Wayfair Inc.

Good day and welcome to the Wayfair Q1 2023 earnings release conference call. 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 star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome James Lamb to begin the conference. James, over to you.

Good morning, and thank you for joining us. Today, we will review our first quarter 2023 results. With me are Neeraj 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. I would 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 2023. 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. Our 10K for 2022, 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. 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 IR website. I would now like to turn the call over to Neeraj.

Thank you, James, and good morning, everyone. We're pleased to reconnect with you today to share the details of our first quarter results. Last August, we shared a roadmap laying out our path to profitability. The first step was getting back to adjusted EBITDA breakeven. Through a focus on our three core initiatives of driving customer and supplier loyalty, nailing the basics, and cost efficiency, we've made significant strides in improving our offering and customer experience while simultaneously reducing our cost structure. Collectively, these efforts have resulted in increasing market share and a significant reduction in operating expenses versus last quarter, getting us to nearly adjusted EBITDA breakeven in Q1. And we're excited to share that we expect to have positive adjusted EBITDA in the second quarter. We've always known, and now we are clearly demonstrating, that the Wayfair model is inherently profitable. and that there is considerable opportunity in front of us to rapidly drive further margin expansion while investing for future growth. We've reached this profitability milestone in spite of the difficult macro environment our business has operated in for the better part of a year. Our category in particular has been impacted more than others, with sales first turning down in March of 2022 and now contracting approximately 20% year over year, according to many of the sources we follow. While traffic remains challenged, our conversion levels have held steady, and our work on nailing the basics and driving customer and supplier loyalty is leading to sustained market share growth. In the second quarter, we're seeing improving year-over-year order trends, and we're just coming off the back of our seventh Way Day event. At the beginning of the year, as we planned a denser promotional calendar for 2023, we decided to try a three-day format for Way Day. We are very pleased by the engagement from both our suppliers and our shoppers to the extra day. It's a testament to the hard work and the quality of execution of the team that our model of fast delivery, great availability, and sharp pricing is firing on all cylinders, even as we are making meaningful adjustments to our cost base. As we've done for several quarters, I want to update you on different parts of the business in the lens of our three key initiatives, starting with cost efficiency. As part of our $1.4 billion total annualized cost actions that we outlined in January, you've heard us refer to $500 million coming from operational cost savings. These cost savings initiatives are multifold and manifest across all aspects of our value chain. As we're now starting to see some of the benefits of these savings flow through in our gross margin, I wanted to take a few moments to share some further examples of these initiatives and provide you some more perspective on our progress. As we started down the road of driving cost efficiency, our overarching goal was to actually enhance the customer and supplier experience, even as we looked for areas of savings. One of the ways we do that is by reducing damage rates, both on specific products as well as in the aggregate. In instances where we see rising incident rates, we take a proactive stance in working with our suppliers to identify specific weak points and improve packaging. Our strength in data science and technology allows us to take this to the next level, using information on damage rates to compose better search results for shoppers. This is one of many factors that has driven our overall incidence rate down by over 15% since last summer. By prioritizing items that we know consistently delight our shoppers, we create a better experience, save on after-order service expenses, and drive a much higher likelihood of generating a repeat order in the future. Lower cost of delivery directly translates to lower retail prices for consumers. So another area that we focused on recently is optimization of our last mile costs. Every product sold on Wayfair is classified as either a small or large parcel. So to set expectations, our small parcels average 30 pounds and can actually go as high as 150 pounds in some cases. Our small parcel orders are shipped through carriers like FedEx, and as you would expect, are less expensive to deliver than large parcel items most of which are fulfilled through our middle and last mile Wayfair delivery network, where all trucks are staffed with two-person teams rather than just a single driver due to the heavy and bulky nature of the products. Many items will straddle the line between small or large, so we've sharpened our data analytics tools that decide whether a product is classified as a large parcel or not. For some items, large parcel clearly makes sense. The higher cost of delivery is more than offset by the reduced damage rates from the extra care. In other cases, we may see that shipping times and damage rates are indifferent, in which case classifying the item as a small parcel creates a more compelling retail price while preserving the customer experience. Our ability to optimize shipping costs has been further enhanced by our efforts to drive more suppliers through Castlegate, with multiple benefits that accrue to the customer and to Wayfair. Improved forward positioning means fewer logistical touchpoints and therefore less fulfillment expense, while also resulting in a lower risk of damage and faster delivery time. In fact, the percentage of items on the site with speed badging hit a new record high in the first quarter of this year. These are just two examples across a multifaceted initiative with more than 70 distinct areas of savings, all of which adds up to the more than $500 million I mentioned earlier. In a few minutes, Kate will talk more specifically about the financial flow through here, but I want to acknowledge the speed and thoroughness with which our team has executed on these work streams. Since we started this process last summer, we've now achieved more than half of the targeted savings on an annualized basis and are making steady progress towards completing the remainder by year end. These are durable, process-oriented savings that we expect will create improved economics and efficiency on every single order placed and which we believe will lead to higher savings when the volume growth returns. I mentioned it earlier, but it bears repeating. We're extremely proud that even as we have driven these considerable changes across our business, we are still seeing strong market share expansion. Our second key initiative is driving customer and supplier loyalty every day. And the best evidence of our progress here comes from the market share picture. We collect market share data from several sources, such as conversations with our suppliers, third-party research, and credit card data. The picture we are seeing across all sources has unified over the past several quarters clear and resounding win in share for Wayfair. Yipit Data, one of the major credit card data providers, recently published their publicly available first quarter home goods market share index for the United States, which shows us in the number one position with ongoing share capture for several quarters. A similar story is playing out in our second largest market, Canada, where we have seen robust share capture since last summer as we've made big unlocks to speak more specifically to our shoppers in the region. Across our efforts to drive customer loyalty, we recently launched filters to search for products fulfilled from Canada, which our customers in the region love, and are highlighting items that are positioned within the country. Our Canadian customers appreciate the added benefit of surfacing items with faster delivery speeds, competitive retail prices, and lower incidence rates. We've also launched a best-in-class French experience for our Wayfair.ca shoppers and host Canada-specific promotional events like Victoria Day and Canada Day sales. speak more directly to our customers in the country. During these moments, we have partnered with Canadian influencers and celebrities to further connect with our shoppers and offer them items they will love. As with the U.S., our core recipe in Canada has never been in a better place. Strong availability, competitive pricing, and fast delivery have kept customers coming back. And this ties nicely to the third of our key initiatives, nailing the basics. In that spirit, we recently enabled detailed end-to-end international tracking on Canadian orders that originate from the United States. While shoppers previously could only see the detailed location of their northbound order once it had crossed the border, our Canadian customers now have full visibility to where their items are at each stage of fulfillment, which reduces the volume of post-order service inquiries. On the theme of service, we've also strengthened our Canada-based customer service team. We find that having domestic agents who understand the unique needs of their local shopper reduces the number of follow-ups and immediately improves the customer experience. The true meaning of nailing the basics.