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Operator: Thank you for standing by. My name is Christa, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Wayfair First Quarter 2024 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to James Lamb, Head of Investor Relations. James, you may begin your conference.

James Lamb: Good morning, and thank you for joining us. Today, we will review our first quarter 2024 results. With me are Niraj 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 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, 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 Niraj.

Niraj Shah: Thank you, James, and good morning, everyone. We’re excited to reconnect to discuss our Q1 results today. The first quarter ended on an upswing, as we saw the category show signs of improvement in late February and March following a challenging start to the year with our own topline results also reflecting this improvement. Our revenue was down just under 2% year-over-year for Q1, which marks our sixth straight quarter of outperformance and share gain within a category that was down in the low-double-digits over the same period. Shoppers are increasingly choosing Wayfair with year-over-year active customer growth once again positive and accelerating compared to last quarter. Over the past several weeks, we’ve met with 100 of our suppliers at major industry events and the feedback has been encouraging.

Inventory levels have been in a very healthy place for a few quarters now and our suppliers are largely past the period of elevated input costs and transportation prices that they faced in late 2022. For the first time since pre-COVID, we’re seeing suppliers introducing large groups of new products into their catalogs as they look to build momentum for the next stage of growth. Across the board, we’re hearing their enthusiasm to partner with Wayfair and substantial interest to lean in behind our entire offering, joining our curated brands, being featured in our promotional events, leveraging our fulfillment solutions, taking advantage of supplier advertising, and having shelf space in our stores. You’ve heard this from us consistently for over a year now.

The sum of all our work is our core recipe further improving to the strongest place we’ve ever seen it. Availability and speed continue to set records and we see our price levels as some of the most competitive in the industry. Our offering is resonating with shoppers in a powerful way driving continued momentum in year-over-year active customer growth. Years from now, we’ll look back on the past 24 months as a pivotal moment in the evolution of Wayfair on two vectors. The first will undoubtedly be profitability as we posted our fourth consecutive quarter of positive adjusted EBITDA. The evolution of our cost structure has set us on a steady path towards the 10% plus adjusted EBITDA margin target we outlined at our Investor Day and we’re on-track to deliver on that goal.

The second vector will be market share and how years of compounding market share capture sets us up for even greater success once the category returns to stability and growth. This has been our focus for many months, ensuring that when customers are ready to lean back into spending on their homes, their answer is Wayfair. At the end of our fourth quarter call in February, I briefly mentioned three of the many ways we’re mobilizing on this goal in 2024, a new loyalty offering in the second half of the year, the launch of our first Wayfair branded store later this month, and a new brand campaign which began in March. While still new, I want to take a bit of time to talk through our brand refresh because this is the most substantial evolution to our brand strategy, creative expression, and marketing presence since 2018.

Hopefully, by now, many of you have seen our new campaign across social media, television, and email and have explored the refreshed imagery on both the site and our app. As I mentioned, our operative goal here is to make Wayfair a habitual part of our customers’ lives. When our customer decides they want to buy something new for their homes, be it a new coffee table for the living room as they get ready to host their family on Mother’s Day or a new patio set to replace the deck furniture they bought in 2020, they go directly to Wayfair. We know that no two homes are exactly the same. Shopping for home is emotive with needs spanning across styles, spaces and budgets. We know people have less time than ever. Wayfair is their solution for all things home in one seamless experience.

Over more than a decade of operating under the Wayfair banner, we built a customer file exceeding 90 million shoppers and have millions of app users. In fact, last year, we drove over 20% year-over-year growth in app installs. We have strong aided awareness across the U.S, Canada and the U.K. where Wayfair is a household brand name and we continue to grow in Germany. The next step in cementing recurring customer behavior is growing our brand preference, which will be a key in unlocking greater share of wallet. We set out a plan for a more evolved vision of how Wayfair connects with consumers. This starts with our overall brand design system made up of a distinctive brand set of elements, our logo, color, fonts and even our jingle. We’ve created a focused and distinctive set of assets that are being presented with consistency across all of our channels, starting with our logo where you’ll see a more streamlined visual and a more vibrant shade of purple.

Our logo has become the foundational brand element that defines our entirely new storytelling platform, the Wayborhood. I’m sure you can all think of great advertising campaigns that use a consistent storytelling device that endures over many years. Our goal is to one day have the Wayborhood join that list. At its center, the Wayborhood embraces the notion of home as a place where everyone can express themselves and what they love, with Wayfair as the shopping destination to make that happen for every style and every home. The first thing you’ll likely notice in our new Wayborhood ads is the cast of characters we’ve brought together. We’ve curated a list of celebrities and influencers who each bring their unique fandoms, such as Shawn Johnson East, a former Olympian, who’s built an incredible audience of new mothers through her own parenting journey, as well as others including reality TV star, Lisa Vanderpump and social media influencer, Thoren Bradley.

And of course, everyone is brought together by our long standing brand ambassador, Kelly Clarkson. Our goal is to ensure that wherever you come from and whoever you are, you’ll see someone in the Wayborhood that speaks to you in your unique expression of home. Every timeless brand evolves across a lifecycle that begins with establishing an identity. This moves on to building out an experience, which is measured by engagement and audience development. And, is where we currently sit on our brand journey. The next stage on our path is to be able to produce memorable, instantly recognizable brand content. For example, everyone recognizes the gecko that wants to sell you insurance, and that’s what you’re seeing as part of this launch. This is what takes us from being a website people know and like on the Internet to a brand presence with a fandom of its own.

The debut of the Wayborhood is the first step on this multi-year journey, and you’ll continue to see it evolve in the future as we look to speak with shoppers in entirely new ways. While you may have seen some of our Wayborhood ads on television as they debuted at the Oscars back in March, you’ve likely also been seeing them across all the other screens in your life. As part of this brand refresh, we’ve taken an expanded lens of our advertising channel portfolio, leaning in with renewed strength across many of the biggest channels on which our customers spend significant time. You’ll find these new ads across Instagram, TikTok, YouTube TV and Hulu to name a few, and our intent is to drive engagement. To give you an example, historically, our Instagram posts were largely a tool to feature specific products for sale events.

These were often met with limited attention and less robust discussion, which naturally results in less engagement. With the launch of this campaign, we’re deliberately aiming to drive more conversation and our early reads on results is quite positive, especially in ad recall, brand linkage and social engagement. As I mentioned at the outset, this lives alongside our other initiatives like physical retail and loyalty. You’ll find the Wayborhood and Motif woven throughout as those launch over the course of this year. We’re thrilled for this next step in our evolution as a brand and a platform. Critically, all the investment we’ve put behind this launch lives in the existing spend envelopes that we’ve operated again for years. As many students of Wayfair know well, all our advertising spend is carefully managed to a set of payback targets by channel and that discipline is not changing.

While we see considerable long-term benefits to making Wayfair a part of our customers’ shopping habits, don’t mistake for this as an investment cycle where ROI only manifests further down the line. In fact, we are continuing to target the same tight prescriptive payback windows across our portfolio with this launch, in large part driven by now scaling up what had been an under indexed level of investment in these newer chains. Now, before I hand it over to Kate, as we’ve done for the past several quarters, I want to take a few moments to address some of the major questions that are top of mind for investors right now. The first question we’ve heard quite often is on the threat from Asia-based competitors as a handful have made fast forays into the U.S. and built a presence over the past year.

While we continue to pay close attention to these players, we still find that there are considerable structural differences in their products and offerings compared to ours. From a size perspective, there are very few competitors in the space that can handle the parcel sizes that we manage daily as our average small parcel order exceeds 30 pounds. The other major area of difference we see is on product quality and confidence. Customers love the items they buy on Wayfair in part because of the effort we take to ensure that they know what they are getting before they click on the buy button. To differentiate ourselves further, we’re continuing to roll out more content such as videos with Wayfair product experts showcasing actual items and bringing to light their dimensions, construction and quality, all to help shoppers gain additional confidence that the item they picked will be exactly what they’re looking for rather than taking a gamble on something because it has an attractively low price.

The second big topic that’s come up recently is tariffs. Our category was one of the first impacted back in 2018 with many of the goods we sell incurring a 25% duty that remains in place today. Much has changed since then. While China remains a large center for manufacturing in our space, in the ensuing years we’ve seen our suppliers diversify their production to other parts of Asia, including Vietnam and Malaysia, and we’ve continued to expand our supplier base. In short, the industry has become more nimble following the 2018 tariffs. Ultimately, we’re confident that we’ll be able to definitely navigate any incremental pressure given the breadth of our supplier base, the changes in manufacturing we’ve seen and the catalog that we offer to our shoppers.

To wrap up, Wayfair remains a durable share gainer with multiple initiatives underway to fuel growth into the future. We’re doing this at a fundamentally higher level of profitability which will improve further from here even with ongoing investments across the business. The power of this combination is something we’re very eager to demonstrate as we continue to execute as a leaner, more focused organization. Lastly, let me encourage you to visit us this weekend. Just remember, Way Day offers the best deals of the year and is too good to miss. And with that, let me hand it over to Kate, for a walk through of our financials for the quarter.

Kate Gulliver: Thanks, Niraj, and good morning, everyone. Let’s dive into our results for the first quarter. Net revenue for the quarter was down 1.6% year-over-year, driven by orders down 1% and AOV down by just under 1% versus the first quarter of last year. Active customers grew by 2.8% against the year ago period showing continued strength. As Niraj mentioned, this was our sixth consecutive quarter of significant outperformance versus the category, which in Q1 remained depressed in the low double-digits range year-over-year. We know there is a lot of attention around when we will finally see some stability in spending on home furnishings. And, while the timing of the inflection point is inherently uncertain, it’s important to remember that this is a category where consumers have now structurally underspent compared to typical patterns prior to the pandemic.

We know that eventually the need reverts as life goes on. People get married. They have kids. Kids move out. The need for home furnishings never goes away, and over time, the category will rebound and return to its typical pattern of growth. Within that context, as we approach a back half of 2024 that comps over a declining macro for a category in 2023, we are excited to be launching the Wayborhood campaign with a new voice to get in front of our customers. As our shoppers are ready to get out and update their home, Wayfair will be top of mind. 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. Gross profit came in at 30.1% of net revenue. As we discussed in Q4, we plan to continue to take a flexible approach to reinvesting our operational cost savings into a better customer experience in places where we see a strong multi-quarter payback on gross profit dollars while balancing this with our plans for EBITDA margin expansion. Additionally, we had some non-operational headwinds this quarter that caused drag on the gross margin line, one of which was a $6 million charge or over 20 basis points for the Canada Border Services Agency review related to duties from prior years. Controlling for the non-operational costs would put us at the midpoint of our guidance range. Of course, we always see some variability quarter-to-quarter, but we expect Q1 will represent a low point on gross margin for 2024.

Customer service and merchant fees were 4.1% of net revenue, showing efficiency as a result of our cost actions in January, while advertising held at 11.9% even if we launched the biggest brand refresh since 2018. Finally, our selling, operations, technology, general, and administrative expenses, or SOTG&A came in at $416 million, down 14% year-over-year. The ongoing compression year is driven by the net impact of the cost actions we took in January with our workforce realignment plan. Altogether, we reported our fourth consecutive quarter of positive adjusted EBITDA at $75 million during the period for a 2.7% margin on net revenue. Our U.S. segment had a $121 million of adjusted EBITDA at a 5.1% margin, while our International segment adjusted EBITDA loss was $46 million.

We ended the quarter with $1.2 billion of cash and equivalents and $1.7 billion of total liquidity when including our undrawn revolving credit facility. Net cash used in operations was $139 million and capital expenditures were $54 million lower than expected for the quarter due to timing. Free cash flow was a negative $193 million. As you know, Q1 is always a cash outflow quarter due to the nature of our working capital cycle, and free cash flow this past quarter showed an improvement of over $40 million compared to the first quarter of 2023. This is despite revenue declining sequentially by a greater degree than in the Q1 period a year ago, which is the biggest factor impacting net working capital. Now, let’s turn to guidance for the second quarter.

Beginning with the topline controlling for the timing of Way Day, which took place in April last year, quarter-to-date we are trending approximately flat year-over-year and expect to end the quarter flat to slightly positive. Moving on to gross margins, we will continue to guide you in a range of 30% to 31%. As I mentioned a moment ago, we would expect Q1 to be the low point for the year. Customer service and merchant fees are expected to be around 4% of net revenue, while advertising is expected to be in the 11.5% to 12.5% range. As I mentioned earlier, even with the new brand campaign, we are maintaining tight control of our payback periods, balancing our mix across the funnel as we scale-up channels we’ve been testing for some time. We expect SOTG&A to be between $410 million to $420 million.

Just to put this in perspective, the midpoint here is over $150 million lower than where we were two years ago in Q2 ‘22 when we began our cost action plan. Following this guidance through, we would expect adjusted EBITDA margin to be solidly in the mid-single-digit range for the second quarter. As we’ve talked about for over a year now, this mid-single-digit adjusted EBITDA margin is a launching point for our journey to 10% plus margin. At our Investor Day last summer, we walked through the major drivers to get us to 10% plus. Several 100 basis points of gross margin appreciation, 100 basis points to 200 basis points from advertising leverage, and 200 basis points to 400 basis points from SOTG&A. This will be a multiyear journey as we balance a thoughtful approach to approach to driving a topline recovery in tandem with our profitability goals.

In January, we outlined a framework for 2024, where flat revenue growth would equate to over 600 million of adjusted EBITDA, reflecting the impact of our cost action, and this thought model remains appropriate now. Now, let me touch on a few housekeeping items. You should expect equity-based compensation and related taxes of roughly $100 million to $120 million, depreciation and amortization of approximately $103 million to $108 million, net interest expense of approximately $4 million, weighted average shares outstanding of approximately $122 million, and CapEx in a $90 million to $100 million range, reflecting some catch up in spend that originally had been anticipated in the first quarter. In combination with our guide on adjusted EBITDA, we would expect considerable free cash flow generation in the second quarter as is typical in a period with sequential revenue growth.

The cost action we’ve taken over the past two years has set us up for a healthy year of free cash flow generation in 2024, which will be the foundation from which we can begin to de-lever our balance sheet as we look at our upcoming maturities. Before moving into Q&A, I would like to underscore a few of the key takeaways from the first quarter. Against a persistently challenging backdrop within the category, Wayfair is outperforming as a function of our recipe health, durable market share gains, and tight execution. We’ve shifted to an offensive playbook across our numerous growth drivers, augmented by an exciting marketing refresh and the upcoming grand opening of the first Wayfair-branded fiscal retail store later this month, along with investments in long cycle efforts such as our forthcoming tender-neutral loyalty program.

Our profitability gains are solidly on-track with our roadmap, and we are incredibly enthusiastic about the future vision of Wayfair that we are driving towards. Thank you. And now, Niraj, Steve, and I will be happy to take your questions.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.

Christopher Horvers: Thanks. Good morning, everybody. I was curious on the topline. Can you talk about where you’re seeing the sales inflexion to flat-to-positive here in the second quarter? Is there any difference between more sort of short-cycle home decor versus longer-cycle furniture? And, can you also share as you think about that quarter to-date ex-Way Day, what’s your view on what the category is doing over the past month?

Niraj Shah: Sure. Thanks, Chris. Yes. So, on the topline, our business, the Wayfair business indexes more to longer cycle than the whole TAM would. And, you see that in our AOV, right? And so, I think you’ve kind of known that. And so for us, when you look at our overall revenue growth, it has to reflect the broad set of categories because mathematically the short-cycle stuff, which generally holds up better in a tough economy, can’t make up for significant drags by the bigger stuff. And so, what we’re seeing is that we are taking share in a durable way pretty much across the board, because to your second part of your question, I think the category remains weak. So, you have kind of a weak category, but what you have is even a weak category is still a very large amount of dollars.

And, those dollars are moving and frankly, most retailers are sort of flat or down, very few are really meaningfully gaining. And, we see the same data that we’ve seen since 2019. It’s ourselves, it’s Amazon, concentrates more on the opening price point lower ticket items, and it’s HomeGoods, which is brick and mortar and focused on its kind of subset of categories that are don’t overlap up particularly strong with where we play. And, you’re seeing the three of us continue to take market share. And, in the panel of AD folks, we follow a lot of the other folks, frankly, are somewhere between challenged to very challenged. And so, it’s a market where there’s things happening even though the overall market has some delays. And, you’re seeing that market share is what’s turning into the numbers you’re seeing where we can be positive in a tough market.

Christopher Horvers: And then, my follow-up for Kate and Niraj as well. On the gross margin, can you talk about what some of these, what I’ll dub alternate profit pools, the supplier services, the advertising? I mean, you’ve been trending down on comp, on sales growth for a period of time. Have those profit pools been growing and contributing to gross margin? And, what is sort of the shape of the curve look like from a contribution perspective as you move to sales growth? Thank you.

Kate Gulliver: Hey, Chris. It’s Kate. I’ll start. Good morning. So, what I would point you to on as we think about that there are multitude of factors that can help drive growth margin over time. One of which certainly is things like advertising and other sort of supplier services. And, we do think that some of that grows independently of revenue. So, if you think about advertising, we last spoke about that in-depth at our Investor Day in August. And, we said at that point that it was around 1% of revenue. Clearly, there’s a lot of opportunity there. Our focus over the last several quarters has been on sort of two-fold. One, improving the supply. We really wanted to test and make sure that we were positioning things in a way that was not detrimental to customer experience.

And so, that meant that it took us a little bit of time to work into what was the right amount of supply there. And then two, improving the supplier engagement with the tooling and making sure that that was working effective for them. So, we do think that some of these areas like advertising can grow even without topline growth. Obviously, if you add topline growth on top of that, that helps that contribute even more.

Operator: Your next question comes from the line of Maria Ripps with Canaccord Genuity. Please go ahead.

Maria Ripps: Great. Good morning and thanks for taking my questions. First, it seems like you have been sort of you had a lot of success driving sort of order growth with repeat customers, but it seems like orders from new customers have been a little bit soft last couple of quarters. Is that largely sort of a function of category weakness? And, is there anything that maybe you can share in terms of your efforts to reengage some of the labs buyers and bring kind of new buyers on-board especially as the category starts recovering?

Niraj Shah: Thanks, Maria. I guess, what I would say is, I think we’re seeing good momentum with both. Now remember, we have a lot of customers that we’ve engaged with over time and the way those metrics work is you can only be a new order once ever. So, while the active customer number, you go fall out if you don’t buy in 12 months and then you can come back and do it if you buy. The new orders, repeat orders, you would have to, but be buying for literally the first time ever, right, going back in our history. And, so when we talk about I think earlier we referenced the customer filed 90 million customers. So, that gives you, for example, a bit of a feel of like the reach. And, so what I would say is, when you see, I think it’s been roughly 2 million new orders a quarter.

We think that’s a pretty strong number considering the state of the economy. And, the fact that really one of the bigger opportunities for us is when you look at the breadth of the people we’ve encountered sometime in the last 20 odd years, we start thinking about their potential to become a habitual customer buying from us many times a year, why we’re excited about the loyalty program, why we’re excited about all the things we’re doing that cause you to prefer us more and more. That all those orders, whether you bought with us in the last year or not, those are all the repeat orders. And, that’s why that’s an 80% plus number. And so, I guess what I would say is, we feel quite strong about our performance in the tough macro that we’re in right now on both the side of the people who’ve been very engaged or in the active customer number already, as well as folks who maybe haven’t bought recently or who are truly new to us.

And, the last thing I’d touch on is when you think about the brand campaign and some of the things we’re doing, those are meant to deepen relationships with existing customers, but also draw in new customers. Obviously, things like the loyalty program coming later this year would be something that allows folks to engage with us and then drive frequency. And so, there’s a lot of different things we’re working on that we’re very excited about.

Maria Ripps: Got it. That’s very helpful. And then secondly, is there anything you can share that maybe could help us contextualize the potential contribution to sales from your large format Wayfair store like later this year and maybe even next year? I guess, how much does a comparable sized furniture store from other retailers typically generate in annual sales? And, maybe how are you thinking about sort of measuring the halo effect and potential uplift to online sales?

Niraj Shah: Yes. Thanks, Maria. Yes, so we’re excited about the launch of the first large format Wayfair store that actually opens later this month on May 23rd. It’s located just north of Chicago in Wilmette, which is sort of for those who know Chicago, that’s right in the center of a dense suburban area, which would be where we find a great population of our customers. It’s a 150,000 square foot store. And so, we think that size allows us to take the breadth and depth of what Wayfair represents and have it come to life. Hopefully, you all have a chance to visit sometime over the coming months as you’re in Chicago. We’d encourage you it’s about 10 miles north. We encourage you to definitely check it out. We obviously are very excited to see what the sales performance is and then how it plays out.

To answer your question, what do others generate per square foot and or in a size store that size? There’s a fairly wide range of answers to that actually, because every retailer is optimized in a different way, different categories that yields different dollars per square foot. And so, one of the reasons we’ve approached physical retail in this organized and methodical way, we’re only launching a couple stores for each of our brands and then iterating to make sure that we really dial it in before we then scale is to make sure that the unit economics work the way we expect that the customer loyalty that it engenders and creates, which would be both online, offline works the way that we would expect, etcetera. And, we don’t necessarily expect that you get that right out the gate.

You probably have to iterate some. And so, that’s why we’re not opening 20 stores at once, right? We’re opening one now and we’re doing it in a very measured way. We do have ways to measure the halo. That would be you take the trade radius and then you see what the pre-post lift is, what the lift is versus twin markets where you haven’t launched a store. You track customers who engage in one side, what they’re doing on the other side. So there’s a you triangulate in on it. And so, over the quarters to come, as we start to get data, we’ll share what we’re finding, but we’re very excited about the launch of it.

Kate Gulliver: Yes. Maria, this is Kate. I would add, as we look at the store, we’re focused on looking at the stores both on their standalone four wall economics, the way a traditional retailer might look at that and looking at it with a halo impact. And, as Niraj mentioned, we’ve been sort of iterating on this for a little bit of time. We have a handful of our smaller format stores open. We’ve been able to use those models to test out learnings about how to operate the store, of course, but actually to test out how to think about halo and the impact there.

Maria Ripps: Great. Thank you so much for the color.

Operator: Your next question comes from the line of Colin Sebastian from Baird. Please go ahead.

Colin Sebastian: Thanks, and good morning. I guess first off, Niraj, I mean the brand campaign is off to a good start. It might also be helpful to understand how much of that spend is a reallocation from performance or direct response channels, if that’s the right way to think about it and kind of gauging the impact on traffic or conversion from that change? And then, second of my follow-up, I guess, would be I heard your comment around app downloads was interesting. I think last year you highlighted the importance of the app in driving engagement, and then also tools like Gen AI and augmented reality. So, I was hoping maybe for an update on your efforts there to drive those downloads and usage, realizing that some of the emerging competitors are more app focused as well? Thank you.

Niraj Shah: Thanks, [Tom] (ph). So, on your first question, which is around the brand campaign and the advertising spend, what I would say is over the years you’ve seen that our top of funnel ad spend has grown, right? We started television a decade ago and that the dollars associated with that channel have grown over time. I think one of the things there are certain other channels around social and other streaming formats that I’d say we probably have under indexed in that we’re increasing our spend in. And, so to your point, whether you think of that as a reallocation or a focus on those channels, but by being tight everywhere, the overall ad spend envelopes stay the same. I think you think about those different ways, but I wouldn’t try to think of it as like some wholesale change.

There’s a shift, but it’s, we’re making sure that mathematically it’s creating a payback and an overall return on the media mix basis that actually is very good for us. And, it’s not so dramatically different than yesterday that you’re like you’re not sure what’s going to happen, right? It’s not like we’re just pulled it all out of here. We put it over there. Now, we need to see what happens. And, then I’d say the brand campaign, we’re very excited with how it started. But again, the impact of these brand campaigns when they’re very successful happens over time, that’s quarters and years. And so, we’re super happy with how it’s launched. I would say it’s very premature to say whether it will achieve what we have as very high goals for it.

But our advertising effectiveness is working very well and the vast majority of the dollars are ones that you can really track very tightly. And so, there’s really not much the room for that to be off is really not very big. The second part of your question or second question unrelated, I guess, was around mobile and apps and the engagement you talked the comment we made about app downloads and what are we doing, how do we think about that. Well, it’s been a trend that’s going on for many years now, which is that mobile is taking share relative to desktop in kind of whatever way you cut it. Mobile web is still a very big component. And then obviously, we have a vested interest for that customer to download the app because that app, it makes it much easier to keep them in the ecosystem and it’s a much, it has the state of who they are, they just click and they’re right in the middle of the experience, we can do app notifications.

And, what we’re seeing is that we are worried about the mobile web experience being great and the app experience great. And, then we’re also doing things to encourage folks to download the app and use the app, which just make their life easier and allow them to deepen their connection to us. And, there’s a whole series of things there, whether it be some of the things we can do visually with the camera, whether it be like app-only-sales, which we’ve done some of over time, whether it be other functionality we put in the app. And so, there’s a series of things we have done, there’s more we’re planning to do. And, what we’re seeing is that customers are increasing, they understand the benefits of the app as well. So, you see them moving in that direction.

And then in our case, we still worry about the desktop or large screens experience being very good. You say, well, why if it’s moving towards the app? Well, the reason is, in our category, if you’re just app focused, I think that works fine. If you’re food delivery, I think that works fine if you’re selling very low cost, very kind of items that you don’t worry about durability of. But, we sell a lot of things which people consider. They need to plan, they need to think about it. They might be putting multiple items together. They may do this over a series of visits. They sometimes use a shopping cart or other list functionality we have to create large lists and then window it down. They sort of share these with others who then are planning on these items.

So there’s a set of functionality on a large screen when you talk about something very visual with a lot of content information is very useful for. So, I think our experience is honed for our categories. And, I think that’s why we care about the whole spectrum of devices more than some others would where maybe you’re reordering pet food as a main use case. And, then I think that obviously the functionality and ease of an app is maybe all you need.

Colin Sebastian: Okay. Thanks, Niraj.

Operator: Your next question comes from the line of Peter Keith from Piper Sandler. Please go ahead.

Peter Keith: Hey, good morning, everyone. So, you’ve talked on the 10% plus EBITDA margin target, from the Analyst Day. I was hoping you could also just refresh us back to the sales growth target where I think you were calling for a sales CAGR of greater than 15%. How are you feeling about that target today? And maybe it’s just simple math that if the category is down negative low-double-digit and you get back to positive low-single-digit, you’re at your target. But, maybe flush that out for us and even some of those six drivers, Niraj, that you’ve highlighted within the target? What’s working for you right now?

Niraj Shah: Yes. So, I think you’re hitting on it really well, which is obviously we through our history have grown at a very significant growth rate and we’re still even at the $12 billion in revenue very small relative to the TAM. We have obvious initiatives across various different segments of the TAM. You mentioned, someone mentioned the forthcoming retail store or we obviously have a luxury platform in Paragould or we have businesses outside of the United States and Canada, in Germany, in the U.K. We have a B2B business, so we feel professional and that’s sizable. So, there’s you need to think about the opportunity across each one, right? And, then you add it up, that’s our total opportunity. The way to think about it is, I think you talked about really the best way to think about it, which is where are we growing relative to where the market is?

And, you talk about that excess share. And, then obviously in an upmarket, it’s easier to take share frankly than in a down market, because it’s an expanding buy versus contracting buy. And so you can see what we’re doing now, then you can think about how that would look as you said, hey, instead of this market, let’s look at the long-term CAGR in the categories for the online piece, long-term CAGR has been 12ish. What’s that baseline? Then you bridge from that baseline and you say, well, what’s the excess share we’re taking through the initiatives that we are executing on? What’s the excess share we could then take over time with the initiatives that we’re going to grow that we’re working on the early stages of, what does that add up to.

That adds up to a significant double-digit compounded growth number. And, you can kind of see that that’s real just by looking at the bridge today from where we are to where is the market and then doing some of the math I just talked about. So, I think that’s probably the best way to think about it. And, one of the things we talk about is that we can do this while we scale earnings. The way we think about earnings, I tend to think about earnings not in the way accountants like to think about earnings. I like to think about earnings in a way that really gets to the true economic power of the business, right, which is basically, sure take EBITDA, but then subtract out CapEx and subtract out the equity comp we get folks, right. And, so what is that cash that we’re generating in the business from the operations we’re doing and how can that grow?

And, when we think about these opportunities, how can that grow while we’re investing and scaling these opportunities. And, I think that’s what you’re starting to see in our financials is that we can actually be scaling the profitability of the business while investing for growth and seeing that return in the excess growth rate relative to the market. And, that’s what you’re going to continue to see play out because a lot of things we’re investing in are not even showing up in that growth rate yet, but will.

Peter Keith: Okay. Very interesting. Thank you. And, I guess part of the margin expansion and scaling would be your supplier services. I’m curious on coming off of High Point. You mentioned, a lot of conversations with suppliers. Presumably, the profitability of suppliers is better with the lower transportation costs, etcetera. But, the industry backdrop is really sluggish. So, what’s the mood of the supplier community right now to lean in on your services? Is there some hesitation or are they kind of full systems go to help get the sales trend up?

Niraj Shah: I think suppliers see that the market landscape as you said is sluggish. But, I think suppliers also see that demand is getting concentrated in the hands of a small number of successful retailers. And, they’re focused on that cohort of customers that they work with. How do I get more share with those folks, whether that be a regional brick and mortar player, whether that be Wayfair, whether that be whomever, because they see that their future is tied to the ones who win, not the broad set of customers maybe who historically had more of a peanut butter spread. The other thing we’re seeing is that they’re very forward-looking now that the inventory overhang has been worked through. They’re very forward-looking at how do I build a business.

So, we saw the largest new introductions that we’ve seen in since COVID. And, I would say larger on average than what they were doing each cycle pre-COVID. So, they’re just kind of playing a little bit of catch up and being impressive there. We’re seeing that when you think about operating on our platform, whether you’re thinking about participating in our promotions or thinking about how you price on our platform, you’re thinking about how we integrate logistics, you’re thinking about how you use our advertising service. We’re seeing keen interest because again they’re saying, hey, Wayfair is one of the handful who I think is going to do very well, how do I do very well in that platform? And, then they’ll go to their next significant customer, whoever that is and maybe that’s a 20 store brick and mortar player.

Okay, they’re winning in that geography, how do I do more with them? And they’re thinking about a very small portion of their total customer base. They’re thinking about the ones that they can win with. And so, I think now that the excess inventory has been worked through, you’re seeing a supplier focus on investing in the right spots being very high.

Peter Keith: Very helpful. Thanks so much.

Operator: Your next question comes from the line of Jonathan Matuszewski from Jefferies. Please go ahead.

Jonathan Matuszewski: Great. Thanks for taking my questions. First one was on international. Looks like profitability took a step back this quarter. So, just what’s the path ahead? Near-term, should we expect a less worse drag as the year goes on? And medium-term, how should we think about the path to initial quarterly breakeven EBITDA abroad? Thanks.

Niraj Shah: Thanks, Jonathan. Let me add a couple of comments and then let me turn it over to Kate, to give some of the specific kind of financial outlook information you asked for. So, what I would say is that in the international segment, we’ve got Canada, we have the U.K., we have Germany and we have with small business in Ireland. And, what you see is that actually each one of those is performing quite well. We’re actually now at a point where we’re taking market share in each of them. And, the unit economics in each of them has improved significantly as headed the right way. And so, a lot of what we’ve done in cost over the 18 months that started in the summer of 2022 got us to a great place across the board. And so, we’re very excited with how that’s playing out.

I would say that there’s some fixed costs. So, for prop for the inherent segment to be profitable, there’s an element of the growth needs to get to a certain level to overwhelm a certain degree of fixed costs. And, I would also say there’s some accounting things about how our corporate overhead gets spread that is in there. And, both of those will just play out over time. So, we feel good about the trajectory, but maybe Kate can provide some more details.

Kate Gulliver: Yes. Jonathan, just as a reminder, when you look at the segment breakout on international and the U.S., obviously, the corporate costs are allocated based on the revenue. And so, as that mix shift changes, the amount of corporate costs that gets allocated can shift around a little bit. I think as we look at international, as Niraj said, we’re encouraged by the signs that we’re seeing there. We’re seeing things go according to the plan. And in particular, if you look at that EBITDA loss, in the trailing 12-month period, the loss is roughly half of what it was prior. And, I think that shows really the nice improvement that we’re making there and the steady gains.

Jonathan Matuszewski: That’s helpful. Thanks for the color. And then, just a follow-up on AOV. I know usually this is an output, the consumer ultimately decides this versus an input in your models. But, it was down very slightly this quarter, less than 1%. So, how are you thinking internally about the trajectory for that? Is there anything you saw this quarter in units per transaction or trade down activity that would lead you to believe flattish trends in AOV for the second half could be potentially conservative? Thanks.

Niraj Shah: Yes. [Tim] (ph), so what I would say is like the big thing that drove AOV over the last few years was all the inflation that came in during the because of product scarcity during COVID followed by supply chain congestion during COVID. And, then subsequently as the particularly the ocean freight cost that came back down all the deflation that then ensued. Given that, that is largely behind us, what you’re back to is the dominant thing that will drive AOV over time. Broadly is more the seasonal cadence, where you have different category mix throughout the year. And so, AOV goes up and down based on that. And then, inside our business, if Paragould grows faster than the rest of the business that would raise AOV because our luxury platform has higher AOV for example.

So, you could have some mix shift. But I think you’re back to seeing a more normal pacing of AOV like you would have seen pre-COVID than those wild swings you saw during COVID. So, I think you can think of it as kind of normalized now.

Jonathan Matuszewski: Great. Thanks so much.

Operator: Your next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Thanks. Good morning. Thanks for the question. My first question, if we take the seasonality in orders from the first quarter and you take the seasonality in the AOV, it would have suggested that by the second quarter, we should be maybe flat to slightly positive and then solidly positive in sales by the back-half. I’m not asking about how conservative the guidance or I don’t know if there’s a guidance range, but is there any reason the seasonality process should doesn’t work for whatever reason? It sounds like you have advertising campaign, you have a new store coming. So, there should be maybe good guys to thinking about seasonality not bad, but making sure that that logic is right?

Niraj Shah: Yes. So, what I would say is so what I agree with is last year the category had significant deceleration. And, there was deceleration that happened in the back half of last year as well as earlier in the year. And so, the slope of last year is this negative slope. So this year, if you do not see significant macro deceleration on a sequential basis, the category compares, our compares, everyone’s compares should get much easier in the back half than they are now. And so, I think that’s what you’re pointing out mathematically to be true. And, we would totally agree with that. I think the question is maybe you don’t see as much macro deceleration this year as last year, but maybe you see some. So, maybe just rolling forward 100%, maybe that may or may not happen.

But as we said, like we’re flat year-over-year right now, and we were negative 2% in the first quarter. So, to your point, the numbers you were talking about, that’s kind of what you said as well. So, we’re pretty optimistic about how this plays out, because you have the math of the category and how that should make compares easy. And then frankly, we’re continuing to take market share and we feel very good about the position we have. And so, there’s obviously a lot of other variables that are out there. Obviously, the Fed did their latest update yesterday, and what they choose to do affects the overall macro economy, it would affect us. So, those things are hard to guess, but that’s kind of my answer. But, maybe Kate will give you some more detail by quarter or something.

Kate Gulliver: We’re not going to give detail by quarter, as you and Simeon both no. But Simeon, I think what I would say is that we are very focused on what we can control, which is that ongoing share gain fees. And so, thinking about our own seasonality is a helpful way to look at it. Thinking about how we continue to gain share, I think, is a helpful way to look at it. Predicting what the category does in the back half, obviously, Niraj provided the context from last year and predicting what that does in the back half. I’m sure there’s a range of opinions on that. And so, our focus is really keep delivering on an excellent offering for the customer. You’re seeing that show up in our active customer growth continuing to improve in our flattish position right now and over time that will return us to the strong growth that we’ve had previously.

Simeon Gutman: That’s helpful. And then, the follow-up, maybe taking that one step further. The relationship that was provided last year, $600 million of EBITDA on a flat revenue scenario, there was some inherent if we get upside to flat revenue, whatever your prevailing assumption was on incremental margin, has that changed in any way? Are you thinking of spending in any different way on that upside or does those incremental margins should apply in the same way that it did when you gave us that framework?

Kate Gulliver: Yes. So, as I said on the call, that framework of flat and $600 million hold. And again, that was not intended to be guidance. That’s really a construct for how to think about the sum total of the cost savings over the last 18 months, and how that would flow through the P&L in that hypothetical flat scenario. And then, to your point on incremental margins, yes, we’ve spoken to that coming in, in that mid-to-high teens range.

Simeon Gutman: Perfect. Thank you.

Operator: Your next question comes from the line of Anna Andreeva with Needham. Please go ahead.

Anna Andreeva: Great. Thanks so much. Good morning, and congrats. Nice results. We had a question on promotions. Niraj, you had previously talked about only one-third of sales, during these promotional events, coming from items that are featured in the promo discount. So, basically, once the consumer is engaged, they do convert at full price. So, just wanted to follow-up if that’s still the case. Just any color on that would be, super helpful. And, then as a follow-up, so the brand campaign, sounds like is off to a strong start. Just curious, how are you incorporating the learnings from that into the loyalty launch, that I think is scheduled for this fall? Thanks so much.

Niraj Shah: Yes. Sure, Anna. So, I think the way to think about promotions is that promotions drive a lot of traffic to the site. And, what the customers they absolutely look at the items on promotion, but they also tend to then explore the aisle. And, they tend to buy the item that they like the most and that’s kind of what we’re referencing, is that only a portion of those sales are the items that are featured in the promotion, of the majority are the items that are actually in the aisle, not necessarily the featured items in the promotion. So, that dynamic remains true and that’s sort of been the case for kind of the entire time. That’s always been true. The brand campaign, so we didn’t about how the brand campaign can really help us deepen preference for Wayfair with customers.

Obviously, the loyalty program is also something that can deepen preference in the sense that if you join a program and it has benefits and those benefits entice you to come back, right, then that would build to you becoming more habitual. So, these are both two of the things we’re doing that. I think certainly help each other and would help a series of other things we’re doing, all in the effort of being your go-to-place for all things. So, and that’s absolutely our goal.

Anna Andreeva: All right. Helpful. Thanks so much.

Operator: Your next question comes from the line of John Blackledge with TD Cowen. Please go ahead.

John Blackledge: Great. Thank you. Two questions. First, kind of on the macro, is there a potential replenishment cycle for pandemic purchases ahead for the industry, kind of as we move further away from it? And, then second on Gen-AI, could you discuss Wayfair’s use of internally of Gen-AI across various departments? Any color on productivity gains? Thank you.

Niraj Shah: Thanks, John. On the macro replenishment cycle concept, there is a replacement cycle on the various goods we sell absolutely. It varies by type of goods. I do think the easiest way to look at it is no matter what way you look at it, the level we’re at relative to 2019 where we’re below 2019 in nominal terms way below in real or whether you do area under the curve and you take the pull forward, but then you see we’ve ripped way past that and we’re still off trend. No matter the way you look at it, you see that the category, which has kind of been a cyclical category forever, is in a cycle that’s down, which is always followed by a cycle that’s up. And, so I think that’s there’s no question about that.

I think the trick comes in when you want to time it precisely, right, which is I think gets to your question, because I do think things like interest rates and home sales and consumer sentiment all play roles in that. The way we look at it is there’s two ways to grow, and one way to grow is the market’s growing and how you take your excess share. But the second way is, regardless of if the market’s growing, how do you take your excess share, right? And so, go back to the concept of share taking how do we take share by being the easier place to shop, the better place to shop, better offerings, better value, faster delivery, more customized delivery, better merchandising, exclusive products, on and on and on and on. And so, that’s kind of what we’re focused on now.

And obviously, as the macro moves from negative to neutral and then neutral to positive, you’re going to see that buoy our sales dramatically. Steve, do you want to.

Steve Conine: Yes, yes. I can talk to the Gen-AI, I think it’s a topic area that I get focused on a lot inside the business. I think there’s areas like technology developed productivity or sales tools, sales and service team uses that we’re integrating with the business as you would expect. Now, I would say broadly if you look at us as our history in technology, I mean the business has done well by us staying kind of the forefront of tech innovation. And so, Gen-AI and using the other areas of the business is something that we’ve got all the different business leaders in the company sort of focused on, thinking about what’s most applicable and we’re seeing where there are wins and obviously staying efficient and staying current with cutting edge technology is something that, is going to continue to help us grow and do well going forward.

John Blackledge: Could I just ask one follow-up there? Could it be a tailwind to margins over the long-term with potential productivity gains?

Steve Conine: There’s definitely a lot of benefits to it. And, I think yes, between running the shop more efficiently, obviously, in retail, it’s a business of being efficient and certainly that’s going to help us over time. It’s also I think there’s really interesting things on the visual side. So, I think on the merchandising side, there’s some really exciting tools we’ve actually launched publicly. We’re just starting to get into better that I think could be meaningful for the consumer experience.

Niraj Shah: Yes. John, I think the way to think about it is like, over a very long period of time, the way I think to think about it is, I think a lot of these categories that have been much more fragmented are going to be much less fragmented. And, the scale players are going to be able to do many more things for customers, than non-scale players will be able to do and that’s going to cause concentration. Historically, to access selection, you had to visit many folks and it had to be fragmented. The idea that you could access selection from one retailer is only become possible with the advent of the Internet. So, then when you think about a scale player, what can you do with logistics? We talked a lot about that, right. What can you do with technology, we talked about that, but now you’re talking about different type of technology and you start thinking about we can do with Gen-AI.

Well, a lot of that requires scale in two ways. One, the R&D, you need to be willing to invest early. And, if you have scale, you can do that. It’s a very small amount of money in the scheme of things for you. The second is the, first-party proprietary data you have is the key to the whole thing. And, if you don’t have a fairly dense amount of that data, you’re not in a position to really do the things that are most interesting and novel. And, then those things will be you getting more scale. And, so I do think there’s a whole economic argument too on how that can grow margins. But, I think the bigger economic outcome comes into how demand moves to a smaller number of folks who can do things dramatically better for customers.

John Blackledge: Thank you.

Niraj Shah: Thanks.

Operator: That’s all the time we have for questions today. I will now turn it back to the Wayfair team for closing comments.

Niraj Shah: Thanks everybody for joining. We appreciate your time, and it was great to chat with you. We look forward to talking to you next quarter.

Kate Gulliver: And, we’re excited about Way Day this weekend.

Steve Conine: Shop Way Day.

Niraj Shah: Yes. Shop Way Day, yes. Bye, everyone.

Kate Gulliver: Thanks, all.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.