Wayfair Inc.

Good day and thank you for standing by. Welcome to the Wayfair Q1 2021 earnings release and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the call over to our speaker today, Jane Gelfand, Head of Investor Relations, Corporate Development and Capital Markets. Please go ahead.

Good morning and thank you for joining us. Today, we will review our first quarter 2021 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 second quarter of 2021. 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 2020, our 10-Q for this quarter, and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. Also, please note that during today's 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 reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast will be available for replay on our investor relations website. I would now like to turn the call over to Niraj.

Thanks, Jane, and good morning, everyone. We're excited to share the details of our first quarter results, which were again characterized by strong revenue growth, solid profitability, and positive free cash flow. While macro conditions are always changing and promise to be especially dynamic in 2021, Wayfair's focus remains squarely on connecting all of the industry's customers and suppliers on our unique platform, which is custom built to address the specific needs of shopping for the home. As a reminder, we refer to ourselves as a platform because we bring together the best aspects of a marketplace model while also incorporating the benefits of a first party or 1P retail experience for the customer. Shopping for the category is fundamentally unlike nearly every other vertical of retail. Each purchase is a personal, highly emotional expression of one's feeling of home. And much of the category is unbranded and differentiated. These are high consideration purchases and require a 1P experience for the customer. Shoppers need inspiration through relevant content discovery through a wide assortment and confidence that is built through strong merchandising, fair prices, reliable delivery, and effortless customer service. Our aim is to set the bar ever higher on each of these dimensions with a best in class customer experience as our North Star. In the process, we are building the preeminent destination for shopping for the home, a trusted household brand that tens of millions of customers return to again and again as they seek inspiration, To do this effectively, Wayfair has flipped the script on what powers the business and adopted the most attractive aspects of a marketplace model when it comes to our suppliers. Instead of working with a select few suppliers, we embrace an inventory-light, third-party model and instead focus on building the tools and services to allow every supplier to easily and productively access our customers. We let suppliers do what they do best. Ideation, Design, Manufacturing, and we deliver them solutions like end-to-end logistics services, technology, and media and merchandising tools that they use to enhance their reach to the customer and grow their business. Years of investment have put us in the position to fundamentally leverage our scale for the benefit of both our suppliers and our customers, creating a whole that is greater than the sum of its parts. In our investor presentation, we show this platform as a flywheel where scale begets growth, which leads to further efficiency. We see this in action each quarter, and Q1 was no exception. First quarter net revenue grew to $3.5 billion, up $1.1 billion and 49% year over year. Our active customer count grew by 57% over the first quarter of last year to reach 33 million, and we delivered 14.7 million orders, 49% more than a year prior. Our shoppers love the experience they have on Wayfair, which keeps them coming back. And Q1 marked the first time that 75% of our orders came from repeat customers. Repeat order growth year over year accelerated versus Q4. Repeat order growth once again outpaced growth in new orders, which were approximately 800,000 higher year over year. Accelerating growth and repeat is, in part, a reflection of those newer customers acquired in 2020 coming back and becoming more loyal. You may ask what we are doing to keep this flywheel in motion and to accelerate it. We are ambitious in going after our $800-plus billion total addressable market. We continue to invest with conviction in all aspects of the platform, improving both customer and supplier experiences, expanding our reach, testing new concepts and failing learning and scaling quickly. Just a couple of examples to demonstrate what I mean on each front. When it comes to the supplier experience, these endeavors have recently included scaling up our Asia-based logistics operations and freight forwarding business. This has been especially powerful given the upheaval and congestion in the ocean container market and has allowed participating suppliers to maintain a steady flow of goods to the US and Europe to keep their businesses on track. We also continue to invest in successfully expanding our reach in Canada and in Europe. Since the onset of the pandemic, our active customer count has increased by nearly 70% in international, and orders from repeat customers are up more than 800 basis points as a percentage of total order mix. We are adding additional Castlegate capacity in Germany to accommodate our growth and to open the door to further market expansion in Europe. And when it comes to experimenting with new concepts, We push ourselves to be forward-looking, unbiased, and methodical. In 2021, among our many ongoing initiatives, we're laying the groundwork to test into physical retail, introducing new customer-facing creative, refining the unique positioning of each of our brands, and developing new supplier-facing services. We are balancing our various endeavors with continued profitability and free cash flow generation. 2020 marked the first year of profitability for Wayfair since we went public. and we expect to remain profitable quarter in and quarter out in 2021. With Q1 gross margin of 29% and $206 million in adjusted EBITDA, a 6% margin, we're demonstrating the structurally profitable nature of our platform model. We generated over $200 million in adjusted EBITDA this quarter while simultaneously and ambitiously investing for the future. including thousands of people who are working on exciting multi-year initiatives. While the magnitude of margins will move quarter to quarter and the various tailwinds and headwinds with which we contend will change over time, we are confident that strong profitability will continue and will expand over time as our various investments continue to bear fruit. Like many of you, we are eager to see the world move post-pandemic. We've been encouraged by the early signs of normalization as vaccinations are increasingly made available to the general public. Many have asked us what this new normal will look like for Wayfair and shopping for the home. While time will tell, some of the early data points we have seen paint a picture that looks very promising for our business over the long term. In the early innings of the pandemic, we saw a shift in shopping behavior as customers rushed to outfit their home offices and homeschooling environments. However, this demand surge very quickly extended across the many, many classes that we sell, a phenomenon that has persisted through today. More than a year into doing nearly everything from our homes has only intensified the emotional value we place on our personal spaces as we have reimagined what we want our homes to look like and have expanded our to-do and wish lists to achieve these visions. While demand for COVID impacted categories like travel and entertainment is returning, We also believe the pandemic has fundamentally increased the share of wallet customers will spend on their homes in the future and the amount they will spend online. That's partly because as we sit here today and the world begins to reopen, many people know that they will still be spending more time at home and have become much more comfortable shopping online. Remote work will continue to be a reality for many, and even as companies begin the process of returning to offices, New norms around flexibility will give people the opportunity to spend more time at their homes. We're all eager to host friends and family again, too, and to make those occasions extra special. We're closely watching category demand trends in those countries that have had greater relative success in reopening, even when we don't operate there. We're also paying attention to how demand on our platform evolves state by state in the United States, given various levels of vaccinations, restrictions, and adherence. across the board, the early takeaways suggest that even in geographies where the economy is largely reopened, spending on the home has remained elevated compared to pre-pandemic levels. Most importantly for Wayfair, e-commerce demand is now structurally higher for our category, though still quite under-penetrated, and could well accelerate more quickly going forward than pre-COVID. All of these trends are encouraging, though it is still very much early days. As you know, this persistent level of demand has brought some challenges to the industry as multiple points of strain have emerged across the supply chain. Earlier in the pandemic, inventory availability and outbound bottlenecks were the biggest sources of stress. More recently, inventory constraints have been magnified due to inbound issues, namely ocean container availability and port congestion. These are challenges faced by the entire industry, driven by broad macro pressures. Retail sales remain more elevated broadly and suddenly dramatic shifts to e-commerce have produced intense demand on existing logistics infrastructure across the spectrum. On the whole for our category, inventory availability and delivery times are sequentially improving, though it is in fits and starts and will likely take towards the end of the year to fully normalize. Though we cannot entirely avoid some of these challenges, our platform model and years of logistics investments put us in a position to weather them better than most. and more significantly, to help extend these benefits to our supplier partners. Having a virtually limitless catalog gives us the flexibility to ensure customers see the products we know we can get to them quickly. Our logistics network and scale has given us a uniquely advantaged seat as we deal with major providers of transportation, which translates to better terms and a position of priority, which we can effectively share with our suppliers.