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 Konine, 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 10K 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-GAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. These non-GAP financial measures should not be considered replacements for, and should be read together with GAP 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-GAP financial measures and reconciliations of any non-GAP measures to the nearest comparable GAP 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 use 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 outworthy 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 dollar range. While the competitive ecosystem has strong similarity to the US 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 scale 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 way for 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 ready 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 happen a bit more rapidly than we expected due in part to mix shift. We still anticipate seeing some modest negative -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 see 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 -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 Wafare 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 Wafare 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 Wafare 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.

Thanks, Neeraj, and good morning, everyone. Let's dive into our fourth quarter results, beginning with revenue. Net revenue for the quarter came in at $3.1 billion, up .4% from the same period last year. Orders grew by .7% year over year, and we saw active customer growth return positive, up .4% year over year in the period. As Neeraj discussed earlier, average order values came in higher than expected, down only .5% against the fourth quarter of last year, as we saw a boost from our performance in higher ticket classes during the holiday shopping season. I want to touch on the top line in macro context a bit before going further in the P&L. As Neeraj shared in his remarks, our category broadly remains under pressure. Within this context, we are very encouraged by our ongoing share gains and our continued ability to outpace the category. We've started this year with the best share figures we've seen across all the data we have in our credit card panel, back to 2018. As we've shared previously, the share capture can be attributed to the return and strength of our core recipe in Q4 of 22, as we improved availability, speed, and price, driving a -in-class customer experience. All of course, in the context of also aggressively managing our cost structure and driving profitability and free cash flow. I'll now move further down the P&L. As I do, please note that the remaining financials include depreciation and amortization, but exclude equity-based compensation, related taxes, and other adjustments. I will use the same basis when discussing our outlook as well. Growth profit came in at .4% of net revenue. As we saw the typical effects of holiday seasonality play out in tandem with our own proactive reinvestment of some operational savings that we had achieved earlier in the year. Customer service and merchant fees were .2% of net revenue and advertising was .2% of net revenue. Once again, there is a holiday effect here, which drove the sequential step up in advertising dollars spent. Finally, selling, operations, technology, general and administrative costs for SOTG&A came in at $447 million for the fourth quarter. That was the impact of our work in 2022 and 2023 on driving fixed cost efficiency. We took SOTG&A down by over 13% in the full year 23 versus 2022, and that doesn't even capture the progress we made on reducing capital expenditures and incremental dilution from equity based compensation. Altogether, we had a third consecutive quarter of positive adjusted EBITDA at $92 million for the period or 3% margin on net revenue. Our US segment drove $131 million of adjusted EBITDA at a .8% margin on net revenue, while our international segment adjusted EBITDA loss of $39 million was less than half the loss we had in the same quarter a year ago. We ended the year with $1.4 billion of cash and equivalents and $1.9 billion of total liquidity when adding the capacity from our undrawn revolving credit facility. Net cash from operations was $158 million, which was offset by $96 million of capital expenditures for free cash flow of $62 million for the fourth quarter and our third quarter in a row of positive free cash flow. Now let's turn to guidance for the first quarter. Beginning with the top line, quarter to date, we are trending down in the mid single digits year over year, and we would expect the full quarter to end in a similar place. We are continuing to win share among consumers, but see the weight of a category correction now rivaling the great financial crisis dragging on top line growth. To put this in perspective, our read of various data sources shows the category declining year over year now for nine consecutive quarters, with the last six quarters exhibiting double digit contraction. Although the timing is inherently uncertain, when macro pressures on our category and interest rates eventually ease, we are set up to benefit meaningfully on revenue growth and profitability flow through. Moving on to gross margins, we would continue to guide you to the 30 to 31% range at the appropriate place to model. As we've said for over a year now, we intend to be very tactical in our decisions around investing some of our gross margin back into the customer experience. In light of the volatile start to the year for the category, we anticipate that we will continue to prioritize those investments. Customer service and merchant fees should be between four and four and a half percent of net revenue, reflecting some of the cost takeout from the workforce realignment plan we enacted last month. We expect this to trend closer to the 4% mark as we run rate the full savings by Q2. Advertising should stay in an 11 and a half to 12 and a half percent range, and SOTG&A should be in a range of $410 to $420 million. Following this guidance through, we would expect adjusted EBITDA margins in the positive low single digit range for Q1, which we would expect to be a low point both on a dollars and margin basis for the full year. While we don't offer full year guidance, I want to refer back to remarks we made on our third quarter call. It is critically important for us to deliver on our commitment of substantial adjusted EBITDA growth in 2024. We have multiple levers at our disposal to drive adjusted EBITDA independent of the top line. Even if the macro environment remains challenged across 2024, we have line of sight to full year 2024 adjusted EBITDA growth north of 50% year over year. As you are modeling, it's worth bearing in mind that the first quarter is typically the period where we see an initial outflow of cash during the year, given our negative cash conversion cycle, which reverses as revenue builds in the spring. Now, let me touch on a few housekeeping items. You should expect equity based compensation and related taxes of roughly 110 to $130 million, reflecting the healthy progress we made on cost takeout. Depreciation and amortization of approximately 103 to $108 million. Net interest expense of approximately $5 million. Weighted average shares outstanding of approximately $120 million and capex in an 80 to $90 million range. As I wrap up, I want to spend a moment addressing the topic of capital structure planning as we look at the maturities coming due over the next couple of years. The meaningful improvement in our financial profile over 2023 in combination with the cost action we took last month has given us broad optionality and managing the convertible notes that come due in the fall of this year and 2025. Looking at the macro and our own cash flow profile, we are prioritizing prudency. Our goal, as always, is to maximize value to wayfarer shareholders, and we are extensively evaluating the best timing and options to achieve this. Due to the hard work of the last year, we believe we've expanded our option set. For example, the improvements in our pro forma financial profile enable us to pay down the notes in cash and remain opportunistic around any potential refinancing activity. Before moving into Q&A, I would like to return to what Neerj touched on earlier. 2023 truly was a year of meaningful progress for Wayfair. Our market share gains and a return to active customer growth clearly show that we are the premier shopping destination for the home. This foundation positions us incredibly well to reaccelerate toward the growth algorithm we laid out at Investor Day once the category stabilizes. As importantly, we have made considerable improvement up and down the cost structure with a clearly demonstrated discipline that carries forward to 2024 and beyond. The combination of these elements, along with all of the exciting innovation we have in store, makes me more confident than ever about the bright future ahead for Wayfair. Thank you, and now Neerj, Steve and I will be happy to take your questions.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Your first question comes from a line of Simien Gutman from Morgan Stanley. Your line is open.

Hey, good morning, everyone. I wanted to ask first about the spread of your share gains -a-vis the industry. If you can contextualize it all where, I don't know, e-comm or total industries trending, and then what gives you confidence that spread holds throughout the year or could even expand?

Thanks, Simien. This is

Neerj. Sure. Let me answer that. So first on market share, obviously there's a lot of ways to calculate market share. I'd say our main two ways we do that are we have a credit card data set we get, which has close to 100 competitors on it, and that gives us really good granular data at the competitor level and in total. The second is we talk to our suppliers regularly, and they share how we're doing, and they'll share their data with us. We share details relative to specific competitors. And while that's less of a quantitative read, that's a pretty dense detailed read, and so we use those two. But if you zoom out, the easiest one is just to look at our revenue, right? And if you zoom way out, you see our revenue was up just under half a percent in the quarter year over year. I think if you look at competitors, depending on the category you pick, you're going to see numbers negative 10, negative 15. You're going to basically see numbers even maybe higher than that. Some are going to be negative 20. That's where the category was year over year. So obviously that delta is the share that we took because obviously the revenue is customers voting with their dollars. That's the market share. So we're, you know, the way to think about it is for five quarters now, so the fourth quarter of 2022, we've been taking away, taking share. And that was basically on the back of availability and price started to recover post-COVID in the summer of 2022. By the fourth quarter of 2022, we had that recipe back intact. So we very quickly started picking up the share, the low hanging fruit of the share. But then even though that got hard after that, as we hit all time highs, we've continued to take share. And so our all time high, we keep hitting all times highs in market share as the quarters go by. And so what we would expect to happen is that you're going to see the category for a period of time, you know, in the near term be challenged. So, you know, the year over year numbers for the total category will be, you know, not great. And you're going to see us outpacing them significantly, thereby picking up incremental share, continuing to hit all time highs. So I don't know if that helps with the context of what we expect, but, you know, that's sort of the way we see it. And then the only other comment I would make is obviously we would expect the category to subsequently recover, you know, the cyclical category. And, you know, it was interesting, I was reading a note someone put out about the Home Depot call the other day, you know, Home Depot is a well run company, but obviously is in the home category as well. And they're talking about how certain segments are, you know, challenged right now, what have you. But the note talked about is how from a cost and a revenue potential standpoint, they're really poised for huge gains once the category recovers. And what I will point out is like, that's also how we feel we are. So in other words, we're taking share while it's really hard to take share as the market's shrinking. It's a challenging time to take share as the competitors don't want to give up share. But we've taken up two billion dollars in cost, you know, close to it. We we've gotten ourselves with a unit economics are very strong. We've got customers really responding to what we're doing. You see that in the market. You'll see on the active customer count, which is picked up. And so as as the market turns and demand comes back, I think you're going to see quite a nice acceleration in revenue and profits as well. So while the market's tough, you're going to see us continue to take away just with the execution we're doing. And then you're only going to see that get a lot better as the market recovers.

And to that point, and this will be the follow up as sales recover, what is the right way to think about incrementals for every point above zero? And then alternatively, if it stays negative for the medium term, is there a way to think about decrementals?

Yeah, sure. So I think the way to think about so actually, one thing I'll just put a today along with the earnings call materials, one of the things we released on the investor website is our annual shareholder letter. And, you know, as title says, annual, we only do that obviously once a year. So it's an opportunity to look out to the future and for us to share our thinking on a bunch of topics. And I really encourage everyone on the call to just take a few minutes and download that and read it. It's right on the IR website, because there we can really share some detailed thinking about what we're focused on, which is not so much the near near term focus as the call tends to be. But one of the things I do mention is how we think about how we're poised for future earnings. And I talk about how the next billion dollars of revenue would flow through in the mid to high teens on EBITDA. And that's basically the concept. We have fixed costs in the business and we get to leverage those as we grow. So there's that's hopefully your point on kind of how

what's

the incremental potential look like.

And hey, I mean, it's Kate, good morning. I guess what I would add to that, too, you know, you asked sort of going the other way. And in the prepared remarks, I referenced that comment that we made on the third quarter fall around substantial EBITDA growth. And I said, you know, somebody respective of the top line, we expect to see 50 percent EBITDA growth as really a floor. So even with, you know, ongoing challenging macro or in your scenario, you know, a potential contraction ongoing, we would still expect pretty significant EBITDA growth in 2024

due to the cost actions that we've already taken.

Thank you both. Your next question

comes from the line of Alexandra Steger from Goldman Sachs. Your line is open.

Great, thank you so much. So you've been very clear that reducing headcounts over the past few months has been a efficiency and productivity within the organization. Where are we in that journey? Do you think there is more room for efficiencies? And when do you think it's actually the right time to start rehiring grow headcount again? And then my second question for Kate, could you just elaborate a little bit more on your Q1 revenue guide in terms of drivers behind the outlook and the factors that are inside versus outside your control? Thank you.

Why don't I answer the first part and then I turn it over to Kate for your second your second part there on the productivity, efficiency, gains, headcount side. I think the way to think about it is we we obviously did reduce headcount our last 18 months, but this last time what we did is we did it with first and foremost an eye to what we thought a very efficient organizational model would be. Versus a cost savings target or something like that is the initial going in goal. And so we think we've set up what will be a very efficient organization. There is some headcount we will add to that, but it's modest in the scheme of the headcount we have and what it really does is it lets us really reformulate teams, including a lot of the more junior members of those teams, which during the covid period we hadn't hired. And so we didn't have as many of those folks on the team as would make sense from a ratio standpoint. And so with the college hires we'll join, you know, we'll have them there. But that's from a from like an incremental headcount cost standpoint. And that's not that's not a big number. And what we think is that there's a lot of productivity gains to come. And that comes from a few different things. One, it comes from with the organizational model we set up, we think it enables folks to move faster and get more done. We're already seeing early signs of that. Second, we think then a lot of people are in new roles. So then as they get settled in, as they're executing, we think there's compounding gains there. And then the last piece is we've spent a lot of the last couple of years on a technology transformation and replatforming our core technology stack. And as we're nearing the later stages of that, we get a lot of gains from when we build feature function on a new the new technology is much faster to build and much more flexible. And those gains will come in the future. But we're nearing that point. So we're quite we feel quite good about how productivity will continue to compound as we go forward.

Yeah. So, Alexander, on your revenue question, a few thoughts there. Obviously, the macro context is the macro context. We don't drive that. But we have been focused for the past six quarters on controlling what we can control. And as it pertains to revenue, a key piece of that is the recipe. So price, availability and speed. You heard your speak to that. That's been driving our share gains. And we think we've done a really great job driving gains in what has been a challenging market. As it particularly pertains to this quarter, we're obviously sitting on this call deep into the quarter at this point. And so I just point you to that as you think about our quarter to date

number and referencing that is generally what you expect for the quarter. Great. Thank you.

Your next question comes from

a line of Brian Nagel from Oppenheimer. Your line is open.

Good morning. Thanks, as always, for all the details. So I have a couple of questions here. I know the first one is going to be a top line guidance you've given here for Q1. Should we should we interpret that to mean that if you're down mid single digits, that the backdrop for wavering has actually gotten more difficult here? And I recognize there's a lot of seasonality and such. But as we've gone from Q3, Q4 and then into Q1, has the backdrop actually gotten more difficult? Then my follow up question, unrelated, thanks for all the details there with respect to the balance sheet. I guess maybe if you could help us understand better, you obviously reposition the business extraordinarily well. You have a better year, a better cash position, cash flow position. But how do we think about the timing of some of these actions on the balance sheet?

OK, great. Why don't I on your first part of your question where you talk about, is the backdrop getting more difficult? I think what you're referring to there is, has the macroeconomic climate gotten tougher? I think that's kind of where you're going with that. And we would say yes. We would say that the macroeconomic climate has gotten tougher. I think that is what we just read comments from a lot of other retailers that have made public comments. That's what I think you're hearing broadly. We've seen that in the credit card data. And I was at the Vegas furniture market, which I referenced earlier, and January was particularly tough. Now, there was some bad weather in there that was temporal. So things have gotten a little better since. But the market is softer than you would have, you know, than you would have thought it would be if it was kind of like sequentially just kind of modestly seasonality adjusted flat. So I'd say the macro has gotten tougher. But I will also point out the macro, the depth of the macro drawdown now is quite significant. So it's kind of like, again, someone I forget whose note it was, but they referred to like demand bouncing along the bottom. And I think that's kind of like generally what we would think it roughly is. But you can't predict the macro. So that's why we focus more on the internal execution, on the recipe. We focus on the internal drivers that we know will let us take share, that will let us outcompete others and do well, regardless of what the market size is. And we've just in this quarter to date, so not the fourth quarter, but the first quarter, you know, our market share is, you know, has continued to climb. So, you know, we're still hitting all time highs. We're continuing, meaning we're climbing, you know, we're hitting new all time highs.

Yes, thank you for that question on capital structure. You know, as you pointed out, we've made significant changes in the profitability and the free cash flow nature of the business. And that broadly gives us optionality around capital structure. So, as I said in the prepared remarks, one of those options actually is to pay the twenty twenty fives off in cash. And, you know, we think that is a good and viable option. That said, we're very focused on what is most economically efficient for our shareholders and best for the business. And we intend to be prudent and thoughtful. And so we continue to vet a wide range of options from cash payments or refinancing to a combination with regards to a question on timing. You know, it's worth noting that each quarter that our financial profile continues to improve and our free cash flow generation improves, obviously, the cost of capital for us continues to come down. And so there is some benefit there to the timing

as well.

Very helpful. I appreciate it. Thank you. Your next question comes from a line of Anna Andreva from Needham. Your line is open. Anna Andreva, your line is open.

Apologies. Good morning, guys. Thanks so much. Can you talk about if you're seeing anything different with demand across various household incomes? Is it the lower income consumer that's more pressured so far in one queue? And also curious on performance of other high margin brands in a portfolio outside of a core Wayfair banner? How did the specialty retail and the Wayfair professional perform? That's either in the fourth quarter or so far quarter to date. Thank you so much.

Thanks. Thanks, Anna. So a few thoughts on that. So first, you know, you do see demand get increasingly pressured as you move down the income levels. So, you know, obviously you would expect that, but we see that in our data and we also see that in the macro data we get from particularly some of the banks, the credit card companies. So I'd say that trend is pretty clean and pretty obvious. And so, you know, I think there's nothing surprising to that, though. Then in terms of our brands, when you talk about kind of our brands, the specialty brands, which kind of play kind of above mass and then the luxury platform, Paragold, which plays above that, you're seeing that those higher hiring ones are doing quite well. And, you know, Paragold, I mean, the luxury market is much less competitive, but it's growing at very significant rates. And, you know, part of that is, you know, it's smaller than Wayfair, but we have small market share everywhere. It's just, you know, that's a relatively young brand for us. It's executing very well. And as we mentioned a minute ago, that higher end market is less pressured. So it's a much better place. It's growing, you know,

significant growth rates. Your next question comes from a line of

Colin Sebastian from Baird. Your line is open.

Thanks and good morning. I appreciate the opportunity. Maybe one quick follow up on the last question around customer segmentation. I know there's a lot of curiosity around emerging competition in e-commerce from Asia, including expansion of the home category. If that's something that you foresee impacting prices or competition, what customer acquisition costs or is that more likely limited to the lower end consumer segment? And then maybe secondly, in the shareholder letter, I was intrigued by some of the comments on logistics around additional services that you're building on top of that infrastructure. And just curious for maybe a little more color on is that adding new revenue opportunity or is that more about creating additional efficiency, obviously, you know, in terms of competitive differentiation, there's some interesting stuff happening there. Thank you.

Thanks, Colin. So first on your first part of your questions around the customer segmentation, and I think basically your question is sort of like the kind of growth of Tmoo and Shein and TikTok Shop. And so what what role do you see them playing from a competitive standpoint for us? What I would say is what we're really seeing is where they compete is that the very low end of the market, both low end quality wise and kind of ticket size. And so that's where their volume is. That's what they're known for kind of with customers for. I think that's where you see Amazon obviously lowered their take rate at the low end of certain categories, I think, because it's kind of out of holiday competition there with those folks for. And I think some of the other folks who sell kind of smaller odds and kind of, you know, referencing, we have not seen them really be a competitor in, you know, we obviously we go focusing home. Many people have a home business. The question is, what do they really sell in home? What are the subcategories and what tranches of them do they really play in? And that's where you start seeing, you know, the diagram overlaps and not being necessarily very large in certain places, and they are much larger in other places. So we have not seen these folks be competitors. Also, some of them are very large advertising spenders, and we have not seen them really be a player when we look at the share and who our competitive set is in certain of the lower funnel advertising things like Google PLAs and Google search or some of these things that are highly targeted and high intent. We don't see them being players there. And as you go upper funnel, things like display or things like television, these are vast markets where no one competitor or two competitors move that market and you're not necessarily competing with named specific competitors. Those markets are more broad. So we haven't seen them be competitors. Now, we obviously watch all our competitors and what they're doing and how things are evolving, but we feel very good about what we've built for differentiation in home around the shop ability, around the delivery and logistics, around a set of things that, frankly, or, you know, unless you focus on these bigger, bulkier items and the home goods in particular that are prone to damage, I don't think you can necessarily tackle those things very easily. So we feel very good about that. And then to touch on the second part of your question on logistics, you know, and you said, hey, you know, in the shareholder letter, I talked about logistics for a little bit and you talked about, you know, do these create revenue opportunities or do these create cost efficiencies? Well, the answer is they can create both. And, you know, just one example I'll highlight, which is kind of a service offering that makes a lot of sense for us to provide doesn't make a lot of sense if you don't focus on our categories very deeply would be something that's relatively new, but that we're that we've been working on and we'll start to roll out, which is consolidating delivery. So consolidating delivery, it allows you, you know, whether you're moving houses or you're doing renovation or you're an interior designer doing a project for a client or, you know, if you want all the items for your bathroom remodeled for a contractor to show up at a given day or you're helping your son move into an apartment, you can basically pick a order of a set of large and small items, pick a date in the future that you want them all to be delivered and they can then be delivered at the same time on that date in the future. So from a customer standpoint, you can see how in certain use cases that's incredibly convenient. It'd be very helpful for the customer for that to happen. And so you can imagine then the customer would be inclined to buy more of those items for that use case or that project from you because it's going to be easier. They'll all come together at the same time. And so maybe you wouldn't have bought that coffee maker from us. But if it's going to be one of the many items you want delivered at the same time, you might as well just buy it from us instead of buying it somewhere else, even though it's more of a commodity item or what have you. So you can see that growing revenue. But then from a cost efficiency standpoint, as you can imagine, delivering things one at a time is less efficient than delivering a lot of things all at once. And so when you have a logistics network where we have fulfillment centers, we're picking up from suppliers, we have over the road transportation, moving goods down the chain towards where they're going to be delivered from, we have these delivery terminals. Given that we have that infrastructure, you can then with with software, you know, which you have to build, which is, you know, complicated. But as you have that, you can actually lower your cost of delivery while improving the customer experience and growing revenue. So you get these combination effects. I picked one that happens to just be an easier one to explain. There's a lot of other benefits and various things we're doing. So we think the logistics runway is a real one. It's significant and it still has a lot of a lot of room for us to build a kind of good customer experiences there.

Great.

Thanks, Neeraj.

Your next question comes

from a line of Christopher Horvitz from JPMorgan. Your line is open.

Thanks. Good morning, everybody. So as you think about a couple of questions. So first, as you think about the flat scenario and six hundred billion plus of EBITDA, can you help us think about, you know, how that plays out down the P&L? Would you expect, you know, gross margin to expand in that scenario? If you go back to the analyst day, a lot of the long term margins are going to be in the potential is in the gross margin line or is it simply, you know, more weighted to the lower cost on the SOT G&A line? Thanks.

Yeah. Hey, Chris, good morning. I'll

start with that. So it really is more of the cost takeout that we took out in January and seeing that flow through. So I would think about gross margin, you know, staying in that 30 to 31 percent range, which is where we've guided to and obviously where we averaged for 23 where you're going to see the cost savings from January hit on the P&L. That was actually in two places. One is on the customer service and merchant fees. We said of the 280 million total takeout. And again, that was net. So that included the hiring back. But of the 200 million, 280 million total takeout, one hundred and fifty million would hit down to the adjusted EBITDA line of that. 25 million within that customer service and merchant fee line. And so, you know, when I guided, I said that would come in a little bit more going forward. And then 125 million of that was on that SOT G&A line. You actually saw that in the guide. You know, if you take the Q4 SOT G&A number and the midpoint of the guide, you'll see that 125 million savings there. So really where you see the pickups are on customer service and merchant fees on SOT G&A. Gross margin ACNR say about where they average in 23 for that hypothetical, you know,

600 million on a flat revenue scenario.

And is that because the long term gross margin issues are more sales dependent, you know, versus, you know, an opportunity to continue to take costs out? And as just as a quick second follow up, the worst case plus 50 percent EBITDA in 24. Is that does that assume that the current trend of the business is down mid single digit sticks to the rest of the year? Thank you.

So let me answer the first part of your question first on the gross margin. So first, we remain very confident in the gross margin opportunities. Obviously, we've talked about, you know, you know, getting in there. Analyst say we talked about getting to 35 plus on gross margin. That, of course, remains what we were trying to provide in that 600 million is the framework on that flat revenue scenario, just from the cost savings for this year, how you can see that flow through. We continue to see ongoing operating efficiency in that gross margin line. And we always always make the trade off of, you know, do we pass that through to the customer or do we pocket that? And as we've spoken about in the past, that's an ongoing discussion around what is going to be optimal on a multi quarter basis. And you obviously saw us reinvest some of that in the fourth quarter of this year. So ongoing opportunity there. Nothing has changed in our longer term plan. And we expect to see that to continue to pan out on your question around the 50 percent adjusted EBITDA growth. I would think about that as a floor that we're trying to set. So the top line scenario, we're obviously not guiding to the top line, but we wanted to help folks see the opportunity that we have on adjusted EBITDA somewhat irrespective of the macro condition based on all these cost efforts and the levers that we have at our disposal. You and I actually just talked about two of them. So one would be the hiring and the SOPG&A that includes some hiring back throughout the year that can be need heard as necessary, depending on the macro. And the other one on that gross margin line, we, of course, always have ongoing operating and cost efficiency there that we're pushing on. And we can choose to pass that through to pocket that. And that gives us some optionality. And it's why we feel comfortable saying that we can have that substantial adjusted EBITDA growth

irrespective of where the top line goes.

Thanks very much. Your next question comes from a line of Stephen Forbes from

Guggenheim Securities. Your line is open.

Good morning, Neeraj. I wanted to maybe expand on your curation comments in the letter, especially as we think about sort of how the assortment or the vendor base can change or how brand penetration can change over the coming years. And then maybe if you can sort of weave in how the curation strategy could or does sort of marry together with like any any mitigation strategy around tariffs.

Great. So so

what I would say is the curation strategy, which is about really, you know, building up the, you know, talk about the house brands and especially retail brands, but building up the selection in those with great items that we know customers will be thrilled with once they open the item and get it in their house and set it up and putting that kind of stamp of approval on it. Obviously, make sure it's very well priced. The logistics on it are optimized. We think we can keep, you know, building that up and adding that value to that curation. So we think what we've done so far is just the beginning of that. Now, what I would say is obviously we then are very thoughtful about which suppliers we're working with for those items, like where we're picking these items from. So we're picking these from items who we know from suppliers that we know are reliable and ones that we can work with as well and who we have a tight relationship with. Obviously, that then, you know, we can take many things into account and obviously, like where items are produced, the tariffs question really is about source of production. You know, the category I would point to that's had a lot of tariff complexity over the last couple of years is mattresses. And, you know, there's been multiple rounds where mattress sort of different countries have been assigned different kind of penalties associated with tariffs, which really inhibited production in different places. And we've obviously been very cognizant of making sure that we have a production that lets us have the quality items we want at the prices that make sense and making sure that we maintain availability, that we're not out of stock and chasing it. So that's the type of thing that we think about as we're building our assortment in mattresses, our assortment is under brands like Nora or Wayfair Sleep. And then obviously, we work with branded folks as well. So hopefully that answers your question in terms of how we think about it and the context of geographic location and supplier selection is part of how we think about it.

Thank you. Maybe just a quick follow up for you, Kate. The comments around sort of your ability to pull back on maybe the reinvestment plans for the back half. Any way to help us contextualize the spread between gross and net? If we look at the first quarter as a TGA guidance compared to the fourth quarter and and assume that's like two thirds of the benefit or any help on sort of just framing where the second quarter as a TGA number sort of troughs.

Yeah, so I guess I would help you with this. The on the SOG GNA, if you pick the midpoint of that guide for Q1 and compare that to where the fourth quarter landed, you see the 125 million of net savings show up there. Right. And so within that first quarter, you obviously had a month of comp for folks that exited in that quarter. And that's sort of offsetting what we said would be some of the hiring backs. You actually end up at that net number in the first quarter and that should stay. You know, based on the hiring plan, that should stay relatively constant throughout the year. Now, as I said, sure, is the lever for us if we had to pull and you could see us pull that lever dependent on the macro. But it's important to note that, you know, we think these hires make sense. It's part of rebuilding the pyramid structure that we think is appropriate for the ongoing growth and execution of the business. Yours referenced, you know, some of the campus hires and how those flow in and the benefit there. But generally, the Q1 guide, you know, think about that as a sort of good point on SOT, GNA throughout the year based on

the current hiring plan.

Thank you. Your next question comes

from a line of Oli Wintermantel from Evercore ISI. Your line is open.

Yeah, hi, guys. I had a question. And Neeraj, you mentioned three things that you're excited about in 2024. One was the new campaign in March and then the loyalty program. Maybe if you could spend a couple of minutes on explaining what that entails.

Sure. Yeah.

So, yeah, I mentioned three things I was excited about. One was the launch of the first Wayfair retail store, which opens in May just north of Chicago and Wilmette. Another one was the new marketing campaign for Wayfair, which debuts in mid-March. So that's the campaign that you'll obviously the most notable place you'll see it on is in television, but it really carried through all the different channels. We're really excited about it. You'll see it very shortly. But the whole goal is to continue to build brand loyalty for Wayfair and tell the story to make sure customers really understand the breadth and depth of what we offer and why Wayfair should be the place to go to for all things home. And so we think that this campaign can further that depth of understanding and continue to build real understanding and ultimately preference for what we offer. And the third one, which you're asking about, is the tender neutral loyalty program. And the tender neutral loyalty program, the way to think about it today, what we have for a loyalty program, all the benefits of the program are associated with having a Wayfair credit card. So you have to get a Wayfair credit card, either the MasterCard that's co-branded with Citibank or just the Wayfair specific store based credit card. And then there's different rewards, benefits that are associated with that. But we don't have a broad based loyalty program that works regardless of how you choose to pay. And we think that there's a real opportunity for that, which could also help us, you know, not just provide customers with enhanced benefits, but help make us the more top of mind place for all things home. It creates significant incremental revenue and drives significant profits. So we're going to launch that later this year. You know, we've internally kind of figured out the framework of what that is, but we need to build the technology to support it and the marketing plans for it and to roll it out. So that's coming. But the reason I refer to it is we know that customers love us and we think, A, there's the opportunity to deepen our understanding of what we do. That's where the marketing campaign comes in. And we also think there's a lot of things we can do to just cause them to come to us far more often. And that's where the tender neutral loyalty program plays a big role.

Thanks very much. Good luck.

Thank you. Your final

question comes from a line of Curtis Nagel from Bank of America. Your line is open.

Good morning. Thanks for taking the question, Kate. Just go back to one queue and the guidance. Just curious if you go through this kind of the range of outcomes within the mid single I'm sorry, the low single digit. Even how much is that based on the ranging of the gross margin? You know, how much of that is revenue? Right. I think anticipation is it continues into low single. So mid single. So if that got better, what would that mean? But just walking through kind of the most important to where the biggest, you know, things that could could drive variability within that low single would be really helpful.

Yeah. So, you know, Kurt, obviously we're somewhat

unique about the first quarter. We're guiding, you know, somewhat seven weeks into the quarter. We said the trend on revenue is quarter to date that negative mid singles. Obviously, if trend on revenue improves, certainly you see more flow through. Right. And, you know, that could be variability on the bottom line. But generally speaking, that's what we've seen so far. Quarter to date, we've maintained that 30 to 31 guidance range on gross margin. You've seen that hit us hit that very consistently over the last several quarters. And then obviously on the ACNR and the ad spend, that being another line that you've seen as, you know, bring that into that 11 and a half, 12 and a half very consistently over the last several quarters. Those being two of the more somewhat variable pieces there. Certainly, you know, if revenue were to accelerate from here, would you see more flow through to that low single digits number? Absolutely. But again, pointing to the fact that we're in the third week of February, we're into the quarter and we see, you know, negative mid singles at this current time.

OK, that makes sense. And then just a quick follow up on the AOV. It sounds like it was impacted and certainly more than you expected from, I think you said mix, but can we just dig a little bit more into what, you know, change, could you have such a radical change with it, you know, anything you did or, you know, anything like as a customer perspective?

Yeah, so I think the thing about AOV, I think what I was trying to describe is actually the real phenomenon in AOV over the last year and a half has actually been that all the ocean freight inflation then reversed and has come back out. And as that's come back out, you've seen AOV drop. That's been the primary driver of AOV. But then as you start anniversarying where it drops, so in other words, it started dropping in the fourth quarter of 22, the subsequent drop to the following year is not going to be as high because a lot of the drop had already happened. Right. And so we're just in the latter stages of anniversarying that deflation coming out. So over the next couple quarters, that all that deflation will come out a year ago. And so then AOV will not really be moving for that reason anymore. And I was trying to say is that AOV can move for many reasons. Right. It can move for mix of our brands. It can move for category mix. It can move for mix due to seasonality. And those are primarily the things that move AOV. It's just that the phenomenon over the last year where it's come down a lot is due to the deflation. And we're nearing the end of that. And so you should expect AOV to not necessarily drop as much because we're now finishing the anniversarying of that AOV. So that was more just kind of the question I was trying to answer earlier.

Okay. Got it. Thanks very much.

Thanks.

And so I just want to thank everybody for joining on the call. One more plug just to encourage you to read our shareholder letter, which is on our Investor Relations website, which we think you'll enjoy. And obviously we think we're poised for really great things both in the tough macro while we can take share. And then as things recover, obviously significant event gains to come this year, regardless of the environment. And we're seeing great customer success. So thank you very much for your interest and wayfarer.

This concludes today's conference call. Thank you for your participation. You may now disconnect.