Wayfair Inc.

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair second quarter 2022 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Jane Gelfand, Director of Investor Relations, Corporate Development, and Capital Markets. Ms. Gelfand, you may begin your conference.

Good morning, and thank you for joining us. Today, we will review our second quarter 2022 results. With me are Neeraj Shah, co-founder, chief executive officer, and co-chairman, Steve Conine, co-founder and co-chairman, Michael Fleischer, chief financial officer, and Kate Gulliver, incoming chief financial officer and chief administrative 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 2022. 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 10K for 2021, our 10Q 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 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 replacements for and should be read together with GAAP results. Please refer to the investor relations section of our website to obtain a copy of our earnings release and investor presentation, which 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 a webcast will be available for replay on our investor relations website. I would now like to turn the call over to Neeraj.

Thank you, Jane, and good morning, everyone. We are pleased to reconnect with you today to share the details of Wayfair's second quarter results. 2022 is proving to be a volatile year. While the Fed and other central banks work to curb inflation and stabilize the global economy, we remain squarely focused on our customers and our suppliers and on making sure Wayfair is their preferred platform for the home in any environment. We're also very focused on controlling the controllables and steering Wayfair in a financially responsible manner through this period. On each of these fronts, we're seeing positive traction, and this is what I'll talk to you about today. Q2 net revenue climbed 10% quarter over quarter, though it was still down 15% year over year. Though year-ago comps will begin to normalize in the back half, it is unmistakable that consumer behavior is being impacted by inflationary pressures as well as by economic and geopolitical concerns. Even so, the emotional connection to one's home means that interest in our category is ongoing and we're seeing consumers remain engaged and responsive to the right combination of wide selection, great deals, and satisfying service. Wayfair's platform model flexes to deliver this outcome across different macro environments and we're seeing it do so today. For the last couple of years, We have indicated that Wayfair should now be at the scale to drive both growth and consistent profitability. The first half of this year has admittedly been less robust than expected. But let me be very clear that our intention is unchanged. We are laser focused on quickly getting back to this goal. Our priority over the coming quarters and looking into 2023 is to steer the business towards positive adjusted EBITDA and positive free cash flow. but we will not stop there. We are actively navigating Wayfair towards a mid single digit adjusted EBITDA margin, which should allow us to consistently generate cash and put us in a position to cover costs such as equity compensation for our employees and CapEx. At this profitability level, we will continue to invest aggressively in the future, given the still large gap versus the current embedded profitability in our model. Once we get to mid single-digit adjusted EBITDA, we intend to philosophically treat it as a lower bound for profitability, but not as the end goal. We remain committed to our long-term target of double-digit adjusted EBITDA. The COVID period showed clearly that we can operate at these levels, and we fully intend to scale beyond them over time. Even as we get sharper on our financial philosophy, Our approach to the business is consistent with the last 20 years. We are building for the long term, but coming in each day thinking about the next set of steps on the path there. With an addressable market approaching $1 trillion that remains meaningfully under-penetrated online compared to other sectors of the retail universe, we are truly excited about what the future holds for Wayfair. The pandemic changed the e-commerce landscape in many ways, but one thing that remains unchanged is the unique nature of our business, an end-to-end platform dedicated to the home category. The competitive advantage this gives us across logistics, assortment, shopping experience, brand building, and more has only strengthened our standing in the post-pandemic world. This is a category where scale begets success, and it's actually difficult periods like this that can serve as a springboard to become an even larger share of the market. Before Kate, Michael, and I detail the roadmap for a return to profitability, let me spend a few minutes walking through what we're seeing in the customer and competitive environment. Inflation continues to be a meaningful presence in customers' lives at a broad level. Our portfolio spans all income brackets, which is helpful since our professional, specialty retail, and luxury businesses are growing well and proving more resilient in this environment. Customers in the U.S. also appear relatively less impacted than our European customers who are navigating the pressures brought on by the war in Ukraine and Brexit in tandem with inflationary pressures. Regardless of geography, it is not surprising that our mass customers are being more deliberate about where their discretionary dollars are going, as prices at the gas station and grocery store eat up a greater share of wallet. For the past few months, we have also seen many of those discretionary dollars flow away from goods. to services, especially travel, as a slow-to-start spring turned quickly into summer. Still, the home remains an important pillar in our customers' lives, and they remain in market looking for great deals. Unlike in 2020 and 2021, promotions and events are mattering more again. This is typical for our category, and we are seeing strong incremental responses to well-staged events like weigh day, Memorial Day, Fourth of July, and other special offers. Importantly, this is also translating into better everyday prices for our customers. In this environment, our suppliers are looking to move product as quickly as possible and have transitioned from having a dearth of product to having to deal with excess goods on hand. Through Wayfair, they reach an engaged and enthusiastic customer audience. When suppliers see success during key events, they're motivated to turn those promotional offers into everyday low prices. by extending better wholesale terms and through taking advantage of other supplier-facing services that can help them gain prominence on our platform. All of this is happening as we speak. A wide selection of products is also crucially important in moments like these. We are observing some trade-down behavior within various classes of home, and the vast selection of our catalog ensures that we meet our customers' needs regardless of price point or style. Our ability to offer this broad selection has been substantially boosted by the large growth in our suppliers' inventory levels. We're seeing this play out in a couple of different ways. First, product availability has meaningfully improved versus this time last year, when out-of-stocks or very long lead times on key items were a pronounced headwind. Key items are back in stock, more items are moving into our house brand collections, and being extended to us with exclusivity features. In fact, roughly 40% of our unbranded U.S. sales now come from these products, nearly double versus last year. Second, we're driving more throughput through our own logistics footprint. Castlegate penetration, or the percentage of products sold that originates in a Castlegate location, is on track to recover rapidly to previous peaks and then exceed them. This is in part void by our ocean freight forwarding service. where volume is slated to double from the prior ocean year. As these logistics components come together into a streamlined end-to-end infrastructure, we are able to make faster and more reliable delivery promises to our customers at a lower cost to us, which they then reward with higher conversion. All of these elements combined are already bearing fruit. For instance, our market share position recovered in 2022 relative to how it fell in the second half of 2021, when supply chain availability issues clearly slowed us down. Customer feedback also speaks to increased satisfaction, with NPS scores up meaningfully year over year and brand surveys highlighting our seamless experience and unparalleled selection. As I mentioned, the industry suppliers have experienced a dramatic shift in their positioning over the course of the last few quarters. From not having enough product to satisfy all of their customers, to facing canceled orders from brick-and-mortar retailers and being over-inventory. Wayfair has long prided itself in the way we build supplier relationships, and that partnership model is working to our advantage today. The team and I have met in person at various markets with close to 1,000 suppliers over the last several months. It is very clear that they are leaning in with Wayfair, extending us more product and better wholesale costs and using more of our service offerings. As they do so, we surface more of their product and pass through lower wholesales to the end customer, helping them turn inventory and maximize cash flow faster, which is especially critical to the many small businesses that make up our supplier base. However, unlike traditional retailers whose cost basis weighs on their pricing decisions and can become a liability in a softening macro, the advantage of our platform model is that by taking minimal inventory risk ourselves, our gross margin can remain resilient. We then have the ability to drive our gross margins higher through capturing incremental efficiencies and in this environment from some potential relief on transportation costs. We're seeing some of this begin to play out in our financials today, as was also the case in 2008 and 2009. This is critical as we think about navigating the path to profitability, which is the topic I would like to cover next. As the macro environment shifts, we know that our operating and financial plans need to evolve. Over the last few weeks, we articulated a clear set of goals to our entire organization, which include three key tenets. One, drive cost efficiency. Two, deliver best in class execution by nailing the basics. And three, earn customer and supplier loyalty every day. Through this lens, we're making swift decisions, prioritizing clearly, and looking to drive costs out of every pocket of the business. Some of this is already visible to you, and more will become apparent as time goes on. This is an ongoing exercise, and frankly, one that will serve us well in all sorts of environments as we evolve in the way we operate and grow Wayfair. An important advantage of our business model is that our P&L is highly variabilized. This means that gross margins, customer service, and merchant fees, and to a large degree, advertising, should be quite responsive to the trend in revenue. protecting Wayfair's unit economics, and leaving room for potential upside through incremental efficiencies. In areas of more fixed spend, predominantly OPEX and CAPEX, we have the ability and willingness to prioritize and sequence differently if need be. One visible example that many of you are aware of is the hiring pause that we implemented back in May. This gives us the opportunity to step back assess how consumer demand is developing, and to react accordingly. Less visible to you are decisions such as pushing off market expansion plans in Europe in favor of reinforcing our focus on the UK and Germany, pausing the development of certain opportunities like registry, and flexing our planned logistics capex investments in response to a changing revenue trajectory. As I said, we are increasing our cost efficiency focus across all facets of Wayfair in an ongoing manner. In companies of our size and scale, these opportunities take a quarter or two to begin to unlock, but we are highly confident that they will not only help us reach our financial goals, but also make Wayfair's execution even tighter. Even as we reshuffle some priorities, we are not trading off on important future growth drivers and enablers. The profitability levels we are targeting should allow us to both control our destiny and simultaneously invest for the long term, which has long been a key to Wayfair's success. While we tighten our belt in some places, our support is fully behind high ROI initiatives that will set us up for years to come. For instance, our technology organization continues to pursue the transformation agenda that our CTO, Fiona Tan, described last quarter. We are expanding our fast delivery capabilities. We are growing our flagship house brands and increasing more exclusive assortment. And we're investing in top of funnel marketing channels and content to drive awareness and frequency among both new and loyal customers. We are also sticking to our test and scale approach in physical retail. In May, we launched our first all modern store with a couple of additional locations under our specialty retail banners slated to open later this year. Next year, and on a limited basis, you will see us continue to experiment with new specialty retail formats to be followed by a larger Wayfair branded store concept in 2024. It is important to bear in mind that we are very much still in a learning stage here. Our goal is to use these handful of stores as a testbed for new ideas around how and where to bring the core competencies of Wayfair to a physical shopping environment. We believe the omnichannel opportunity for Wayfair is quite meaningful, but we intend to pursue it with our usual approach of testing, iterating, and proving out success before finally scaling. Across everything I've discussed just now, our goal has been to make clear the thoughtful and considered approach we're taking to the current environment. We've always said that we run this business for the long term, and nothing about that has changed. The size of our category remains tremendous. The field is fragmented. The structural march of shopping more online will continue. And Wafer is uniquely positioned to grow and consolidate share over many years to come. We have a management team that has seen multiple cycles in all sorts of different businesses. We all recognize that in moments of macro volatility, like we are living through today, it is just as important to focus on the here and now as we steer through this period, as it is to look forward. Doing so centers around returning to and sustainably operating in a free cash generative way. The timeframe to get there will evolve with the macro environment and our response to it, but we're very focused on the variables that are in our control. Driving out excess costs while being there for our customers and suppliers and driving the tightest execution possible. We also take confidence that our platform model is designed with the flexibility to weather unpredictable moments like this and emerge stronger for it on the other side. I'm going to hand things over to Michael for a review of our financials and outlook.