Wayfair Inc.

Ladies and gentlemen, thank you for standing by and welcome to Wayfair Q2 2020 earnings release and conference call. At this time, participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, please press star 1 on your telephone keypad. If you require further assistance, please press star 0. We ask that all Questions be limited to one question and one follow-up in the essence of time. I would now like to turn the conference call over to Jane Gelfed, Head of Investor Relations and Special Projects.

Good morning, and thank you for joining us. Today, we will review our second quarter 2020 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman, Steve Conine, Co-founder and Co-chairman, and Michael Fleischer, Chief Financial Officer. We will all be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the third quarter of 2020. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. our 10-K for 2019, 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 statement made today. Except as required by law, we undertake no obligation to publicly update or revise these statements, whether as a result of any new information, future events, or otherwise. also please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance these include measures such as adjusted EBITDA and free cash flow these non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results please refer to the investor relations section of our website to obtain a copy of our earnings release which contains descriptions of our non-GAAP financial measures and reconciliation of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thanks, Jane. And good morning, everyone. I'm glad to be speaking with all of you and hope that you are safe and well. Q2 2020 was a very strong quarter for Wayfair as COVID demand tailwinds benefited our sales momentum. More significant is that these circumstances highlighted the attractiveness of Wayfair's value proposition to our customers, the solid foundation we have built over multiple years, and the early fruits from the plans we put in motion last year to drive tighter execution and efficiency gains. Q2 demonstrated that Wayfair is now a meaningful, well-recognized, and trusted household brand. Millions of customers, new and loyal, are seeking us out when their attention is on their They're turning to Wayfair as they explore how to use their homes in new ways and seek comfort in them during highly uncertain times. Q2 demonstrated the wisdom of our strategic investments and the returns that they can generate. Our proprietary logistics network allowed us to effectively meet peak demand, not just for a few days or a three-week holiday stretch, but consistently over the course of a full quarter. The wide spectrum of product classes we have seeded over the last several years positioned us to capture an outsized share of increased category demand. And our robust local operations and offerings in the UK and Germany forged the way for strong customer acquisition in Europe, as demand there also shifted online. Finally, Q2 demonstrated the uniqueness of Wayfair's culture. Our more than 16,000 employees persevered despite the challenges of the moment. Our team demonstrated enormous agility, productivity, and strength of execution. and stepped up to serve our customers when they needed us most. Combined, all of these elements led to a turning point in our profitability. Even against the normalized demand picture, we fully expected to inflect positively in adjusted EBITDA in Q2. But what played out in this quarter was exceptional. We delivered $440 million in adjusted EBITDA at a 10.2% margin, and over $1 billion in free cash flow. These results demonstrate the inherent strong structural profitability of our platform. While we are pleased with our financial results in Q2, we are most proud of how Wayfair has continued to support our employees, our customers and our communities in the midst of the pandemic and pressing social issues. We remain vigilant when it comes to health and safety and continue to build on and enhance the host of safety measures we first implemented in March to keep our employees and customers as protected as possible. We're maintaining our dinner to go program on the front lines, which provides meals twice a week to our logistics employees and their families, while also supporting local independently owned restaurants in the many communities where we operate. And we stepped up our charitable efforts this quarter with several million dollars donated to both COVID relief and social justice organizations. Internally, as part of our ongoing diversity, equity, and inclusion work, we launched a company-wide discussion series to bring greater visibility and understanding to the perspectives of Wayfair's diverse employee base. While early in these efforts, the discussions are a step in helping us to collectively address the multifaceted issues that many of our employees contend with every day. I would like now to turn to some observations about customer behavior and category momentum during the second quarter. While it was difficult to pinpoint precisely, we believe the home goods category in total remained relatively resilient over the last several months. Consumers deprioritized expenses such as travel and entertainment and shifted their focus and discretionary spending to their homes. We see evidence of this in strong and consistent demand across nearly all of the product classes we sell. not just those directly linked to having to shelter or work from home. Accelerated e-commerce adoption was also an important tailwind in Q2 and should bring longer lasting benefits to our business. What was, even before COVID, an inexorable shift to e-commerce then became supercharged over the last several months and we believe much of the step change in online penetration will prove to be sticky. In fact, our view is that e-commerce adoption is likely to continue to shift faster than it did pre-COVID. Just to put things into perspective, in the quarter we activated nearly 5 million net new customers, more than the last four quarters combined. In the U.S., we also reengaged more than a million past customers who had been absent from the platform for longer than 12 months. Whether B2C or B2B or new or lapsed, These customers discovered why shopping at Wayfair can be a superior experience to shopping at brick and mortar, and how our selection, merchandising, service, and delivery are constantly improving to make finding the perfect product for your home easier and more enjoyable. Also unique to this quarter was the relative magnitude of the strength of both new and repeat customer activity. In a typical quarter, Order growth from our repeat customers tends to considerably outpace our strong order growth from new customers. In Q2, despite the fact that repeat orders more than doubled year over year, new customer orders grew even faster. This is the first quarter that this dynamic has played out since Wayfair's IPO in 2014. The behavior of these customers activated during the COVID era continues to suggest that they are a high-quality set who will choose Wayfair again and again. As you know, we are a highly data-driven and analytical organization, so we're keeping a close eye on newly acquired customers for any behavior differences relative to pre-COVID cohorts. Our observations tell us that this new cohort of customers is reengaging with our platform at higher than usual rates after their initial purchase, and that this engagement is translating into higher than average repeat order rates. In Q2, we also saw a slightly different cadence to our customers' order patterns, with fewer items per order offset by higher purchase frequency. Shopping via mobile platforms, including our apps, which saw heavy download activity, grew about 600 basis points sequentially in Q2 to over 60% of all orders. It would be overreaching to predict what exactly will play out in the coming weeks and quarters. There's a tremendous amount of macro uncertainty and various pressures on the consumer. This is coupled with clearly changing behavior in terms of what consumers are buying and how. That said, what we have seen thus far would suggest that even as economies reopen, our customers remain focused on the home and are extremely satisfied with Wayfair. In those markets where reopenings thus far have proceeded pretty smoothly, We are seeing some moderation in our rates of growth relative to Q2. But even in those instances, we are still experiencing strong momentum well above the top-line growth rates Wafer was seeing at the start of 2020. While COVID-related tailwinds are still undoubtedly a strong contributing force, recall that late last year, we put in place a number of internal changes which are now translating into tighter execution across the business and an enhanced customer experience. We believe these improvements are also showing through in our top-line momentum and should bear long-lasting benefits well beyond the COVID period. I want to take a step back now to acknowledge the Herculean task of what responding to such unprecedented demand has meant to our team. In a normal year, Wayfair experiences two seasonal peaks, with Way Day typically in the spring and Cyber 5 going into the holidays. There are, of course, other promotions and events happening all year, but these two major events require months of advanced planning and coordination, both cross-functionally inside Wayfair and in collaboration with our supplier partners. Since approximately mid-March, nearly every day has rivaled those cyclical peaks. Simply put, we could not have effectively met over $4 billion of demand, as we did in Q2, without the kinds of infrastructure, technology, and relationships We've invested in over many years. And while not everything can be operationally perfect under such extreme conditions, we're also internalizing our learnings and adjusting our practices very quickly to address any stress points that reveal themselves. Let me elaborate. Across our Castlegate fulfillment network, the sheer volume of products moved in Q2 nearly doubled year over year. Recall that over the last two years, we added approximately 40 buildings and more than double the square footage across our logistics footprint to over 16 million square feet. As a result, we are fortunate to have capacity in many places to flex in response to the wave of demand, and we saw enhanced efficiencies as a result. Where capacity was tight, we took advantage of the hybrid model we have in place and leaned on our suppliers logistics solutions when appropriate. The work we had started pre-COVID to build additional racking and automation across our Catholicate locations served us well during this period, and we continued to move quickly against our pre-planned CapEx projects to unlock additional capacity. We did so while bringing on more frontline staff and implementing many safety measures to keep our teams safe. Due to unprecedented e-commerce demand in general, we could not fully avoid the shipping congestion and longer delivery times all carriers faced in Q2. However, we were able to mitigate some of the inconvenience within our own Wayfair delivery network through which most of our large parcel orders travel. Within customer service, we are now onboarding 1,000 additional members onto our service team to bolster the customer experience. We pride ourselves on delivering the highest quality customer service in the home goods space, and our employees have worked literally around the clock to satisfy the higher volume of calls and emails during this time. Customer inquiries are elevated as a function of greater order volume in general, but shipping congestion and related delays are also contributing. Despite this, customer satisfaction remains high and service levels are now improving as we bring on more associates to help our customers. Nowhere was the strength of our model and ability to be agile more evident than in how we worked with our suppliers over the course of the quarter. We believe that we will emerge from this experience an even stronger and more strategic partner to each of our suppliers. And Steve will speak to this in greater detail in just a few minutes. By working together to navigate quickly changing regulations, we aided suppliers in pivoting hard as store closures mounted. And through nearly constant communication, together we were able to demand plan and optimize the flow of product to the customer. In the process, we demonstrated once again how suppliers are truly a part of the Wayfair family and how differentiated our approach is relative to more traditional supplier-retailer relationships. Shifting gears to profitability, I want to go back to a phrase I used last quarter to describe where we are today. Wayfair is now large enough and strong enough to both be profitable and to continue to invest with a long term horizon. Several years ago, we simultaneously pushed forward with our three large strategic investments. Even when we were a much smaller company, we knew that these would, together and individually, be game changers with high ROIs, which meant plowing back every profit dollar and also leaning on external financing to back these. Today, at $11.5 billion in net revenue over the last 12 months, our conviction in these projects remains as high as ever, and we continue to fund them with enthusiasm. The difference, of course, is that there are many more contribution profit dollars being generated today relative to a few years ago, and so increasingly, they are flowing to the bottom line. As our strong sales momentum continues, the inherent profitability of our platform will will become increasingly apparent. Q2 profitability inflection occurred fully in line with what we expected would happen when we started the year. Though admittedly, the strength of the quarter made the inflection much more powerful than even our ambitious plans had envisioned. I want to briefly highlight a few of the many levers that contributed to the exceptional leverage across the various P&L lines in Q2. While the magnitude of the benefits we derive from each of these in Q2 is likely to moderate as revenue momentum normalizes, the underlying drivers behind the efficiencies remain structurally in place. To be clear, we expect to continue delivering positive adjusted EBITDA margins on a go-forward basis, assuming 20% or higher net revenue growth rates. Within gross margin, we've often talked about four primary levers. One, the benefits of scale and how that can drive more robust competition on our platform. Two, logistic savings as our network becomes more fully utilized and as we expand the capabilities within it. Three, merchandising and house brands as a means to drive loyalty and pricing flexibility. And four, the advent and growth of supplier services. We saw progress on all four dimensions this past quarter. We drove gains in assortment as many suppliers leaned in on e-commerce in general and our platform in particular. We gained access to full catalogs and built wider product selection across many classes. Via our partner home platform, we also moved to leverage more data and technology to inform supplier decision-making when setting wholesale costs, this unlocking some benefit in the process. Across Castlegate and WDN, we saw a slew of wins as a function of the elevated throughput. Even while absorbing extra expense to upgrade the safety standards of our logistics operations in light of COVID, we saw gains via fulfillment labor efficiency within Castlegate, stops per route increases within WDN, and optimized routing yielding savings even when dropshipping product. We made further progress against the body of empirical work we started last year, showing that customers choose and stay with Wayfair because of the superior overall experience we offer them. and not because of any specific product or promotional event. This is a milestone built on the back of several years of major investment, particularly in elements like red carpet merchandising and our differentiated house brands. Our findings have also opened the door to more refined promotional and everyday pricing strategies. Finally, it's perhaps not overly surprising that supplier services such as sponsored listings grew quite strongly in this environment. particularly as suppliers shifted more of their resources away from brick and mortar and traditional trade show formats and focused their attention on winning in an e-commerce setting. We believe we have a long runway of gross margin gains ahead of us as we continue to invest and reap the benefits from these efforts. Q2 spoke clearly to this potential. Q2 was also a powerful illustration of our marketing model at work. During the quarter, we reached the tighter efficiency targets we established across all of our channels earlier this year. This was consistent with the timeline we set for ourselves, given moving to these targets is an iterative process and it was in a highly dynamic market. In Q2, as always, we empowered our channel marketers to invest in long-term growth and customer acquisition so long as those decisions met the refined payback targets. Even as our teams took advantage of unique opportunities across paid channels, which were driven by strong ROI from lower media costs and high customer velocity, we drove significant leverage year over year in advertising as a percentage of sales. While we are pleased with the financial result, we are most excited about the influx of first-time online shoppers and look forward to building long-lasting relationships with many of these new Wayfair customers. Let me now touch upon the corporate headcount as the primary driver of our OpEx line, which also saw meaningful leverage in Q2. We're nearly six months into having slowed our hiring after an intense two years of growing our ranks, and earlier this year, eliminating some roles. The intent of both of these moves was to strengthen day-to-day execution by allowing our teams to mature and to accelerate our progress against our most important initiatives. During our biannual business review cycle this spring, the executive leadership team was encouraged to see these goals clearly playing out. Over the last two years, we hired many people to focus on multi-year initiatives based on our long-term orientation. And I'm excited that we have kept that orientation even as we have tightened execution. As a result, we believe that our original plan to keep OPEC's headcount flat to down for the year relative to 2019 levels is appropriate despite the exceptional momentum we have experienced. Those of you who have followed Wayfair for a while and know us well understand that we do not manage this business in quarters, but think forward in years and decades. Through that lens, Q2 is significant to us not because of the strength of this period's financial results, but instead because of the opportunities it presented. We served new and existing customers as they faced off against precarious circumstances. We increasingly built strong relationships with each of them, as well as our many supplier partners. And in the process, we are leveraging the strategic investments we've made with a much longer-term future in mind. We do not know what tomorrow will bring, but we are confident that Wayfair is stronger today than it has ever been, that we will emerge even stronger on the other end of these uncertain times. We have firm control of our business levers. The unique capability to be both a quickly growing and profitable company and a significantly bolstered balance sheet to usher us through a volatile market environment. Though we remain focused on our long term vision and goals, we're ready to seize whatever opportunities come next. And with that, I'll turn it over to Steve.