Wayfair Inc.

Hello and welcome to the Wayfair Q3 2023 earnings release and 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 1. I will now turn the conference over to Mr. James Lam, Head of Investor Relations and Treasury. Please go ahead.

Good morning and thank you for joining us. Today, we will review our third 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 fourth 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 10-K for 2022, 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 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.

Thanks, James, and good morning, everyone. We're excited to reconnect with you today to cover our third quarter results. While we still have a couple months left to go, I'm confident the overarching theme of 2023 will be execution. Our team came into this year with a plan, a plan to see our core recipe return to form to return our business to profitability, and to continue pushing our major growth initiatives forward. Wayfair is now in a place where we can both drive profitability while simultaneously investing for growth. Q3 is one more proof point of exactly that. Today we're reporting positive adjusted EBITDA of $100 million, a second consecutive quarter of positive free cash flow, and nearly 4% year-over-year revenue growth driven by strength in orders. We saw order momentum persist from the spring through the summer of 14% in the third quarter versus 2022. You're seeing this lead to steady improvement in our active customer metric, which saw sequential growth strengthen to 2% and is well on its way to getting back to positive year-over-year growth. 2023 has been an eventful year for Wayfair as the plans we set in motion during 2022 have come to fruition. A remarkable progress against the three core priorities we set back in the summer of last year, nailing the basics, driving customer and supplier loyalty, and cost efficiency, put us in a position to beat our own timetable to profitability. One of the analyst reports summing up our second quarter results was titled, They Did What They Said They Would Do, and we can think of no better compliment. We executed further in the third quarter to produce consistent profitability while still driving demonstrable market share growth. as evidenced by our gains on customers and orders. One of our long-running focus areas is controlling the controllables, and you're seeing that we have and will continue to keep a tight grip on the range, even with a volatile macro environment around us. Our improving order trend has led us to a place where net revenue returned to positive growth this quarter, even as average order values continue to normalize versus last year. With the considerable inflationary pressures across ocean freight and raw materials coming out of the system, it has been no surprise to see pricing levels continue to come back down to a more normal range for the category. We've heard a lot of debate around AOV over the summer as investors try to piece together where levels will stabilize. Our conversations with suppliers suggest that prices should continue to rationalize in Q4, which we anticipate will represent the year-over-year trough. Lower AOVs in tandem with strength in the core recipe are contributing to our order growth and share capture. This is particularly encouraging when we think about the strong repeat behavior of our customers with nearly 80% of orders in 2023 so far coming from returning shoppers. Growing market share is a key focus area as our category demonstrates persistent weakness. We've seen the sector slow from the last time we spoke in August. A few weeks ago, I was in High Point and heard repeatedly from our suppliers that the market is getting tougher. In the U.S., the category is now tracking down in the mid to high teens on dollars with continued order pressure industry-wide. In spite of the distressed home goods environment, our share position has held up well. Third-party data shows that our share gains across 2023 are persistent and have come from a large collection of peers rather than from any specific displaced retailer, just as it has for most of our existence. Every day we see customers choosing Wayfair because of our unmatched combination of competitive pricing with the widest selection in the industry and speedy fulfillment on the items our customers love. The success has been broad-based across our catalog, not focused on any specific classes within our assortment. In fact, we still frequently hear our customers and investors express surprise at the depth of our catalog. So I wanted to take a moment to highlight a couple of categories you might not immediately associate with Wayfair but are great examples of our strong share gains. Many shoppers think of Wayfair as a great place to buy their next bed, but we don't stop there. Our customers can also pick out their next mattress, sheet set, and bed pillows at the same time. We've seen our share in the mattress class outperform meaningfully over the past couple quarters, with positive unit growth in the low double-digit range year over year, while market volumes have been down by a commensurate amount in the same timeframe. Mattresses are known for having a wide range of price points, and at Wayfair, you can find a broad assortment of the highest-end national brands all the way to our Wayfair Sleep Essentials line. Mattresses are the perfect example of the core recipe in action. This is a class where we win by having that wide assortment in tandem with competitive pricing. As we do with our entire catalog, we take a good, better, best approach to our selection, ensuring that customers are finding the highest value at any budget level. We wrap it all together with fast delivery. Mattresses have one of the highest levels of speed badging across any of the classes we sell. We also have the value-added services customers expect in a great shopping experience, be it financing, white glove setup, or taking an old mattress away. Our scale enables us to compete successfully in a class that pushes the boundary of online penetration across our category, with nearly a third of mattress sales happening online. Just like mattresses, we frequently find our customers surprised and delighted at the breadth of furniture products they can find for their dogs, cats, birds, fish, or reptiles on Wayfair. The pet furniture opportunity represents several billion dollars of our $800 billion TAM, and we've seen strong double-digit growth here over the past two quarters, well outpacing the peer set. Our place in the field is unique as we tap into the emotional investment of the home, multiplied by the emotional connection our shoppers have to their pets. We built a promotional calendar around major pet-focused events to speak to customers in this space. For example, we ran an app-focused event for National Dog Day this summer, which saw considerable double-digit boosts to click-through rates, conversion, and sales as shoppers celebrated the opportunity to make their homes a better place for their four-legged friends. Before I turn things over to Kate, I would like to spend a few minutes touching on three of the biggest questions we've heard from investors in recent weeks. And the first of these is around promotion. A few of you have asked how promotions have impacted our order momentum and ability to take share. So it's important to frame up how the environment has evolved in the past year. Last fall, we saw promotional intensity spike as suppliers used discounts as a tool to clear out inventory. While our cadence mirrors the peer group, our focus is leveraging promotion as a tool for engagement. Shoppers are staying on the sidelines until they spot a good deal. But once in the door, they're proving happy to shop around. As I noted last quarter, during promotional events, less than a third of our gross revenue is driven by featured items. Moreover, our average supplier is marking down within a very reasonable range, where they can achieve positive order economics for themselves even with a discount. This is due in part to the massive base of 22 million customers that our suppliers access by selling on Wayfair. Our customer file draws more selection on the platform, which in turn brings in more customers and ultimately spins the flywheel of share capture. As the inventory environment normalizes and promotional intensity evens out, we can continue to be a share winner as our core recipe has proven for many years. The second question is unsurprisingly one about the housing cycle and our ability to succeed in an environment where people are staying put in their homes for longer. The answer to that question is quite straightforward. While we do have customers that will come to Wayfair for purchases geared around a move, this is far from our most common customer use case. You can see this in our own data on orders and revenue per customer. The average Wayfair shopper places about two orders per year, totaling about $540. This isn't someone that is typically refitting an entire room or house, but instead a shopper that's going through their home item by item, project by project, making small updates on a much more frequent cadence. If our customers stay in their homes for longer or are well positioned to be their retailer of choice, the next time they decide that they'd like a new lamp for the living room or want a new set of chairs for their dining table. As I wrap up, the last question I want to address is one we heard following our investor day in August. For those that were able to tune into the event, you'll remember the slide on our growth algorithm, which detailed our pathway to returning to a double-digit growth rate. We walked through our major focus areas, our specialty and luxury brands, international efforts, physical retail investments, Wayfair professional offering, and our supplier advertising solutions. In the weeks since, one of the most frequent questions we've gotten is how to think about the timing across these initiatives. The way to think about these growth drivers is on a staggered basis of maturity. While even the most mature efforts on this list, our higher end brands and Wayfair Professional, are still in early days compared to our U.S. business, we see a strong trajectory for each. As these businesses eventually ramp up to the middle of their S curves, we expect the next initiatives will be right in line to follow a similar pattern. In totality, we believe that this will give us the legs to drive considerable share out performance in the years to come. And as the category returns to stable footing, push our aggregate growth rate comfortably back into the double digits. This also means that we will be vigilant about tracking their performance against our investment thesis. As we operate the business over a multi-year period, we will concentrate our focus on growth drivers delivering well over 10% top line growth with significant flow through to EBITDA. and we won't hesitate to shift course if a driver is not delivering as we expect. That goes back to where I began today, the concept of execution. We see this as the key theme of 2023, but not one that goes away as the calendar turns over. Even with a turbulent macro, we remain committed to being adjusted EBITDA profitable in good times and bad. We'll continue to drive peerless focus and execution into 2024 and beyond, as we push every day to be the number one shopping destination for the home. Thank you, and now let me turn it over to Kate.