Wayfair Inc.

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair fourth quarter 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. James Lamb, Head of Investor Relations in Treasury, you may begin your conference.

Good morning, and thank you for joining us. Today, we will review our fourth 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 first quarter of 2024. 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 2023 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 any 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 be with you today to discuss our fourth quarter results and recap 2023. Q4 was one more definitive step on our profitability journey. as we generated a 3% adjusted EBITDA margin, even in a difficult macro environment. This was our third consecutive quarter of positive adjusted EBITDA and free cash flow, and a reflection of the immense progress we achieved across the entire year. In fact, on a revenue base that largely mirrored 2022, our free cash flow in 2023 improved by over $1 billion. As we exited 2022, we anchored ourselves around three core initiatives, nailing the basics, driving customer and supplier loyalty, and cost efficiency. Over the course of 2023, we systematically executed on all three fronts. Our efforts to nail the basics and drive customer and supplier loyalty led to a large improvement in our core recipe across availability, speed, and price competitiveness. The improvements across our offering were directly responsible for the step-up we saw in loyalty. which manifested in our robust share expansion over the last year, and by the fourth quarter, a return to year-over-year growth in our active customer count. That engagement was driven in part by our progress on the third initiative, a meaningful evolution in our cost structure, with savings spanning labor, operations, and every other line of our P&L, which allowed us to reinvest in our customer experience. We've consistently shared that those same core initiatives would carry forward into 2024, and you've already seen the results of that play out. If you haven't had the chance, I'd encourage you to take a look at our shareholder letter that was published alongside our earnings results earlier this morning. Last year, we saw our team unlock large productivity gains as focused execution against our top ideas met reduced friction and less internal bureaucracy. As we look at the evolution and composition of our teams throughout 2023, it became increasingly clear to us that there was more that could be done to increase productivity. We realized that many of our teams were still over indexed to middle and upper level managers in proportion to the more execution focused team members that are the foundation of each group. Late last year, we started an exercise involving a number of our senior leaders to look at each team across the organization and answer some simple questions. How would we maximize the efficiency of this team? How many people would be on it? What would the appropriate leveling look like? Would we actually prioritize all the activities the team does? And then we answered as if we were starting from a blank slate. We took this work and used it in conjunction with the effort we started in the summer of 2022 to return to our lean and fit self by reorganizing around an ideal structure. While this is not the work anyone enjoys, being lean is a key part of our culture and partly why we think we've out-executed others over the last 20 years. The key here is that we are comfortable being frugal around headcount. We're excited to welcome a group of new college graduates this summer, and we'll allocate those hires to the key teams and efforts that will provide the biggest gains, all the while growing the foundational base of talent in the company who can rise through the ranks in the years to come. This enables us to move forward against an ambitious set of growth initiatives while at the same time see our team thrive in a workplace where they have fewer obstacles, fewer meetings, and fewer boxes to tick off to bring these initiatives to fruition. Many of you asked if the decision was made in reaction to what we're seeing from the macro, and the answer is no. Our intent was to address the structure of our org in a way that will unlock productivity gains, not just for one or two quarters, but for years to come. However, as we shared in our press release from last month, our category does remain challenged with softness persisting through the start of the year. I was recently at the furniture market in Las Vegas and had the opportunity to speak with many of our suppliers. We heard that January was weak, though a short bout of extreme weather was clearly one factor. While uncertainty remains around the timing of a recovery, we are well positioned to see meaningful upside as the spending climate around the home and housing rebounds, and we continue to see our own growth well outpacing the category. It's important to call out that our success is not exclusively against smaller home-focused competitors. We're also seeing share gains against some of the biggest retailers in the country. I mentioned earlier that we've been able to win through execution gains driven by a more nimble, focused team, and we've been encouraged to see that play out across the organization. One area that I'd like to highlight today is our UK business, where we've seen a noteworthy inflection in share over the past year. The UK is a key market for us with an addressable market estimated to be in the $60 billion range. While the competitive ecosystem has strong similarity to the U.S., with a mix of a few multinationals, a number of large multi-category retailers, several homeware specialists, and a long tail of smaller competitors in various niches within the category, the actual list of names looks almost entirely different. The market fragmentation works to our advantage as we are one of the few skilled players that focuses exclusively on the home. Over the past year, we've driven healthy market share growth on the back of considerable availability improvements double-digit percentage growth and small parcel speed badging, and meaningfully more competitive prices. This was fueled by our operational efficiency initiatives that drove considerable savings dollars, some of which we were able to pass back to our customers. Our aided awareness in the UK is nearly as high as the US, and we've seen an encouraging increase in customer satisfaction scores since the same time last year. Just as we do in Canada and Germany, we take a country-specific approach to servicing customers in the United Kingdom. Our creative is specifically built to emphasize UK tone of voice, along with using UK homes in our television ads, which you can view on our UK-specific social channels. Leveraging our strength in logistics and our six UK Wayfair delivery terminals, we bring our UK customers a best-in-class fulfillment experience with services like scheduled delivery and white glove upgrades, while also opening up a wider selection from suppliers based in continental Europe. we find that UK competitors frequently have much lower levels of selection, which makes our endless aisle even more compelling and positions Wayfair as an unparalleled option in the market. Now, before I hand it over to Kate, I want to take a few minutes to address three of the topics around which we've heard the most interest. Let me start first with the Red Sea and ocean cargo situation, which we've gotten many questions about over the past couple of months. Like many others, we've seen some supply chain disruption. especially for our product being shipped to Europe through the Suez Canal. We've seen our carriers implement interim solutions, including routing shipments around the southern tip of Africa. It's important to keep in mind the minor scope of supply chain disruption this poses in contrast to the type of disruption we faced back in 2021. These new routes increase shipping time on a much more manageable basis than we faced in 2021, and availability across our catalog has seen no meaningful negative impact. Container prices have risen, but nowhere near the order of magnitude the industry faced a few years ago when rates reached $20,000 per container during the COVID crisis. So the net is that while rates have risen, it is something we're very capable of managing without issue, and we're already solving for that today. The second topic we've received questions on has been average order values. We know this has been tracked quite closely in recent quarters as the inflationary pressures for many of those same supply chain challenges have now finally worked their way out of the inventory picture. Our AOV peaked in the second quarter of 2022, and by the end of that year, we began to see prices decline. We lapped those initial price drops this Q4 and saw that normalization process happening a bit more rapidly than we expected, due in part to mix shift. We still anticipate seeing some modest negative year-over-year comparisons during the front half of this year, as we approach a fully normalized pricing state mid-year. The third topic we know investors are acutely focused on is the volatile macroeconomic backdrop, as the category quickly approaches a new record for a peak-to-trough correction. As we said consistently, our focus is squarely on controlling the controllables. You've seen the enormous progress we've made on our cost structure in the last 18 months. As part of our press release from January, we called out that we would expect to generate over $600 million of adjusted EBITDA this year on a hypothetical flat revenue scenario, which would translate to a margin north of 5%, putting us in a position to check the box on step two of our profitability ramp. And that only captures part of the substantial leverage we've unlocked in our model with our true earnings profile further augmented by the reductions we've brought to bear on equity-based compensation and capital expenditures. With all the work we've done to optimize our fixed cost base, we'll see even further benefits to the bottom line when the category recovers. as the high margin on flow-through of each incremental dollar of revenue will drive up the margin rate quickly. It's important to reiterate that our work on cost savings hasn't deterred our focus on delivering a best-in-class shopping experience. For example, we recently launched free white glove delivery on certain large parcel items, which we combined with deluxing, where our delivery agents unbox an item, inspect it for any flaws before the final delivery, and greatly enhance the customer experience. to seamlessly set the item up in the customer's home and make sure it's immediately ready for use. This is only possible to provide nationally with the scale and focus that Wayfair brings to the category. And it's one of the many factors behind a return to positive active customer year over year growth this quarter. We're eagerly looking forward to demonstrating the growth potential of our business as the category recovers. And I want to end by calling out some of the things I'm most excited for in 2024. The first is the launch of our Wayfair branded store this May. We're delighted to showcase the breadth and depth of our catalog in an entirely new way and can't wait for you to see it. The second is the launch of our new brand campaign, which will roll out in mid-March. We're bringing a vibrant refresh to the Wayfair brand with new merchandising, new marketing, and new ways to connect with our shoppers. The third is our plan to launch a tender neutral loyalty program this fall. a new opportunity to create a differentiated shopping experience for our customers to keep them coming back time and time again. We have a lot of exciting things underway to help us keep driving compounding gains. With that, let me turn it over to Kate to walk you through our financials.