Wayfair Inc.

Good morning. Thank you for standing by and welcome to the Wayfair third quarter 2021 earnings release conference call. At this time, your attendee lines are in a listen-only mode. After the speaker's presentation, we will have a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone keypad. As a courtesy to all callers, please limit yourself to one question and one follow-up question so that all callers may have a chance to ask their question. Please be advised, today's conference is being recorded. If you require operator assistance, press star zero. It's now my pleasure to hand today's conference over to Director of Investor Relations, Landry Gambia. Please go ahead.

Good morning, and thank you for joining us. Today, we'll review the third quarter 2021 results. With me are Neeraj Shah, Co-Founder, Chief Executive Officer, and Co-Chairman. Steve Conine. co-founder and co-chairman, and Michael Flasher, chief financial officer. We will 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 fourth quarter of 2021. We cannot guarantee that any forward-looking statement will be accurate, although we believe that we've been reasonable in our expectations and assumptions. Our 10-K for 2020, our 10-Q for this quarter, and our subsequent STC filings identify certain factors that could cause the company's actual results to differ materially from those projected in our forward-looking statement made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events, or otherwise. Also, please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. These non-GAAP financial measures should not be considered replacement for and should be read together with GAAP results. Please refer to the investor relations section of our website to obtain a copy of our earnings release and investor presentation, which contain 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 webcast will be available for replay on our IR website. I would now like to turn the call over to Neeraj.

Thank you, Landry, and thanks everyone for joining us this morning. We're glad to reconnect with you today to discuss the details of Wayfair's third quarter results and to share more about the various initiatives on which we are focused. In Q3, we generated $3.1 billion in net revenue and over $100 million in adjusted EBITDA. Though net revenue declined, this was not overly surprising, given the quarter played out against the backdrop of customers eagerly embracing reopening trends, still having to anniversary an extraordinary moment of category demand last year, and supply chain issues becoming more pronounced this period. Even so, we are seeing sequential acceleration in the year-over-year gross revenue growth rate in Q4 thus far. and product availability is improving, albeit slowly. As various geographies have reopened post-pandemic, consumers have naturally shifted some spend towards travel and entertainment and from e-commerce towards brick and mortar. Demand and interest in the home remains resilient, but it'll take a few more quarters for our growth and e-commerce growth in general to get back to normal. Through this period of transition, we are not standing still. Those of you who know us will appreciate that we manage the business with a horizon of years, not quarters. Therefore, we are focused on making the necessary investments against ongoing strategic initiatives to deliver the best possible customer experience. Our $840 billion total addressable market is huge. We're already a leader in the category, and we plan to only widen our competitive moat. While the macro situation may mean more financial volatility on a quarterly basis than we and you might have initially expected, we are fully convinced that we continue to make the right moves for the long term. I'd like to spend most of our time today on these longer term initiatives, which focus on all aspects of Wayfair's platform model. However, first, let me address some of the supply chain issues buffeting the economy. To put things into perspective, our product availability has improved versus the spring and is well above trough levels seen at the height of the pandemic. It's just not where we or the industry would like it to be or consider normal. We feel reasonably well positioned into holiday and have built our promotional calendar to ensure adequate supply and sufficient lead times. Still, it is true that the home category, like many sectors of the economy, is facing various supply chain bottlenecks that are resulting in inventory shortages, prolonged delivery timelines, and inflation in both wholesale costs and retail prices. Ripple effects from factory closures in Asia, ocean container shortages, port log jams, and a tight labor market are all factors that will continue to cloud the picture through much of 2022, even if governments and private enterprises mobilize to remedy them. We too are doing all we can to mitigate these effects on behalf of our supplier partners and our customers. Many features that are natively built into our platform model help in this regard. Additionally, we are also changing some practices to adjust to the environment. Inherent to our model is Wayfair's expansive catalog of products and inventory light approach, which helps preserve substitutability and customer choice. This is not a new feature and does not totally absolve us of losing out on some revenue if a customer decides to look elsewhere when faced with elevated out-of-stock levels on best-selling products. However, it is an important dimension of the platform that we believe translates into a long-term competitive advantage vis-a-vis inventory carrying retailers with markedly more narrow selections. We're also adjusting some internal practices that became counterproductive in this environment. Specifically, Wayfair did not sell items that were currently not onshore in either our or our suppliers' warehouses. And therefore, we've listed these items as out of stock to the customer. In the current environment, customers have come to terms with much longer lead times on products, and we need to adjust to that. We're just now beginning to sell products that we know are in transit, including those goods that are on the water. In doing so, we're estimating delivery timing further out and using that to level set customer expectations. Another important feature of the Wayfair model, especially at times like these, is our international supply chain, which we now call Castlegate Forwarding. This is a set of services and freight forwarding capabilities which translate into ocean container availability at competitive rates for our suppliers, something they would not consistently be able to unlock on their own and which is particularly difficult to source today. We're leaning in here in a big way. Our effective shipping capacity is growing multiple fold year over year as supplier demand for these services continues unabated and our relationship building and large volume with ocean freight carriers is paying off. This long-term investment, which we started several years ago, is creating an ever more connected partnership between us and our suppliers. As we speak, we are also simplifying the supplier value proposition for using our logistics services beginning to end, starting all the way in Asia and ending at the customer's room of choice. Bundling the various services together in a cost-effective way aligns incentives with our suppliers to forward position products as deep into our network as possible. We expect this to drive further adoption and penetration, which should in turn increase product availability, speed of delivery, and unlock greater efficiencies for our supplier partners and for Wayfair. To be clear, there is no panacea solution for the supply chain challenges. It will take some time for the world economy to work through, but we're staying flexible and we're doing all we can to drive the best outcomes for our customers. Wayfair also continues to look ahead while navigating these short-term issues. It's easy to become distracted by the current noise around us, so I'll now pivot to talk about the variety of initiatives we have underway that will translate into an even stronger competitive position over the years to come. Wayfair's platform is fundamentally about connecting the industry's customers to the industry's suppliers and delivering an easy and inspirational shopping experience that is tailored specifically for the home category. We do this through custom-built technology and infrastructure solutions across merchandising, logistics, customer service, and supplier services. On the other side of this transitory period, as the market resumes its structural shift online, we expect to return to historical growth levels as Wayfair translates these competitive advantages into share gains. I'll give you a sense of how we're expanding our reach and deepening our offering on a few of these fronts, reinforcing why our 2% market share And this nearly $1 trillion market has substantial runway from here. When it comes to customers, our focus remains on activating new or lapsed customers while driving repeat among existing ones. In the U.S., brand and category awareness are important drivers of frequency. Our new There's No Place Like It universal marketing campaign emphasizes the emotional value tied to our homes and establishes Wayfair as the destination for all things related to it across all sets of classes. We continue to innovate with ad formats. Via our apps, we recently launched Wayfair OnAir, an initial set of influencer-led video content, which will grow into an on-demand shopping offering. Targeted print catalogs for Paragold and our specialty retail brands are also soon headed your way and emphasize shopping spaces, not just items. All of this is done via an ROI-oriented framework consistent with how we drive our considerable ad spend. In Europe, where the UK and German flywheels are nicely turning and under the direction of new executive leadership, we're laying the groundwork for our next set of geographic and brand extensions starting in 2022. We have long said that any expansion will be methodical and built on the back of existing infrastructure. so you'll not be surprised to see our next country launches be into adjacent markets like Ireland and Austria. Over time, you should also expect us to establish a presence in other large European countries. When it comes to merchandising, the pandemic has only underscored the fluidity between the online and offline worlds while shopping for the home. Online penetration for our category has substantial upside. Other categories, including consumer electronics and office supplies, has set the waterline for online penetration at approximately 50%, while even the most established classes of home are only about 20% penetrated today. That said, some customers clearly value the physical shopping experience. We saw this via our pop-ups in a mall-based store over the past several years. And the temporary swing back towards brick and mortar this summer was another interesting proof point. These data points provide further validation for one of our key future ambitions, which is to establish a new kind of omnichannel shopping experience that blurs the lines between the online and offline. You'll begin to see that manifest starting next year. We're embarking on this next phase of physical retail experimentation by establishing multiple formats for our family of brands. We'll take the time to test into the winning format and then scale, as we've done before with other initiatives. To spearhead our physical retail strategy, we've spent the last couple of years assembling a highly capable team of both externally and internally sourced talent, and we're truly excited to begin to unveil what we've been working on in the next year and beyond. As you know, our supplier partners are a critical part of our business model. We're building out tools and services to empower them to own their success on the Wayfair platform. To enable that, we have reorganized internally to modernize our partner home tech solutions so that every supplier, regardless of size, can have as seamless an experience when partnering with Wayfair as our customers do. We're also unlocking the capability to welcome suppliers from all corners of the world onto the platform. We now support suppliers in their native languages, including French, Spanish, Polish, Italian, Mandarin, and of course, English and German. A follow-the-sun support service model also leverages our offices in multiple time zones, including Boston, Berlin, and Shanghai. On a personal note, it has been a real pleasure to meet with many suppliers in person over the past several months. Our teams have reunited at our offices, where we've hosted multiple supplier summit events, and also at several in-person trade shows. Nothing replaces the in-person experience, and we're feeling the benefits of that connectivity. A pivotal part in our ability to work with a truly global set of suppliers is our end-to-end logistics infrastructure. When we can take possession of products in Asia, break the shipments in bulk to go to different locations, range for transport over the water, and to population-adjacent fulfillment centers, we optimize the supply chain for our suppliers who cannot do it on their own. We also drive efficiencies in cost and speed that would not have been otherwise possible. This enables us to provide extraordinary service to our customers. Part of our focus next year will be to drive even greater utilization through our network. New programming and incentives in 2022 should kickstart our progress once again, which will only further accelerate as suppliers rebuild their inventory positions. This in turn should unlock the next level of efficiencies for our suppliers, our customers, and for Wayfair. Nearly everything we do at Wayfair is supported by a powerful backbone of custom-built technology. We already employ more than 3,000 best-in-class engineers, product managers, designers, and data scientists, and are proud to be a magnet for the tech industry's brightest minds. We have significantly evolved and up-leveled our technology organization over the last year. To expand our employer reach even further, we're opening new engineering hubs across North America in the Bay Area, Toronto, Austin, and Seattle, and are welcoming the next generation of technology talent to Wayfair in these locations. You may now see that despite short-term volatility and admittedly some macro murkiness, our long-term vision is, if anything, in sharper focus. The initiatives required to realize it are fully in flight, even as we work through near-term macro challenges and consumer behavior continues to adjust. The Wayfair model is resilient and built to scale Our people are energized and our financial condition is strong. We are, as ever, focused on the long term, balancing strong growth and profitability over years, not quarters, and solidifying our position as the definitive destination for the home.