Q1 2025 Wayfair Inc Earnings Call
Andreeva, John Blackledge, John Blackledge, Steven Forbes, Eric Sheridan, Brian Nagel, Curtis Nagle, Curtis Nagle
Kayla: Thank you for standing by. My name is Kayla and I will be your conference operator, way. At this time I would like to welcome everyone to the Wayfair First Quarter 2025 earnings release and conference call. All lines been placed on mute to prevent any background noise.
Kayla: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star in one.
Kayla: I would now like to turn the call over to Ryan Barney, Head of Investor Relations, you may begin.
Good morning, and thank you for joining us.
Speaker Change: Today we will review our first quarter 2025 results. With me, our Niraj Shah, co-founder, chief executive officer and co-chairman, Steve Conine, co-founder 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.
Speaker Change: I'd 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, industry trends, and our financial performance, including guidance for the second quarter of 2025.
Speaker Change: 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 [inaudible]
Speaker Change: 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.
Speaker Change: Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow.
Speaker Change: These non-GAAP financial measures should not be considered a replacement for and should be read together with GAP results.
Speaker Change: Please refer to the Investor Relations section of our websites to obtain a copy of our earnings release and investor presentation which contain descriptions of our non-GAAP financial measures and reconciliation of non-GAAP measures to the nearest comparable GAAP measures .
Speaker Change: This call is being recorded and the webcast will be available to replay on our IR website.
Niraj Shah: I would now like to turn the call over to Niraj.
Niraj Shah: Thanks, Ryan, and good morning everyone. We're pleased to be here today to discuss our first quarter results with you.
Niraj Shah: Despite persistent category volatility that showed a fourth consecutive year beginning with contraction, we were able to once again outperform our peers and take healthy market share while driving meaningful improvements in profitability.
Niraj Shah: Year-over-year growth, excluding the impact of Germany, came in nicely positive at 1 percent, driven by the US business up 1.6 percent against the category that we estimate was down over the same time-free
Niraj Shah: Tariffs are clearly top of mind for everyone. While there is a lot of uncertainty in the broader economy, we have a clear line of sight and strong conviction on what we need to do for both our customers and our suppliers.
Niraj Shah: I want to spend the bulk of our time this morning laying that out. So let's take a moment to take stock of where we stand, what we're seeing and how we think about the go forth.
Niraj Shah: As a reminder, terrorists are not a new phenomenon in our category
Niraj Shah: Going back to the early 2000s, a number of Chinese producers were hit with anti-dumping duties on wood furniture products, some of which were over 50%
which began a migration of production out of China.
Niraj Shah: In 2019, a 25% duty was implemented more broadly on home furnishings products and that never went away.
Niraj Shah: So we're dialing the clock back to walk through how we navigated these headwinds as many of the same forces stand to benefit us today.
Niraj Shah: At the most basic, we operate a platform that connects over 20,000 suppliers to our more than 20 million customers.
Niraj Shah: Our Retail Platform delivers for the customer by facilitating Marketplace Dynamics, where a supplier competes with other suppliers to win each order.
And they do that by offering the best value [inaudible]
Niraj Shah: Value can come in many dimensions in this category, breath of assortment, quality, speed of delivery, and price being a few
Niraj Shah: Like other retail channels, our platform allows our suppliers to choose the wholesale price they want to charge us, and we layer a take rate on top of that for a retail price.
Niraj Shah: Suppliers who offer a more competitive wholesale price often succeed on the storefront because that translates directly into more competitive retail prices for customers.
Niraj Shah: So when an incremental cost like a tariff enters the system, suppliers have to make a decision on how much they want to pass through versus bearing themselves.
Niraj Shah: This is where the marketplace-like forces on our platform work most in our favor [inaudible]
Niraj Shah: The category we operate in is largely unbranded and highly substitutable [inaudible]
Niraj Shah: On top of that, we have thousands of partners selling through Wayfair, which means that there is intense competition amongst our suppliers to win each order
Niraj Shah: Just as we're seeing now, back then there was a lot of speculation about how much tariffs would ultimately increase retail prices.
Niraj Shah: It's important to remember that the tariff is applied to the value of the goods at the time of import, which is a fraction of our wholesale price.
Niraj Shah: There are multiple companies who participate in the value chain and the burden of the tariff can be shared across that group.
Niraj Shah: In 2019, we saw this playing out in real time. Suppliers that found a way to keep wholesale cost low were the most successful.
Niraj Shah: They could often make up the margin difference with the volume gains by taking share from their peers that chose to pass the cost burden through.
Niraj Shah: This creates a very clear incentive structure for suppliers to offer their best prices at all times Then incentive has only grown more powerful in the years since as we have grown the global base of suppliers and we have provided them with increasingly powerful tools to manage their business
Niraj Shah: All of this, combined with the prologue contraction and category demand, has only served to further elevate competition amongst suppliers for each customer order.
Niraj Shah: We're frequently asked by investors what the mix of sourcing by country looks like.
Niraj Shah: Our platform has considerable diversity and sourcing can shift in a very dynamic fashion, based on which suppliers have the most compelling offering to consumers at any one point in time.
Niraj Shah: This is an important facet, not all investors appreciate. When suppliers in one region raise prices, we may see consumer demand quickly shift to suppliers in another region if they have a more competitive offering.
Niraj Shah: Many of our largest suppliers have manufacturing capabilities spread across multiple countries, and can pivot production lines as the cost equation shifts [inaudible]
Niraj Shah: Our scale gives us a durable competitive advantage here. We can drive healthy competition across our thousands of suppliers in a category that, as I mentioned a moment ago, has vast assortment and high substitutability.
Niraj Shah: We have suppliers that manufacture in over 100 countries across the world, including a substantial base of production that is done domestically.
Niraj Shah: Across dozens of our top classes, such as area rugs, beds, dining chairs, and tables, and more, we have thousands of items made in the US.
Niraj Shah: Overall, our wide breadth of products and supply base from around the globe continues to offer us a healthy degree of insulation against tariff headlands.
Niraj Shah: Our team has been interfacing with suppliers nonstop to make sure they have both up to the minute information on the latest developments and a thoughtful partner in planning how to navigate the hit.
Niraj Shah: The broad feedback we're hearing from suppliers is clear. They understand the dynamics of our platform and are not keen to raise prices as they want to continue to take share and win.
Niraj Shah: I personally spoken with a broad range of suppliers in the past month. They're pragmatic and resilient. Many of these are businesses that have operated for decades through both booms and busts. [inaudible] I'm sorry, I'm sorry, I'm sorry, I'm sorry
Niraj Shah: Each conversation turns to how Wayfair can help support our partners as we have for many years.
Niraj Shah: The first pillar of support we can offer is data, which is how we ground these conversations. Our ability to attract spending propensity in real time gives suppliers a clear view of how they can optimize their pricing to maximize their own economics.
Niraj Shah: From there, we get into how they can take advantage of some of the value-added services we offer to drive better unit economics, such as leaning deeper into
Niraj Shah: Another increasingly important lever we've been helping suppliers activate is advertising.
Niraj Shah: We know supplier advertising has been a key area of focus for investors for some time and so we want to spend a few minutes today giving you an update on that arm of our business.
Niraj Shah: When we last discussed supplier ads as part of our investor day in 2023, this business was roughly 100 basis points of revenue penetration .
Niraj Shah: We saw that grow by more than 50% in 2024 to end the year north of 150 basis points.
Niraj Shah: For 2023 and much of 2024, our work in growing this adoption has centered around education.
Niraj Shah: This has been a key point of distinction between our supplier advertising business and that of our peers [inaudible]
Niraj Shah: Many of our suppliers are newer to digital advertising than large consumer brands.
Niraj Shah: For multiple years, our team has been investing time and energy to bring them up to speed on all the ways that way for advertising can drive profitable growth to their businesses.
Niraj Shah: To augment this effort, we've developed an in-house service where suppliers can have internal experts at Wayfair run their advertising campaigns [inaudible]
Niraj Shah: Our team Lenser expertise to define which products will benefit the most from incremental ad spend based on the supplier's competitive positioning on site today and manage the campaigns to ensure that they'll hit the supplier's financial return target.
Niraj Shah: The traction we've built on this front has been considerable, and as a result we've seen significant interest from suppliers to participate over the past several quarters.
Niraj Shah: We've ramped the number of suppliers spending at least 100 basis points of their revenue on advertising by more than 40% over the past 12 months.
Niraj Shah: We're thrilled at the response and have been taking a thoughtful approach to unlocking advertising inventory in a deliberate and controlled manner to ensure that we're preserving the integrity of the shopping journey that our customers enjoy so much on Wayfair.
Niraj Shah: We're constantly running tests to measure the impacts of higher ad load on conversion, ensuring that we could continue to grow our footprint while also driving incrementality.
Niraj Shah: The road map gives us a clear line to our goal of reaching three to four hundred basis points of revenue penetration.
Niraj Shah: Our team is driving innovation at all levels of the experience. For example, one of the products from the process of developing is co-biting for off-site advertising.
Niraj Shah: Wayfair has been an industry leader in digital advertising for decades, and I'll say advertising will open the door for us to share that directly with our suppliers.
Niraj Shah: It's still very early in our journey here and this is just one of several initiatives we have underway to drive further adoption among our supplier base [inaudible]
Thank you.
Niraj Shah: Oliver working the space comes back to a simple principle when our suppliers delight customers, Wayfair succeeds.
Niraj Shah: That alignment is especially important in today's environment. Our teams are in daily conversations with suppliers helping them understand how services like advertising can become a critical lever to ensure they're driving enough volume to optimize production flows or getting a new product launch from a new location off to a smooth start.
Niraj Shah: In a period where margin pressure is high, whether from tariffs or other factors, advertising becomes a way for suppliers to actively manage demand levels. That's the power of way for advertising. It allows our partners to target and capture incremental volume in a way that supports their broader business health.
Niraj Shah: We see tremendous opportunity ahead and we're moving quickly to deliver the strongest offering to our supplier community at a pivotal time.
Speaker Change: Before I hand it over to Kate, I want to zoom out for a moment and close with a few important steps we've taken over the past several months to further strengthen the foundation of our business.
Niraj Shah: We began the year with the announcement of the closure of our German business [inaudible]
Niraj Shah: We determined that continuing to invest in that business was unlikely to provide us with the highest long term financial return [inaudible]
Niraj Shah: So we made the decision to reallocate those dollars towards higher ROI areas [inaudible]
Niraj Shah: In early March, we filed that up with the announcement of a size reduction across our technology team.
Niraj Shah: As we achieve milestones in our major platforming work, we have an opportunity to reorganize our team, which remains strong and approximately 2500 people, while also having more resources focused on new product development, which we expect to pay meaningful growth dividends over time.
Niraj Shah: The third action we took was the issuance of our second high yield bond and simultaneous refinancing of our revolving credit facility in mid-March.
Niraj Shah: Prior to this, we had roughly $1 billion of convertible maturities coming due over 2025 and 2026.
Niraj Shah: While we had the capacity to handle those with our balance sheet alone, we've always taken a conservative view on maintaining a healthy cushion of cash as we run the business.
Niraj Shah: Given the trading dynamics of the market, we were able to issue $700 million of high yield bonds at a competitive rate.
Niraj Shah: And use the majority of the proceeds to repurchase our 2026 convertible notes at a roughly 5% discount Opportunistically putting cash to work at yields nicely in excess of treasuries and consistently showing progress on our stated goal of de-leveraging The end of the 2026 convertible notes at the end of the 2026 convertible notes at the end of the 2026 convertible notes
Niraj Shah: We now find ourselves in the strongest capital structure position in many years, with just under 400 million dollars of maturities coming due in the next two years, which we can easily handle with our balance sheet. And tandem, we have a renewed 500 million dollar revolving credit facility that extends
Niraj Shah: We've always treated our revolver as an additional safety net that we do not draw on for the day-to-day purposes of running the business but having this now extended through the remainder of the decade gives us one less point of risk
Niraj Shah: These steps all enhance our resilience, sharpen our focus, and position us to play offense in a market where many are increasingly playing defense.
As we look ahead, our strategy remains clear [inaudible]
Continue gaining share through discipline execution.
Deep in our partnership with suppliers [inaudible]
and invest judiciously in high ROI growth initiatives.
You've heard us discuss several of those in recent quarters!
Areas like Wayfair Rewards, Our Verified Program [inaudible]
Niraj Shah: And our physical retail efforts, where we recently announced our second-way fair store launching early next year in Atlanta and have our first two parallel stores opening later this year in Houston and West Palm Beach
Niraj Shah: Periods of disruption have historically been moments where Wayfair pulls ahead, and today is no different We've deliberately built a platform that thrives in dynamic conditions
Flexible, resilient and efficient [inaudible]
Niraj Shah: With strong momentum, a healthy balance sheet, and a sharpened operating model, we're confident in our ability to navigate what's ahead and emerge even stronger
Kate Gulliver: Thank you, and now let me turn it over to Kate to walk through our financials.
Kate Gulliver: Thanks, Niraj, and good morning, everyone. Let's dive into our results for the first quarter.
Kate Gulliver: Beginning with the top line, we saw net revenue flat year over year for the quarter [inaudible]
Kate Gulliver: This was weighed by the exit of our German business, which led to a 10.9 percent decline in the international segment, but was offset by robust performance from our US business, which posed a positive 1.6 percent growth compared to the first quarter of last year.
Kate Gulliver: We saw ramping customer activity as we got through March and proactively leaned in to drive our own out performance against the category.
Kate Gulliver: Let me now continue to walk down the P&L. Please note that the remaining financials include depreciation and amortization but exclude equity-based compensation related taxes and other adjustments. I'll use the same basis when discussing our outlook as well.
Kate Gulliver: Growth margin for the quarter came in at 30.7% of net revenue. There were several moving pieces in K1, particularly in the back half of the quarter. So let's walk through which road goes in the back half of the quarter. So let's walk through which road goes in at 30.7% of net revenue.
Kate Gulliver: As we've discussed in prior calls, we have ongoing matters with the Canada Border Services Agency that have driven non-operational drag on the Gross Margin line.
Kate Gulliver: This quarter, one of those matters resulted in non-operational tailwinds, as we were able to recognize a refund related to valuation for duty calculations during 2022, 2023, and partial year 2024.
Kate Gulliver: We were able to proactively reinvent some portion of this back into the customer experience, which we believe was a profitable investment.
Kate Gulliver: In addition to our deliberate areas of infestment, we also saw some temporary impact from Catholicates.
Kate Gulliver: Many of our suppliers accelerated inventory imports as tariff considerations rose in the back half of the quarter.
Niraj Shah: As Niraj mentioned, we've been working with our supplier partners for months to help them strategize and plan for the incremental cost from tarot [inaudible]
Niraj Shah: Castlegate has been one of our best solutions. Our Castlegate Network can help suppliers meaningfully bring down fulfillment costs and offer more competitive retail prices to consumers through forward positioning and other efficiencies.
Niraj Shah: We saw many suppliers lean into capital gate as we closed out the quarter, keen to bring in inventory ahead of increased duties.
Niraj Shah: This accelerated adoption increased upfront cost for us, which weighed on Gross Margin in Q1, but it will pay dividends in the future as we both collect Catholic fees from the shipment of the increased inventory and have more availability and more competitive pricing for our customers in the months ahead.
Niraj Shah: All together, Q1 Gross Margin reflects both the benefits from CBSA and the disciplined investments we made to drive healthy growth in a category that remains under pressure. We feel great about the trade-offs we made in the quarter and remain confident in our long-term gross profit dollar trajectory.
Niraj Shah: Turning now to customer service and merchandise, these came in at 3.8% of net revenue for the quarter.
Niraj Shah: Advertising was 12.6%. This was down quite a bit from Q4 as we had previously communicated.
Niraj Shah: You'll recall the last quarter, we talked about the incremental spending investment we made into more nascent channels. The type of spend that is needed to learn and build into our systems, but, by its very nature, has a longer term payback and a startup testing cost. [inaudible]
Niraj Shah: With that surge of experimental spending behind us, we can scale those channels as we build them to full efficiency, which will ultimately get us back down to the advertising margin levels we were at earlier in 2024 and eventually even lower.
Niraj Shah: Selling, Operations, Technology, General, and Administrative Expenses were 366 million in the first quarter.
Niraj Shah: This was down by roughly 50 million compared to the first quarter of last year. A reflection of the considerable cost deficiency we've brought to bear across the organization as we have regained our focus on strong execution in tandem with profitable growth over the past several years.
Niraj Shah: In total, we generated $106 million of adjusted EBITDA in the first quarter for a 3.9% margin on net revenue, including a 3.9% adjusted EBITDA margin in our US segment.
Niraj Shah: Our international segment has adjusted EBITDA margins of 3.7%, bolstered by the Canada Border Services Agency detail when, as I mentioned, a moment ago, [inaudible]
Niraj Shah: We ended the quarter with 1.4 billion dollars of cash, cash equivalence and short-term investment, and 1.8 billion dollars of total liquidity.
Niraj Shah: Cash for Operations was negative $96 million, which was a notable improvement from the year prior, despite revenue being largely unchanged year over year.
Niraj Shah: Capital expenditures came in at $43 million, a bit lower than our guided range, due in part to timing, as well as the reduced headcount driving lower capitalized labor
Niraj Shah: Free cashflow for Q1 was a negative $139 million. Again, very typical for the first quarter of the year given the working capital seasonality and a nice improvement of almost $60 million compared to the first quarter of 2024.
Niraj Shah: Now, we're going to take a slightly different approach to guidance this quarter.
Niraj Shah: Our quarter to date performance is warped by the timing of Easter and Wayday this year relative to 2024, making a comparison not meaningful.
Niraj Shah: Additionally, there is of course a fair bit of uncertainty around the macro, making it challenging to give a traditional top line guide for the quarter in totality.
Niraj Shah: Instead, we'll walk through the P&L and highlight where you should expect each cost adding to fall if revenue ends the full quarter flat year over year, which would equate to sequential growth right in line with what we saw in the second quarter of last year.
Niraj Shah: Obviously, this is not our standard approach, and while we feel good about the performance to date, we think this is prudent given the uncertainty in our current operating environment [inaudible]
Niraj Shah: We would guide Gross Margin to be in the range of 30-31% of net revenue, likely at the lower end of the range in keeping with where Gross Margin was in the back half of last year.
Niraj Shah: Customer service and merchant fees should be just below 4 percent, while advertising should be in the 12 to 13 percent range, likely toward the midpoint of the range
Niraj Shah: Finally, SOTGNA is expected to be 360 to $370 million for the second quarter. Again, show a nice compression, your rear, from our ongoing cost takeout.
Niraj Shah: Following this guidance down, in the context of a flat assumption on net revenue, we would expect adjusted Eva Damarjan to be in the 4-5% range.
Now let me touch on a few housekeeping items.
Niraj Shah: We expect equity-based compensation and related taxes of roughly $70 to $90 million dollars.
Niraj Shah: Depreciation and amortization of approximately $75 to $80 million, net interest expense of approximately $30 million, weighted average shares outstanding of approximately $128 million, and CapEx and a $60 to $70 million range.
Niraj Shah: To wrap up, I want to echo the sentiment Neurogexpress earlier. Moments of disruption, whether for macroeconomic volatility, shifting consumer behavior or tariff-related headwinds tend to highlight the advantages of our model.
Niraj Shah: We're continuing to lean into areas where we see a clear path to gain share will simultaneously growing adjusted EBITDA dollars and free cash flow in 2025.
Niraj Shah: With a streamlined cost-base, a solid balance sheet position, highly competitive supplier ecosystem, and a disciplined approach to investment with numerous exciting initiatives underway, we believe we're set up not just to withstand macro volatility, but to lean in and gain ground while others are retrenching.
Speaker Change: Thank you. And now, Niraj, Steven, I will take your questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Please limit to one question and one follow-up question. Our first question comes from the line of Christopher Horvers with JP Morgan, your line is open.
Christopher Horvers: Thanks and good morning. So my first question is on the top line at understanding that, you know, the Easter shift creates I think some benefit here in the April month was can you parse out how much Easter was maybe a headwind as we thought about the first quarter?
Christopher Horvers: How much exactly was the leap day headwind, and then more broadly on the sales side, he had a big bump in average order value, is that price is going up, or is that people buying higher priced items on a pull-forward basis given tariff uncertainty?
Yeah, sure, Chris, thanks for your question.
Christopher Horvers: So, let me share some thoughts on those two different questions. So, I'm first on the top line. What I'd say is, there's definitely a bunch of timing mismatches this year to last year. You mentioned Easter moving. Wayday, for example, just happened this year, but last year, it's going to happen this coming weekend, the one that's coming up next.
Christopher Horvers: Leapier, as you imagine, that you lose a day, right? So it's about 1% in the quarter or something like that that you're going to lose.
Christopher Horvers: because our demands kind of like fairly spread out and so the timing is what makes it difficult so like obviously we didn't give a quarter to date number and the reason we didn't is we could have shared it it would be a very big number it would be up a tremendous amount but it's a hard number to do anything with because
Christopher Horvers: Wayday is coming up, right? And so the timing mismatches make things a little hard to read. But what I'd say is that we're seeing demand actually stay pretty strong. There's a big divergence between what we're actually seeing in actual demand and what you're reading in the headlines about the consumer sentiment. [inaudible]
Christopher Horvers: Now, the consumer sentiment stuff is talking about forward expectations. We haven't hit the forward period yet, obviously, but we're seeing demand actually demand be pretty good [inaudible]
Speaker Change: On ALV, no, we have not seen suppliers raise.
Prices
Speaker Change: And to be honest, when we've been talking with our suppliers, we have a large team that work with our suppliers to create joint plans, make sure the inventory hand best sellers stays in stock, talks about pricing, what we're seeing on the platform.
Speaker Change: Well, we're actually, the suppliers are very wary to raise prices because they know they're competing with one another They know the way our platform works is that they need to compete with each other to impress the customer or they don't get the sales [inaudible]
Speaker Change: Because it's been a pro long downturn in this category, multi year downturn, they know that it's hard to get volume and they need volume to be efficient
Speaker Change: And so what we've seen is that their interest is really...
Speaker Change: You know, if you look at actually what's been happening with AOV, you can see the AOV your year was starting to grow up in Q3 last year This is pretty normal right so AOV has a lot of moving components to it one that you reference is unit price one is items for order but another one is mixed so as we mix in you know different brands that have continued to do well like our specialty retail brands or parable or higher brand those obviously coming in higher AOV I think more relevant to think about you know sort of what's happening with AOV is to look at
Speaker Change: And if you look at this approach, they're very consistent to what they were last year. So pretty normalized. And then just, you know, you packed it, a question around Q1 and a question around quarter of a day and I think we addressed the quarter to date on the Q1 obviously yes and puts in takes there, you know, you feel quite pleased with that revenue performance because of course there is the drag from, you know, the lack of the day from the leap year and also, you know, we have a roughly 100-bit drag from the German business, right? So to be flattened and up 1.6% in the US is, you know, very good. [inaudible]
Speaker Change: And then the follow-up is just, you know, is there an indication of...
Speaker Change: of Pull Forward demand. I'm not sure how you would measure that. It seems like the consumer is just reflecting back to maybe the supply chain crisis and stuff that you know products that maybe they had to wait for in the Furniture and Category of the Electronics Category. Are you seeing or can you comment on or measure how much of this could be pulled forward?
Yeah, thanks Chris. So, we-
Speaker Change: So we know what we see in our data, we know what we see in credit card data, and we know what we hear from some other companies in the space. And so we don't believe we've really seen pull forward. The only one subcategory we have where we've seen pull forward was in large appliances.
Speaker Change: So large appliances clearly had some pull-forward. It lasted a fairly short period of time.
Speaker Change: And because of the size of that, that category is very large overall, but we're a relatively new player in it. It's a relatively small category for us. So the amount of pull for we directly benefited from is actually very small. It's the minimum for us. So overall, we haven't really...
Speaker Change: Benefit it from Pull Forward, and we don't think the category has had much. [inaudible]
Speaker Change: Great. Thank you very much. Have a great rest of the spring.
Thank you. Thank you.
Speaker Change: And your next question comes from the line of Jonathan Matuszewski with Jeffree's Remindens Open.
Jonathan Mudachowski: Oh great, good morning and thanks for taking my questions. My first one was a follow up on pricing. Sounds like not a lot of suppliers are raising price on your marketplace. Is there any indication maybe from your conversations with vendors that they're choosing to raise prices on other platforms first maybe as a test?
Jonathan Mudachowski: before doing so on Wayfair. Any thoughts there would be great.
yeah
Jonathan Mudachowski: You know what I would say is generally what we've heard from them is they're generally wary to race prices you know anywhere and so I don't know exactly like I we've been
Jonathan Mudachowski: I haven't heard that, right? So I haven't heard of them being aggressive in raising prices anywhere yet. What I've generally heard is that they're trying to be very thoughtful about how to optimize their business. They know that it's a challenged, demand environment in general. And they know that raising prices...
Jonathan Mudachowski: If our competitors don't, it's going to hurt them substantially, so they want to make sure that they remain competitive [inaudible]
Jonathan Mudachowski: I think a number of places that they sell, they have a similar dynamic to us, that we have a very big benefit because we're as a platform versus the traditional retailer. We have a lot of suppliers on that platform that are competing with each other and to some degree their goods are substitutable.
Jonathan Mudachowski: So, the dynamic is such that by raising your price, not so much that you're negotiating with a buyer, and it's zero sum, and it's not necessarily directly correlated to the retail here, you're actually able to do whatever you want, however you're directly changing the retail. So you have to worry about the end effect because of that.
Jonathan Mudachowski: We haven't, we've seen what they don't want to raise on our platform. Now, with regards to what they may want to do selling to traditional retailers, I think that could be a different setup but we're less, you know, that's not, that's not our model with a little less insight into how aggressive they're being there, but we've definitely heard that a lot of folks are saying that they can't, you know, that they have to, they can't eat the cost. The traditional retailer, if they're doing direct import, they have to basically carry the cost. [inaudible]
Christopher Horvers: Understood. And my follow-ups on Castlegate, Kate, is there a way to understand the magnitude of the 1Q Gross Margin headwind from the Castlegate rush and how we should think about maybe the magnitude of the tailwind from increased Castlegate fees in the quarters ahead? Thanks so much.
Yeah, great question, so...
Niraj Shah: You know, sort of taking a step back and thinking through the benefit that this provides us, right? What we want to partner with our suppliers on it, you know, Niraj mentioned it and their references price, but I'll say more broadly.
Niraj Shah: And part of that is bringing product into the country in advance in Q1, and as we talked about in the call, we were quite successful with that with our suppliers.
Niraj Shah: You will see a benefit of that manifest in a few different ways in the quarters ahead, so one of those ways is, you know, price and availability for the customer, right? So that allows us to maintain really efficient prices for her, that allows us to have good availability and so that helps support the top line. On the growth margin line, obviously products that you've got to capital gate versus somewhere else are, you know, cost advantage on top of that, there is a benefit, of course. [inaudible]
Niraj Shah: You know, when we charge the suppliers for the pickpacks fee, when that product shifts out. So that that manifests in the subsequent quarters, but I think it's important to keep in mind that the benefit is twofold, right? It's both on the top line of having that product here and available and the pricing there and is on the gross margin line over time.
Understood. Best of luck.
Speaker Change: Thank you for watching. Please subscribe to my channel. I upload weekly. Please like and share this video.
Speaker Change: Thank you. And your next question comes from the line of Brian Nagel with Oppenheimer, your line is open.
Brian Nigel: Good morning. Thanks for taking my question. Questions I guess. My first question is on surprise prize. I want to talk about tariffs and appreciate all the commentary you outlined. So I need to be a step back. The question I have is as you were watching this terrible dynamic unfold.
Brian Nigel: You know, I'm hearing you correctly, it sounds like, you know, from a wafer perspective, I mean, most of the burden is really lies with with your suppliers. So I guess that's just to make sure I heard that correctly. But the second question I have, or the question I have is, you know, are there, you know, as is unfolded, are there levers that Wayfair is internally pulling? [inaudible]
Brian Nigel: Yeah, I'd say there's two things we'd really directly help suppliers with, so one is [inaudible]
Brian Nigel: We share a lot of data in what we're seeing happen on the platform because suppliers realized they may need to raise prices at some point But again, they don't want to raise them earlier or larger than competitors do [inaudible]
Brian Nigel: So they want to know kind of what's happening on the landscape so that they can try their best to stay very competitive So we basically do try to provide them with some direction and guidance and share the landscape with them [inaudible]
Brian Nigel: And the second thing we can help them with is, when you think about Castlegate, I think off of you think about Cascade Filment, so the kind of warehouses we have, the Filment Centers, and the fact that we do with the WGN, we do the last mile delivery for large bulky items, and through the combination of the two, we can provide a high quality of service on deliveries, we can offer faster delivery.
Brian Nigel: But what we actually offer goes all the way back to moving the goods via ocean freight, forward position the goods using consolidation centers that are close to the point of origin. And then obviously then they make it to the fulfillment centers and they do everything we just described and then we have. And then we have, and then we have, and then we have, and then we have,
Brian Nigel: fulfillment centers, not just in the U.S., but also in Canada and the U.K. So in Canada, we have two one in Vancouver and one in Toronto and in the U.K. we have a large facility, a lot of worth.
Brian Nigel: and so they have an ability to directly bring goods into the country versus in the case of like Canada for example transiting through the US which could prove to be much more expensive. So the second way we help them is with kind of custom logistics solutions.
Brian Nigel: Taking advantage of all the assets and the network we have that allow them to optimize and lower their cost which then allows them to save money and keep retail sharp and so perhaps something costs the more money and something lets them save some money and these are benefits that they want to make sure that they're optimizing.
Speaker Change: But it's helpful, there is another game. Again, just to follow up and be excited, we're all having these type of conversations with a lot of different companies. But I mean, so to be clear that from a Wayfair perspective, as you're looking at your business, you're not really having to determine what impact to Wayfair's margins could happen or from a sales perspective. This is all really on the part of your suppliers, correct? That's right.
Speaker Change: What I would say is like, so we have a platform, right? So the platform solves for-
Speaker Change: Making sure customers get the best value by suppliers needing to compete with one another and because we have such a large basis of suppliers
Speaker Change: And the goods are largely non-branded, differentiated categories. There's a lot of substitution that can happen. So these dynamics line up for suppliers to really want to make sure the customer is getting a great value.
That said, of course, you know, there's [inaudible]
Thank you.
Speaker Change: The elasticity, there's supply and demand, there's the health price and fixed demand.
Speaker Change: And here we have a category that's been out of favor for multiple years so it's already at a low demand level and so that might be part of why you know we haven't really seen as much demand destruction as maybe some other discretionary categories have commented on but we obviously do think about different scenarios of what could happen depending on different different trajectories different different series of events. [inaudible]
Thank you.
Oh, go ahead, Brian.
If you want to add something, that would be great.
Brian Nigel: No, I would echo when you're said. You know, we think our model and our platform service is quite well here, and we think that helps us be positioned to outperform in this kind of environment. You know, that's quite sort of diligent partnership though with our suppliers on helping them understand the dynamics and the impact.
Speaker Change: and the opportunity for sort of share gain in an environment like this [inaudible]
I appreciate all the color. Thank you
Speaker Change: And your next question comes from the line of Aigle Arounian with City Your Line is Open.
Hey, good morning guys. Thanks for taking my question.
I-I-I-I-I want to ask-
Speaker Change: about the range of potential outcomes and how you think about it and how you can potentially plan for it.
Speaker Change: We got to pause on the 90-day reciprocals for many of the countries and I think maybe you could help expand on this a little bit. We've seen some production shift to those countries instead of China. And what happens if-
Speaker Change: You know, those come back at the 90 days or, you know, we have higher tariffs and more of the input countries. How you think about that, how you can help your vendors, and the ability for vendors to absorb costs in that scenario where there's less of an ability to shift production to other
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: So there's a 10% based tariff, we're talking about in China, there's a 10% based tariff, and then there's the varying degrees of reciprocal tariffs, the reciprocal tariffs are what have been paused for 90 days [inaudible]
Speaker Change: and then Shida has a different whole set of things. And so...
Speaker Change: to try to project exactly how this will all met out because it's been talks of discussions, negotiations underway with India and with...
Speaker Change: South Korea and Vietnam and with a whole host of countries. To project exactly how they'll play out, it's difficult. What I will say is what happened if you go back all the way to 2019 and the tariffs that were put on fairly quickly during that period of time, that really spurred a lot of companies who had not yet created a lot of diversification to really work on diversification to multiple places. This is so tough.
Speaker Change: And then what they do is they flow goods based on, you know, this course is where they have capacity and skills but frankly a lot of is weird to the cost [inaudible]
Speaker Change: Come out the best between the various types of manufacturing operations they have. In some cases they may have more automation, some cases they may have, you know, optimization for certain types of degrees of finishes. There's a raw material supply chain. There's a whole bunch of variables that drive that. So,
Speaker Change: So, long story short, what I would say is, you know, I don't think suppliers [inaudible]
Speaker Change: All in on a specific bed of how things are going to play out, but they have a general trajectory that they believe, and I think they're optimizing for that.
Speaker Change: And obviously, they're trying to do in a way that they're creating a multi-variant solution so that they can evolve it as needed And I think today, we sell goods on our platform that are made in over 100 countries [inaudible]
Speaker Change: So there's a wide amount of diversification that the Reddy has taken place and I think our suppliers have a view on kind of relatively what you know what's you know range of what could happen and they're kind of playing towards that in general we feel like that sets things up.
Pretty, pretty well around them. [inaudible]
Speaker Change: You know, flexibility and agility for our platform, given our base of suppliers, the large number of them in the dynamics we have.
Kate Gulliver: I don't know if Kate, is there anything you'd like to add? Yeah, you know, the other, you know, piece in this environment and frankly it's a reiteration of what we've been saying for many quarters now given the complexity that this category's been in that we've been navigating through is our focus is on controlling what we can control.
Kate Gulliver: And we think we've done that quite effectively over several years now of cost take-outs. You saw us report an SOTGNA number that was our lowest since 2019.
Kate Gulliver: Right, that's multiple years of work to get there. So we've kept really tight control over our cost structure and this allows us to enable to deliver what's best for our customers by partnering with these suppliers.
Kate Gulliver: So we have very good cost controls. We have a wide range of suppliers across a wide range of countries and overall that allows us to position the best product, the best opportunity for our customer to buy what she means and doing that enables us to gain share and we're quite confident in our ability to do that going forward.
Speaker Change: Okay, that's really helpful. And maybe to follow up on the opportunity to take share and sign that into the advertising strategy in this environment.
Speaker Change: Kate, you mentioned leading in a little bit as things were going better than expected, maybe not characterizing that perfectly, but how do you think about your advertising message?
Speaker Change: Are there an opportunity for kind of, you know, make that message to the consumer or you come to Wayfair, get better value in this type of environment and stepping into that over the course of the year. Thanks
Speaker Change: Yes, sure. I'll share a couple of thoughts and then turn it over to Kate. So on our marketing spend, one thing I do want to just reiterate,
Speaker Change: We do measure it by the paybacks it creates and we've tightened up those paybacks and we've now we continue to hold that degree of tightness so we don't we don't like create a budget and then spend it regardless what we're seeing for signal we make sure that it's paying back
Kate Gulliver: A portion of it's around brand building, and that would be longer paybacks than a portion that's much more transactional, and that gets payback much more quickly. But everything's on a relatively short payback still.
Kate Gulliver: You know, there's certain channels we're large in and certain channels that are emerging for us that have grown to be large in the industry that we think there's an opportunity for us to sort of a grow in while doing so profitably, right? So we also think about our whole goal is to grow EBITDA dollars and so the way we think about it is like what's the optimal mix?
Kate Gulliver: of things between whether it's in the cost of goods line or whether it's in the soccer line or the ACNR line, that let us maximize the growth of profitable dollars and that's kind of the way we're.
Managing it and done. [inaudible]
and Saul Herrmann. Thanks for joining.
Thank you.
Speaker Change: And your next question comes on the line of Michael Lasser with UBS, your line is open.
Michael Lasser: Good morning. Thank you so much for taking my question. So it sounds like your message is, listen, we've got a lot of benefits from Taros.
Michael Lasser: This is many more benefits than drawbacks. The big unknown is what's going to happen to the demand environment. So with that being said, is it right for us to continue to use?
Speaker Change: This incremental, decremental margin of made the high teens as we try and synthesize what the model looks like over the next couple of quarters, and then longer term, does we for need to make any adjustments?
Speaker Change: to the extent that this paraphrasing stays in place, such that its margins would be permanently impacted, or is that not realistic, given that the benefit of time would provide more flexibility to make any changes in the justice accordingly? Thank you very much.
Kate Gulliver: Let me try to clarify that comment on benefit, and then I'll turn it over to Kate to answer your question.
Kate Gulliver: Just to be clear, I'm not saying that we benefit from tariffs when I'm saying actually is that
Speaker Change: In a scenario where there are these tariffs, our business model of being having a platform [inaudible]
Kate Gulliver: Having a very large number of suppliers, allowing suppliers to have a dynamic where they control their destiny by competing with one another, and focusing, you know, our business focused on these substitutable categories. This...
Create a much more beneficial scenario.
than if we were a traditional retailer. [inaudible]
Kate Gulliver: where we had merchants, where we bought goods from a narrow set of factories in a long dated way, and now, and we're the importer of record, and now we've got all of a sudden these tariffs and our plans for the next 12 or 18 months have been locked and we're in a tricky situation.
Kate Gulliver: So it's more a relative thing, versus saying that tariffs are beneficial for us as a direct point.
Kate Gulliver: But Kate, let me turn it over to the answer. Yeah, so Michael, we're we're remain quite focused on flow through and continue to drive growth and adjust a bit to dollars You know as we actually just referenced a minute ago and you saw that panel quite nicely this quarter right and so there's a few different moving pieces on that [inaudible]
Kate Gulliver: You know, you've seen us continue to take in that as OTG and A-line and get real structural efficiency there that has been enduring now for quite some time. And that's allowed us to invest in areas like the marketing spend and still grow a justy bit of dollars. And in fact, you know, that panned out, you know, quite nicely as I said in the first quarter of this year. And you know, we believe we'll continue to go in forward. So our focus remains on growing those adjustedy bit of dollars. And we'll continue to invest in that as we continue to invest in that as we continue to invest.
Kate Gulliver: Growing that concept of owners' earnings that we've talked about, and that continues to be our long-term focus [inaudible]
Speaker Change: Okay, now my follow-up question is, near to your stock has been adversely impacted by this pair of situation. There's probably a lot of us understanding given what's been helpfully presented today. Is there enough capacity in other markets outside of China?
to absorb the demand for the production of...
A Home Furnishings,
to make it a relatively seamless transition as this...
Speaker Change: Potential situation continues such that there wouldn't be a lot of disruptions for Wayfair as
Speaker Change: your platform shifts to wherever the demand or supply, I should say, goes.
Speaker Change: Sure. Yes, I would share your observation that the stock certainly has not been great and that I do think folks misunderstand some of our relative strengths.
and how well things are going, but... [inaudible]
to answer your specific question about capacity outside of China.
Speaker Change: Well, there's actually a large amount of capacity outside of China, and I kind of said this a few times, but the demand in the category has been weak for a number of years in a row. And so the amount of capacity that exists, the operating level of it right now is far below the capacity that is available.
Speaker Change: Obviously, folks source and bring in goods from wherever the kind of the best price value for them is and so think of tariffs as long as they change the landscape of price value from various different in this case countries around the world that will change the math for folks and them.
There's a lot of capacity where things can move.
Speaker Change: Zill, whether that be different countries in Europe , Eastern Europe that are considering becoming a large-rexpore. So we're quite advantaged in this environment because of how we're set up.
Understood, thank you so much, you did a lot [inaudible]
Thank you.
Speaker Change: And your next question comes from the line of Simeon Gutman with Morgan Stanley . Your line is open.
Speaker Change: There was a little sticker shock in an initial couple of quarters and sales flowed a little. It doesn't sound like that's happening, but thinking about if that happens.
Speaker Change: Where you see some sticker shock from pricing. How do you think about managing it given that you've made a lot of positive changes now to the P&L?
Thank you.
Kate Gulliver: Yeah, let me start to let me answer a little bit of that question and then turn over to Kate to further answer it.
Kate Gulliver: I think, you know, when you think about what's changed from 2019 to now [inaudible]
Kate Gulliver: I think there's a couple of things. One, I talk about the dynamic on the platform and I talk about basically the breadth and depth we have of suppliers from all over the world. That has certainly increased substantially since 2019. I think we have doubled the number of suppliers and then if you look at their geographic distribution, that would probably change even more than that. [inaudible]
Kate Gulliver: And then the other thing would be our logistics capabilities. So when I talk about the consolidation operations we have...
Kate Gulliver: Number of locations abroad, the number of freight lanes, ocean freight lanes that we operate are Ocean brokerage on. When I talk about the Ford positioning capabilities we have both from technology and physical logistics standpoint.
Kate Gulliver: That's much, much more intense. So there's quite a lot that's advanced on the logistic side which it ends up being material to how you think about this because that is...
Kate Gulliver: Suppliers who actually operate there and they want to scale up and we have a logistics capability they can just use so what they just need to do they're end of it and then they can leverage us for these other things So I think we're pretty advantage there the other thing I would say is you know one of the things that we embarked on around that time frame was a large tech reforming of our you know a large tech stack [inaudible]
And that project going to be taking...
A number of years, but we're now substantially through that. We're very far into it. And so this is the first time in a few years.
Kate Gulliver: where we're now turning tech capacity back towards building feature function.
Kate Gulliver: which is historically a big way that we've driven our growth. So when we talk about these levers we have to take market share and accelerate our rate of taking market share and grow profitably things like growing our loyalty program rewards, or scaling up way for verified our editorial program, or what we're doing with our B2B sales force, or enhancements we can make to customer service...
Kate Gulliver: What happens is we actually now can dedicate technology resources to those for the first time in a number of years and
Kate Gulliver: That I think is actually a pretty big lever for us to actually drive growth in our business which I think could be pretty exciting because even if it's a tough macro it's still a very large category and there's a lot of share to be had.
Okay.
Kate Gulliver: Yeah, you know, Simeon, you had this sort of about based on the cost changes, how might this pan out differently for us in 2019? And I think you actually, you know, somebody answered it in your question, which is, or in a very different cost position.
Kate Gulliver: We are much more efficient on the P&L than we were in 2019. We've proven that out now over actually multiple years at this point [inaudible]
Kate Gulliver: And so, our ability to find the appropriate opportunities to lean in with the consumer on a, you know, focus on adjusted EBITDA dollars growth, right, and free cash flow growth is quite different now than it was then because of the structural changes that we've made.
Kate Gulliver: And you know, that's why we're confident in saying we're committed to growing a Justiniva to dollars and free cash of growth in 2025 and we feel good about that path forward.
Kate Gulliver: My one follow-up, just thinking about the vendor community, Niraj talked a bit about this [inaudible]
Kate Gulliver: In thinking about China-based vendors, have you seen a lot of movement already?
Kate Gulliver: And, you know, we think about some of the makers of product if you're a single source origin.
Kate Gulliver: Wayfair should be no worse off if a certain table with some modifications appears on many different platforms.
Kate Gulliver: of your competitors and you. That price and theory goes up. But is there a situation in which some platform of vendor moves production?
Kate Gulliver: And a price can be lower. How do you think about that? The risk that someone else moves a vendor quicker and someone else's platform has a lower price? Why shouldn't Wayfair be disadvantaged in that situation?
Kate Gulliver: Yeah, so, again, there's two types of competitors, so there's competitors who are also platforms.
Kate Gulliver: There, I would talk about the scale of our team, the size of our team that directly works with suppliers versus them solely having to work with us through the technology we are for them, and that's a real advantage we have there.
Kate Gulliver: And then there's kind of what we've built for logistics that's bespoke for home goods so there's some advantages we have there I would say by and large with the biggest platforms out there we work with a very large breath of suppliers and so I'm not sure that they have a substantial advantage over us you know when you think about the other [inaudible]
the number of the other platforms
Kate Gulliver: And I think we have an advantage over a number of them, so it's a balancing act to, you know, we're one of the strongest for sure on that side.
Then if you talk about traditional retailers, I think they're...
Kate Gulliver: You have them sourcing from a very specific company and they generally have sourcing offices in one, two, three, whatever numbers of countries they focus on certain regions and then they are directly sourcing from these factories [inaudible]
Kate Gulliver: You can say, okay, well, they'll stop sourcing from one, they'll start sourcing from another. That then becomes a question is do the jury know what factories they want to do that from? Have they been working with them already or not? If not, that's start up.
Kate Gulliver: It could take a while, but they would have the ability to directly write a purchase order to that company, but I don't think that that's a very fast thing. So then the question is which models faster, I would argue that the platform model where you're already working with folks, particularly where you could provide the logistics would be generally faster.
Okay, thank you. Good luck.
Speaker Change: And your next question comes from the line of Peter Keith with Piper Sammler. Your line is open.
Hey, thanks. Good morning, everyone.
Speaker Change: Just focusing on when prices go up, I think we can all agree that they will go up at some point on your platform Is the intent that you want to hold the product margin or hold gross profit dollars or would you even absorb some of those pricing increases just for price competition?
Speaker Change: Yeah, so the way to think about that is like we [inaudible]
Speaker Change: We're always running different pricing tests to make sure that our take rates are margin rates by the various subcategories that we vary the margin rates by that they're optimized to maximize our profit dollars.
Speaker Change: So we will always do that, but generally the way to think about it is when a supplier changes the input costs whether that be the wholesale price they want to charge us or the logistics setup that flows through into a retail within a matter of minutes.
Speaker Change: And so there's the long-term data science approach where we're constantly testing.
Speaker Change: on different cohorts to find the optimal margin rates and those changes continue to flow through the system.
Speaker Change: And then there's the sort of a given supplier's activity. And so those two I'd encourage to kind of think about them separately. They're both optimized to create the best outcomes for the customer and us together. And that's why we talk a lot about growing profit dollars because that's the optimization function that we're focused on.
in a near-term [inaudible]
Speaker Change: But I was also thinking back to what seems to be in the back after year will be sort of COVID like inventory shortages and that we saw in 2021, 2022.
Michael Lasser: And that was a period where you guys did see Gross Martin Pressure, and there was less utilization of Castlegate So I'm wondering if we just go forward a couple of quarters, tear of stay in place on China, is that a risk that Castlegate inventory could actually start to come down as, you know, as suppliers are basically hoard inventory in their own DCs?
Yeah, so you know, it's-
Michael Lasser: It's not clear that there's going to be inventory shortages based on the conversations we've been having with folks. I think...
Michael Lasser: The 2020-1222 period was different in that you had a combination of due to COVID restrictions. There was very limited ocean freight capacity and different countries had different periods of production shutdowns mandated by the government. So there's an artificially low amount of supply driven by governmental regulations.
Michael Lasser: While at the same time, due to the stimulation of the economy and federal spending and checks, there is a high level of demand, so you had a high market demand and a government suppressed low amount of supply. So that created these shortages.
This time, when you talk to suppliers,
The reality is they...
Michael Lasser: There is no, we think the equilibrium will be held, supplied demand. We see suppliers not thinking about, you know, you know, hey, you know, I'm just going to sit tight and happy to not sell things. It's like, oh, well, I got to figure out how to react. And this is an opportunity for me to take share. And again, it's a tough category for a few years. So you actually see the stronger ones wanting to take advantage of the opportunity, you know, don't let a crisis go to waste, type of thinking. [inaudible]
Michael Lasser: And so I think the scenario this time is actually quite different.
Michael Lasser: Okay, I don't know anything you want to add. That's true. No, I think that's well more covered.
I would agree, thank you so much.
[inaudible]
Thanks Peter. Thanks Peter.
Speaker Change: And I will now turn the call back over to the Wayfair team to the Wayfair team.
Speaker Change: All right, thanks everybody for joining, and we hope you have a good spring and start of the summer.
And this concludes today's conference call. You may now disconnect.