised which was a testament to the tremendous work we've done on driving profitability across the business.
Speaker Change: With the rapid improvement in our financial profile and movement across rates and credit spreads. We saw this as an opportune time to derisk the balance sheet.
Secondly, pre funding our upcoming convertible maturity in 2025.
Speaker Change: As I've said from the beginning of the year, we are laser focused on delevering the business over the years to come and we will use these proceeds in combination with our own free cash flow generation to handle our coming obligation.
Speaker Change: Now rounding out the cash flow statement cash from operations was $49 million in the third corner offset by capital expenditures of $58 million.
Speaker Change: This capex was a bit lower than our guided range due to a combination of timing and further expense rigidity on our part.
Speaker Change: So while there will be some catch up in Q4, the net will still be lower than the run rate our Q3 guide implied.
Speaker Change: The end result, with free cash flow of negative $9 million in the third quarter.
Speaker Change: Let's now turn to the fourth quarter guidance as we round out the year.
Speaker Change: Beginning with the top line quarter to date, we are flat to down slightly year over year and expect to end the full quarter down in the low single digit range.
Speaker Change: This contemplate sequential seasonality in line with what we saw last year.
Speaker Change: While we're pleased with the strength, we saw way day and are excited for the holiday season ahead. We're also cognizant that the weakness in the category on top of all of the distractions facing consumers right now create a challenging operating environment.
Speaker Change: Turning to gross margin, we would guide you to the lower end of the 30% to 31% range. Once again as we continue to lean in on take rate and the strategic areas, where we see valuable payoff and order capture.
Speaker Change: Customer service and merchant fees should be just below 4% again as well.
Speaker Change: Advertising should end up in a range of 12% to 13% of net revenue and likely toward the upper end of this range. This is higher than in the past few quarters as we see clear demonstrable evidence of high value opportunities to lean in here to drive further share capture as we get into 2025.
Speaker Change: It is important to bear in mind that many of the dollar spent today are driving order capture in the next few quarters.
Speaker Change: Finally, S&P G&A should fall in the $400 million to $410 million range. We saw some spending that had been planned for the third quarter shift to Q4. So there's a slight normalization here as you think about the sequential trend.
Speaker Change: Following this guidance down the P&L would lead to a fourth quarter adjusted EBITDA margin in the 2% to 4% range, even with a challenging top line environment. This puts us right in line with the commitment we made to drive at least 50% growth in 2020 for adjusted EBITDA, which.
Speaker Change: Which is a testament to our steadfast focus on cost efficiency.
Speaker Change: Now, let me touch on a few housekeeping items.
Speaker Change: You should expect equity based compensation and related taxes of roughly $90 million to $110 million depreciation and amortization of approximately $90 million to $95 million net interest expense of approximately $14 million weighted average shares outstanding of approximately $125 million.
Speaker Change: And capex and a 60% to $70 million range.
Layering this on top of the expectations for adjusted EBITDA and the working capital benefit with revenue up sequentially in the fourth quarter, we would expect healthy free cash flow generation to round out the year.
I want to make sure investors appreciate just how unique 2020 for it then in the context of wafers long history.
Speaker Change: We spent many years post our IPO focused primarily on growth and then over the past several years appropriately pivoted to prioritize profitability.
Speaker Change: 2024 has marked a return to the pre IPO format. This business balancing the dual mandate of driving progress on both the top and bottom line and there is more to come in 2025.
As we close out the year I want to draw back to Neurogen Steve's remarks from their shareholder letter from February.
Speaker Change: Our mission is to make wafer at the best place to shop for the home over not just the next quarter or a year, but the next decade and beyond we believe the best is yet to come and have never been more excited to execute against the tremendous opportunity in front of us.
Speaker Change: Thank you and now Steve and I will take your questions.
Speaker Change: Thank you and we are now open for Q&A I'll reminder, in order to ask a question Press Star then the number one on your telephone keypad to raise your hand and joined the queue when.
Speaker Change: When called upon to ask you a question. Please on your device indeed possible to use your device handset to ensure optimal quality sound again that is star one to join the queue and your first question comes from the line of it got La Runion from Citi. Please go ahead.
Speaker Change: Hey, good morning, guys.
Speaker Change: Maybe just first on.
Speaker Change: On the share gain that you're seeing if you can.
Speaker Change: Quantify or qualify that.
Speaker Change: A little bit more is it do you see it all coming from the pricing that you can deliver or are there other factors that.
Speaker Change: That you are seeing.
Speaker Change: How do we think about that as the market gets better.
Speaker Change: Positioning for that and then on the 2025 EBITDA comp.
Commentary.
Speaker Change: Any more color, we can get around that the level of confidence.
Speaker Change: As we've talked about the mid teens incremental EBITDA margins, just how do we think about that.
Speaker Change: On a category that maybe doesn't improve as we.
We work our way through the beginning of next year at least thank you.
Speaker Change: Yeah. Thanks, Thanks for the questions let me in.
Speaker Change: Let me run through them and then if there's anything you want to add Kate you can jump in.
On the first one around the.
Speaker Change: The share gains we're seeing.
Speaker Change: I would say since the end of 2022 since fourth quarter 2002, we've kind of consistently seen ourselves gaining market share every quarter hitting all time highs in the credit card panels that we get on market share and Vince.
Speaker Change: In terms of how we're doing it you mentioned pricing and I'd say optimizing our pricing to maximize profit dollars is certainly one thing again, we didn't really change breaking memory. So I just wanted to quantify that right that was low due to low tens of basis points, but thats, just a kind of an ongoing optimization, we do on the demand elasticity to maximize our position there, but that's just one of many things.
So you talked about pricing, but for example, we could talk about improvements we've made in our logistics network like for example on our prior calls we talked about consolidated delivery, which is right now live in Houston Las Vegas, we're rolling that out nationally or we've done a whole series of kind of logistics features and functionality that increases speed increases customer service levels.
Speaker Change: <unk> of the business or on our website and our apps will recall our storefront experience.
Speaker Change: A team that had spent a lot of the last couple of years working on re platforming big pieces of the technology, but as they've done that now the developer velocity is much faster than the feature function. We can rollout and optimize is back to a very high rate and we're seeing gains from that so the way we can kind of take a market share is actually through a long list of things, we can do to improve the customer experience drive up conversion.
Speaker Change: <unk> gained customer reach optimize.
Speaker Change: The outcomes we're getting.
Speaker Change: And so when we look to 2025, we see a lot of ways to continue to grow market share regardless of whether the macro economy in this category as something thats getting better or not so we're not we're not counting on that we know it's a cyclical category. We know that consumer discretionary durables are under a lot of pressure now that is where we play despite that we see a pretty pretty good outlook.
Speaker Change: From how we're going to grow on the back of taking market share and then for the 2025 EBITDA the way to think about between 25 EBITDA will be set as well.
Speaker Change: We see 2025, EBITDA dollars being higher in 2020 for EBIT dollars because of the ongoing roadmap we have around what we can do around market share as I, just described and it kind of kind of scale our business that way. While we also continue to have a good cost roadmap and as you've seen on that <unk> line for example.
Speaker Change: I don't know if I forget the number is eight or nine quarters in a row, you've seen that come down.
Speaker Change: That's just us being very smart about how we're spending money and continue to find ways to optimize that but let me just turn it over I just wanted to jump into clarify obviously, we haven't given any 2025 guidance and we don't typically give annual guidance, but.
Speaker Change: All we have said to 2025 is exactly as <unk> said, which is we are focused on growing adjusted EBITDA dollars and that continues to be.
Speaker Change: Our focus and commitment and we can do that through the combination of the cost discipline that you've seen us execute on over the last few years and the investments that we're making now to grow revenue and so that revenue growth, which we see come in on this multi quarter basis on a positive front from adjusted EBITDA dollars will help us grow adjusted EBITDA dollars in combination with that cost.
Speaker Change: <unk> narrowed referenced how that's showing up on that G&A line.
Speaker Change: Alright I appreciate it thank you.
Speaker Change: Your next question comes from the line of Christopher <unk> of J P. Morgan Your line is open.
Speaker Change: Thanks. Good morning. So my first question is.
Speaker Change: In the fourth quarter revenue guide, you're assuming some modest slowdown in revenue growth in the balance of the quarter I parse seemed a little bit here, but flat to low single digits quarter to date versus download low single digits. You also mentioned preelection deferrals. So can you bring that all together for us why wouldn't trends get better for <unk>.
Speaker Change: Tumors are slowing in collection and pushing the holiday holiday sales later into the quarter.
Speaker Change: Yes, Chris So I think on that.
Speaker Change: You've got to get the election coming up.
That's something that may or may not really be determined in one day that could take a little bit of time, we've got.
Speaker Change: Calendar or the number of days that you are talking about kind of the holiday season is a little shorter and you have whats been a challenging macro so you have a bunch of uncertainty. So we feel very good about how we can continue to take share, but you know as youre kind of looking forward to the quarter and you still have a lot of the revenue yet to come and you have some of these uncertainties youre trying to figure out where you think youre going to be.
Speaker Change: And I guess, how significant has the I mean, obviously.
Speaker Change: Wait a purposely extended that earlier, but you know do you think that how significant is that slowdown ahead of the <unk>.
Speaker Change: Election versus maybe just timing shift around.
Speaker Change: Longer way day.
Speaker Change: Yes, I mean, I think wait a week.
Speaker Change: In hindsight, we're pretty happy with how we played that we had planned for a three day event, we built some flexibility in how we did that and then as we saw the calendar playing out we saw a bunch of other major retailers playing a two day plenty of two days sales on that right. After we day, we said to take advantage of the online shopping that was going to happen over that time.
Speaker Change: Certainly maximize how we did but I don't know that that dramatically.
Speaker Change: Effects, when you get a week or two out from health demands going.
Speaker Change: I think it's just it's just that the <unk>.
Speaker Change: <unk>. It just makes it harder to predict I think thats basically the biggest thing I would just say when you look to the forthcoming holiday season, and you're like Hey, how is this going to exactly play out you can come out with a range of possibilities that all seem plausible.
Speaker Change: Got it that makes sense.
Speaker Change: And then on the on the operating margin forecast for the fourth quarter.
You talked about we're hitting our goal of mid single digits.
Speaker Change: You did four 1% in the third quarter, but at the same time that the midpoint of the fourth quarter guide is not mid single digits. So I guess to what extent does that sort of undermine the view of hitting that goal that you've sort of said you would get to win.
Speaker Change: We have said that you've achieved that and then is any of that just seasonality from a mix perspective versus timing of spending.
Speaker Change: Yeah, Chris Thanks for the question I guess I guess the way I'd look at it is obviously over the last two quarters. We've proven we can operate at that mid single digits right and we've shown.
Speaker Change: I think very nice discipline to get to that point, what you heard with the fourth quarter guide is a little bit of incremental investment on that marketing spend and.
Speaker Change: As a result, we stepped up that range a little bit and then the net of that is that we think that that is going to drive incremental revenue and incremental adjusted EBITDA dollars over the next few quarters. So I want to be clear that bottom of the funnel marketing spend it's a place that we are quite disciplined we have very good visibility and we see.
Speaker Change: I'm confident in the ability of that to drive both the revenue and the adjusted EBITDA dollars and Thats really where were driving volume.
Speaker Change: Thanks very much.
Speaker Change: Thanks, Chris. Your next question comes from the line of Peter case Piper Sandler. Please go ahead.
Peter Case: Thanks, Good morning, everyone. So just sticking on some of the advertising and election dynamics. So youre highlighting the elevated AD spend from the stepped up influencer marketing, but we're also hearing that AD rates are very high right now around the election season. So how do you think about the AD spend going forward do you think.
Peter Case: The overall costs are going to come down as we get in further into November December and going forward.
Speaker Change: Yeah, Thanks, Peter so.
Speaker Change: Way to think about it.
Speaker Change: In parts of the AD market.
Speaker Change: We'll definitely have elevated rates pre election. So think about this is like local TV and think of this as some of the upper funnel channels, which you could use for any variety of messaging and.
Speaker Change: And just to remind you we are very quantitative in how we spend the money. So in other words, we won't chase that spend so.
Speaker Change: If it's not economic someone else can buy that media and of course, if it becomes economic again and makes sense to us we would buy that medium and so that's sort of one thing. They think of that is like what do you think that influencers or separately, we're talking about some lower funnel fast payback channels. Those are channels that are very narrow and specific to <unk>.
Speaker Change: Types of advertising and so those arent once where you'd find political ads and so that's sort of a different segment of the advertising market, but I think the main thing to just to kind of keep in mind is that we're just very quantitative and when we're talking about this AD spend so we're not we don't really participate in anything thats not economic and yes, those channels like local television do get much cheaper after.
After the election, but we don't really do that much in local TV for example.
Speaker Change: Okay. That's helpful and then.
Speaker Change: Just a quick question for you just on the wafer rewards so.
Speaker Change: Deciding to have a loyalty program out there I am recalling it was six or seven years ago. You did have a loyalty program called my way, which was ultimately just standard. So maybe just talk about the learnings from my way and whats different this time that ultimately might make this new loyalty program.
Speaker Change: Yes, so I think our biggest learning from my way with that.
Speaker Change: What kind of customer value proposition that we had associated with the program.
Speaker Change: It wasn't that strong now in contrast, you think about what we're offering and wafer rewards.
Speaker Change: When I talked about on the call already anything about that average customers $600 a year.
Speaker Change: 5% back that tranche of customers would be basically breakeven on the program right off the bat after annual spend they pick up those other benefits to members only customer service line early access to the sale of that but obviously the way. It works is if youre getting rewards dollars every time you make a purchase you have a balance you could use against your next purchase and that customers really spending a few thousand dollars.
Speaker Change: Home today spread across many many retailers. So you think about that next two to $3000 that they're not spending with way fair what they spend some of that with us the programs with some cost for them and theyre going to get rewards on that incremental spend and so it has some of the basic engineering you want in a program that makes it very obvious and easy for the customer to change kind of where.
Speaker Change: Or they can choose to drive their spend.
Speaker Change: And then there's a bunch of other benefits side of the program that you say are not economic but they could be exciting to consumers. So I think we've got a very good setup and I don't think in hindsight My way did not have as good a setup for that reason, we didn't see the traction we wanted with that wafer rewards new red it's only been out there for a.
Speaker Change: A couple of weeks, but.
Speaker Change: We're happy with the start to scale.
Speaker Change: U E.
Speaker Change: Our near to speak on the call the value of loyal customers and do we have a very good understanding of when someone is increasingly loyal with us the overall ROI that that drives and customer lifetime value there and so this program is really designed at driving incremental <unk>.
Speaker Change: So folks who were getting a portion of their spend but we know we can be getting that third in that fourth order and.
Speaker Change: And we tested the concept with customers. We had good reaction. So we're really excited about both how the customer perceives this value prop and what it can do for us.
Speaker Change: Very good thank you so much.
Your next question is from the line of Simeon Gutman from Morgan Stanley. Your line is open.
Simeon Gutman: Hi, Good morning, everyone. A couple of questions first on the category home furnishings.
Simeon Gutman: Turnover or housing turnover picks up I think the category would rebound if it doesn't curious what you think about pent up demand.
Simeon Gutman: Is that going to drive some life in the category, where you think we are in that continuum.
Speaker Change: Yes so.
Speaker Change: I think <unk> kind of phrasing it well in the sense that obviously, if housing demand and existing home sales picks up that's obviously highly stimulative to the category.
We are seeing signs that there is pent up demand, but how much time needs to elapse before that becomes top of mind enough to be stimulative on its own is less clear I would say.
Speaker Change: This is why if you just think about our strategy. We've had for two years during which the market has gone down what 25%, but we've basically been able to take significant market share and so we're doing far better than that I think our strategy is really not counting on a rebound in the category, but it's actually calling out the fact that.
Speaker Change: Use rough numbers of the category with whatever little over 400 billion in North America, and now, let's whatever over 300 billion in North America, It's still 300, whatever plus billion of spend that's out there and we think that Theres a lot of argument of why we can take share very nicely with all the things we're doing and if you kind of think about that as being a long tail very fragmented.
Speaker Change: And you're increasingly seeing players who are having a harder time being differentiated in the middle sort of.
Speaker Change: Losing share or going away and you've kind of seen that from major pleasure the declining a lot or they have been a handful.
Speaker Change: Most recently, what kinds that got more going out of business and so there is definitely things that are changing and I think this is the real opportunity for us.
Speaker Change: Yes of course, when the category turns theres going to be tremendous amount of growth too, but it's sort of like.
Speaker Change: Timing that I don't think its very easy to do and I don't think its really pertinent with given the strategy we have.
Speaker Change: And then the follow up on the just the construct for 25, which I know once you give a construct we're going to ask all sorts of questions.
There's obviously a lot of room.
Speaker Change: You say EBITDA dollars north of 2024.
Speaker Change: The question is you could lets say thats a couple of hundred million dollars or are you going to lean in to market share to the point, where youll just drive a modest outcome and I'm not looking at dollars and how much it will be up year over year, but more on your posture of how much you want to lean in to take market share to just achieve that goal of growing them more acts.
Speaker Change: Really taking market share in a more meaningful way.
Speaker Change: The essence of the question.
Speaker Change: Yes, the only thing I'll say and I'm going to turn over to Kate those if those are interrelated, meaning that the things you do to take market share some of those do not have costs associated with that.
Speaker Change: Already sunk, meaning like for example, I showed on the storefront experience. That's a team of people we have on payroll Theyre doing hard work every day rolling out a lot of features that will have an outcome that will drive Marcia theres no incremental costs and the ongoing payroll is the cost there. There's other things you would do like if you talk about advertising what are the costs associated with revenue, but what we're saying is we're going to do that.
Costs associated with profit dollars that it generates so those who have a very direct relationship theyre not unrelated, but let me turn it over to Kate for any clarification, Hey, Simeon Yeah. I would just reiterate we are very focused on driving both the top and bottom line and we believe that we can do these things in concert with each other and we have a high degree of conviction around that.
So what youre hearing us say that there are select places, where we have made investments and are making investments you. Obviously last quarter. We started to talk about that in the gross margin line you saw how that showed up this quarter, we talked a little bit about the marketing spend we are doing these things because we think that they drive incremental order growth and revenue capture and ultimately that drives adjusted EBITDA dollars.
Speaker Change: And we can do that while continuing to be quite disciplined on the cost side and you see not pan out over the last few years as well <unk> already mentioned that S&P G&A expense, we've taken that down nine quarters in a row on an LTM basis, that's down over $250 million at the top of the cost take out we took out the end of <unk>.
Speaker Change: 22, <unk> 23, so you are seeing really nice discipline, there, where we can manage the fixed costs and youre seeing and say hey, there is some places where we think there are pockets of opportunity to invest that will drive on a multi quarter basis revenue gross profit dollars and ultimately adjusted EBITDA dollars.
Speaker Change: Okay. Thank you good luck.
Speaker Change: Your next.
Speaker Change: <unk> comes from the line of Brian Nagel from Oppenheimer. Please go ahead.
Speaker Change: Hi, good morning.
So I have a couple of questions.
My first question on market share.
Speaker Change: This has been a big topic.
You highlight you consistently the numbers show that clearly wafer already tough environment, taking market share broadly, but a question I have is.
Speaker Change: If you look at that data you have.
Speaker Change: Maybe closer is there any indication that some of these more.
Speaker Change: Mass merchant more value oriented.
Speaker Change: Retailers are sites that are performing well in this environment.
Speaker Change: They actually youre, having a more difficult time, taking market share there or are they potentially take market share back from wafer.
Speaker Change: Well I guess just to clarify what I would say, it's a large and fragmented market. There's quite a few people losing share, but just to clarify we're not the only one winning share and so to other folks that highlighted I think have done a very good job also over the last few years. One is Amazon now they played at the kind of opening price point commodity item is really were they special.
But they've done a good job and other one is homegoods, whose purely brick and mortar and they really play in sort of the decorative accents the core textile space lower ticket items, but they both been taking market share. So there's a handful of folks who are doing well much longer list of folks who are not doing well and that's kind of the landscape and so I wouldn't say that we expect to.
Speaker Change: The only winner, but I think there's actually kind of only a handful of winners in quite a few folks who are on the other side.
Simeon Gutman: That's helpful marriage, and then my second question is.
Speaker Change: Probably more for you but.
Speaker Change: You've done a great job taking.
Speaker Change: Taking your cost infrastructure to our controlling cost a bit.
Speaker Change: Topline weakness.
Speaker Change: Looking at 2025.
The topline there is still somewhat of a wildcard, but I guess the question is and you look at your cost infrastructure, how much incremental opportunity is there to take costs down further and then philosophically.
Where to stay weaker.
Speaker Change: Are you looking to take more cost out or <unk>.
Point start to prepare for the eventual recovery in sales to kind of keep the cost infrastructure in place.
Speaker Change: Yeah, Great question. So so first let me just start with how we look at the cost efficiency and the cost opportunity you've seen us focus sort of up and down the P&L on cost obviously, the place where you see that continuing to show up is on that Opex expense at SSG G&A, although you've halted.
Speaker Change: The night disciplined for example on the Capex expense and as we're driving towards our sort of ultimate goal of growing adjusted EBITDA less the capex less the equity based compensation, where you've also seen nice gains from a cost control perspective, youre seeing that sort of combination of those three continuing to improve so as we look at it we do.
Speaker Change: We see ongoing opportunity for efficiency, you've seen us do those restructurings in the past and then you've seen ongoing tightening on a quarterly basis on that <unk> line and as a reminder of that line is not just labor rate that's labor, but it's also if any at all I know, it's an overhead and software expense and youre seeing us be really disciplined in.
Speaker Change: All of these pockets as well as Capex equity based compensation et cetera. So when we look at it yes, we see ongoing places for tightening and places to be quite thoughtful and as we think about 25 again, what I will say and reiterated we're very focused on growing the as adjusted EBIT dollars that we intend to balance things appropriately to continue to drive that.
Speaker Change: And that in combination with Capex equity based compensation for that adjusted EBITDA less capex less equity based compensation continues to improve.
Speaker Change: That's very helpful. I appreciate it thank you.
Speaker Change: Your next question is from the line of Curtis Nagle Bank of America. Your line is open.
Curtis Nagle: Great. Thanks, very much for taking the question I guess the first one just on the ALJ came in above expectations, but pointed to high price elasticity and press for small versus large ticket items. So just curious what drove.
Curtis Nagle: The better expected higher payoffs.
Curtis Nagle: Thank you.
Curtis Nagle: Yes.
Speaker Change: So I think.
Speaker Change: Way to think about <unk> is really an output metric right. So you think about our business. We're doing a lot for example to sell lower ticket items. When we talk about like the frequency agenda, and what we're doing with housewares items decorative accents and one of the benefits in wafer rewards for example, free shipping on every order and she said all of that will decrease ELV, but then we have a luxury platform.
Speaker Change: <unk>, that's actually growing at a very nice rate and say Oh, that's going to increase <unk> and so we're doing a whole variety of things that our real goal is to grow the dollars per customer per year. So the way, we think about getting market share as you think about market share as more customers and those customers each spending more with us.
Speaker Change: And an outcome of that is obviously a number of orders tons. They will be as the revenue, but again because our strategy is not around low ticket orders are high ticket orders <unk> as an outcome metric or a combination of things, we do and so I would say <unk> kind of like a permanent cost, but when youre talking about inflation of like for like items or deflation of like for like items being your second quint.
Speaker Change: Kyle price for beds is that moving.
Speaker Change: But that's not really what's happening right now all of that inflation with Covid and the ocean freight rates. Then there was a deep cycle deflation of that coming back out that's all behind US right now and so this will be more these moves are more an output metric of the seasonality and us executing the business and all the dimensions, we talked about.
Speaker Change: Okay got it.
Speaker Change: And then just.
Speaker Change: Would love to ask a question.
Terrorists.
Speaker Change: Yes, I mean, effectively just kind of how we should think about the framework. If you were to go to 50 or 60% I think.
Speaker Change: Lastly spoke and it was a while ago.
Speaker Change: China exposure about 50%.
Speaker Change: So in terms of kind of our expectations on revenue and margins.
Speaker Change: <unk> right I mean pricing is probably harder to portions capacity moves right out of China might be lower so just kind of piece of all of that together, maybe an update on what your exposure is at the moment will be Craig.
Speaker Change: Helpful.
Speaker Change: Great News, let me, let me give some thoughts on this and then I'll hand, it over to you.
Steve: This is Steve.
Steve: So tariffs are something we've certainly seen over the history of this business.
Steve: <unk> seen antidumping, and we've seen tariffs and they've certainly.
Steve: Can have an impact so I would say.
Steve: On the one side, we are running a marketplace and so.
Steve: We really have selection across a broad spectrum of suppliers and that allows our customers to.
Steve: I see a lot of options for products, they haven't swap and different things and so we're able to sort of move demand around in that regard. We certainly have some practice now navigating tariffs and so I think when we look out in the future and certainly it's uncertain exactly how how that might play out.
Steve: We feel much better about the playbook, we will run in the approach we will take to help consumers buffer whatever price increases they may see selectively on certain imported products. The other side of it as our suppliers are obviously more directly impacted even than we are and so they've been working over the last year.
Steve: Here are two here.
Steve: Two just modified their businesses so that they don't have single source problem as quite as much as they have in the past and so I think the combination of all those we think will buffer this as best we can.
Steve: And Shouldnt.
Steve: Should be very navigable.
Steve: I would mention though too so in the five years.
Steve: There is some.
Steve: Antidumping things that happened in like wood, some specific categories that would good certain factories from China, which happened years and years ago, but then really the notable things where the tariffs during the first Trump administration work.
Steve: 10, 25% well ever since then and that was for goods from China in our categories.
Steve: Ever since then what you've really seen happened is theres been a lot of suppliers, who built our manufacturing capabilities in Cambodia, and Vietnam, and Malaysia, Indonesia. Other places so that they actually have more control over their future should the tariff landscape change et cetera, So I would say that the industry.
Steve: Now, it's much more cognizant of that risk than they were five years ago and so.
Steve: <unk>.
Speaker Change: We have kind of a couple benefits going for US one is that the industry is definitely in a different position than it was five years ago. The second is as Steve mentioned, we have 20000, plus suppliers, we have domestic suppliers, we have import suppliers and suppliers to make goods in Brazil with suppliers to make goods in eastern Europe. So we have suppliers that are quite different from one another and so we have the benefit of how they compete on our platform for the customer.
Steve: So, yes I think.
Steve: You never know quite what's going to happen, but I would say that thats certainly a topic that folks have been thinking about doing things about.
Speaker Change: Okay got it thank you.
Speaker Change: Your next question is from the line of Colin Sebastian from Baird. Your line is open.
Speaker Change: Thanks, guys good morning.
Colin Sebastian: So I know, there's a lot of focus here on the category challenges and efforts on pricing and advertising.
Colin Sebastian: But if we sort of zoom out on broader e-commerce platform and technology trends I mean, theres a lot of change happening around shopping tools and digital assistance and personalization within apps and so I wonder how important those initiatives are for wafer and are you seeing any positive impact perhaps in metrics like time.
Colin Sebastian: So we're discovering and browsing, even if those arent converting to sales in this environment.
Colin Sebastian: Yeah. Thanks for the question. This is Steve again, let me just kick this off.
We have been doing a lot of things internally actually just this morning, I send out an internal sort of pre earnings.
Colin Sebastian: And I did it completely with AI and I think part of this we're all going through this learning curve together right now of how to best use these new tools and certainly you look at it and say if we don't adopt the best practices in the business, we're going to be in trouble and so it's on us to really push our teams to make sure. They are using these new tools and experimenting and trying new things and pushing the cutting edge. So that we can.
Can be a leader.
Colin Sebastian: And not be kind of at risk of the market changing around us without us without us catching it. So we have a number of initiatives internally that are that are some are very tactical and some have even a very direct efficiency paybacks, where teams are using them to improve process flows that they have today and then some are much more experimental where they're trying to go after things.
Colin Sebastian: That could be disruptive in the future that could be very exciting for our customers that could change the efficiency curve in different parts of our business.
Colin Sebastian: Yes.
Colin Sebastian: What <unk> seen like so we've been.
Colin Sebastian: Large adopter of machine learning data science for a very long time and Thats, how we priced the catalog how would you sort of or how we do blunt personalization, but with the kind of more recent AD then.
Colin Sebastian: We've also been aggressive adopter, there, where we have a lot of use cases, where you can kind of do things and you see that Richard very quickly. For example, we have a very large catalog millions millions tens of millions of items and so.
Colin Sebastian: Finding dimension in accuracies and correcting them auto tagging a lot of merchandising attributes.
Colin Sebastian: Those are things that we've actually put into production they are driving a lot of value.
Colin Sebastian: Very insignificant cost.
Similarly on how we empower our customer service agents to do to be able to take care of the customer and do a good job of being able to create tools there or for our software development teams and the kind of the co pilot type products out there for increasing productivity of.
Colin Sebastian: Coating. So there's been a bunch of things we've been aggressive adaptor on on the customer side I think what Youre also getting at is it could change how customers shop and there I think we actually do have some kind of pilots and proof of concepts are things that we're trying that we do we have one that we're selling small amounts of traffic in and it's actually shows.
Colin Sebastian: Really amazing customer engagement, it's still early but we are basically we are certainly.
Colin Sebastian: I think we're being prudent about how much we're investing we're not over investing but I think we're also not ignoring it and I'd say, we definitely are pretty happy with some of the progress, we're making and we're in a good position because it's a category, we're not selling commodity goods and I think the biggest challenge with agents or if youre a seller of commodity items.
Now you can have an agent you say, hey, I want to reorder those bounty paper towels that dish soap more dove soap bars that agent can basically figure out hey is it cheaper at Walmart target Amazon or does it makes sense. So.
Colin Sebastian: We're ordering enough from Walmart automatically sign me up for Walmart, plus or whatever execute that order I don't care, who is kind of brown cardboard box shows up at my door right.
Colin Sebastian: But if you are selling items center exclusive theres a lot of consideration in how you pick the right item. There's a lot of fine distinction between different items. The agent role is going to be a little different and I think there's things you can do to kind of enhance the customer experience in a way that's really engaging but it's not I think the real challenge is if you're in more commodity provider.
Speaker Change: Okay, Thanks, Nir and thanks, Steve.
Speaker Change: Your next question comes from the line of all of them into metal from Evercore. Your line is open.
Speaker Change: Thanks, guys.
Speaker Change: Thank you mentioned you are looking forward to a healthy free cash flow generation to fourth quarter maybe.
Speaker Change: Maybe can you confirm that free cash flow that you guys expect free cash flow to be positive this year.
Speaker Change: And then maybe.
Speaker Change: Allocation into next year, maybe talk a little bit about.
Speaker Change: How do you want to invest in.
Speaker Change: It's driving Capex next year.
Speaker Change: Yeah. So.
Speaker Change: So just first relative to the fourth quarter, we do typically see positive free cash flow in the fourth quarter and as a reminder, a part of that is the working capital dynamic races seasonally the fourth quarter is typically a bigger revenue quarter than the third quarter and that in combination with our ongoing discipline around adjusted EBITDA growth in Capex should.
Drive nice free cash flow in the fourth quarter.
Speaker Change: Obviously, we haven't given any 2025 guidance, but as we think about Capex I sort of look at what we've done over the past year and so what you've seen is ongoing discipline on that line as well there are really two.
Speaker Change: You sort of components of Capex that we break out here one is the capex labor piece and you've seen that continue to come in quite nicely as we've been very thoughtful and disciplined on our team and our structuring and then the other is that PP&E line and within that <unk> line is the investment in our logistic network any investment in physical.
Speaker Change: Retail and.
Speaker Change: And what we've spoken about there is in the logistics network, we're very pleased with where the network is today. So we're not in a growth mode on that network and there's some maintenance capex there, but it's really not about expansion, we have ample capacity for the growth that we intend to have.
Speaker Change: And then on that physical retail side. What we've also said there is we're excited about that opportunity. We're obviously quite pleased with the results from that first large format store that opened in the spring, but we intend to be very disciplined about the rollout there until you should overall you know you've seen us throughout this year, bringing capex nicely from last year.
We maintain that expense discipline, and rigor up and down the P&L.
Speaker Change: Got it thanks, and then maybe on international.
Speaker Change: Like that.
Speaker Change: This improvement in EBITDA versus the first half of the year.
Speaker Change:
Speaker Change: On your comment about next year's EBITDA dollars to be positive for 2024.
Speaker Change: How much of that is international improvement.
Speaker Change: Yes, so I'll just make a quick comment and then turn it over to Kate for the details.
I think what Youre seeing over time is a lot of the work we did over two years of really streamlining our cost structure focusing on the key things for each business line that we think are important to drive them forward and then as time plays out.
Speaker Change: Seeing that the business, where we're pretty happy with the progress we're making on the key drivers in each line of business that we want to see progress.
Speaker Change: Not really allowed to give guidance I'll turn it over.
Speaker Change: I'm also not going to give guidance.
Speaker Change: But I reiterate when you said, which is as we thought about the cost discipline and the selective areas, where we invest.
Speaker Change: That's right that's not just specific to the U S and what we said it was we started some of this cost restructuring is that that would be sort of global in nature and how we look at that.
Speaker Change: And as we.
Speaker Change: As we sort of think about what we're driving for the business. We're really focused on the business overall and what that looks like across week Harry.
Speaker Change: And in the interest of time, we will conclude our Q&A session I would like to hand back over to the wife ethane for closing remarks.
Speaker Change: Yeah. Thank you. Thank you everybody for joining us today as you can probably tell we're pretty excited with where we are now.
Speaker Change: The business the things that are rolling out in coming and we're pretty.
Speaker Change: We're pretty.
Speaker Change: We really like the prospects we have as we're looking forward.
Speaker Change: Thanks for your interest in wafer I hope you have a great holiday season. Thank you all.
Speaker Change: This concludes today's conference call enjoy the rest of your day you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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