Here, Ygal Arounian from the Citi Investment team. Thanks for being with us. Pleased to have Wayfair CEO Niraj Shah, CFO Kate Gulliver. Thank you guys for being here today.
Thank you for having us.
Thank you for having us.
Pleasure to have you. All right, so we'll jump right in. Let's start with Investor Day. A few weeks ago, I thought it was really successful. We got a lot of great color on the business. You highlighted revenue growth, driver expectations, updated margin targets, gave us a little bit of a bridge on how to get there. So maybe Niraj should start just kind of high level, your most important takeaways from that event, and your thoughts coming out of it.
Yeah. Great. Well, I think, you know, we were really happy with how the event went. I would say the key concepts we wanted to convey, we think were well understood, but what they were was, one is that the mid-single digit EBITDA target is right around the corner, and then from there, we believe we can both invest in the areas that we're focused on and incrementally continue to grow that EBITDA with a long-term target that is, you know, higher than what we previously had shared, and we kind of showed that bridge.
That was sort of the first thing. The second thing was that these opportunity areas we're going after are each individually quite substantial, and in each we have quite little market share. So, for example, Wayfair Professional is a $2 billion business for us today. That's 1% of the end market that the verticals we're focused on represent, and so on, so forth, where, you know, in Wayfair.com, which is probably our best-known line of business, it only has about 2% market share.
So there's an incredible opportunity to grow. And so the investments we're making that are in the P&L, which after those investments, we still had 4% EBITDA last quarter. Those investments basically represent all this opportunity that should then get us to a growth rate that,t his, this shouldn't yield, like, a 10% growth rate. This should be meaningfully in excess of that if things are working. And frankly, if they're not, then we would discontinue pursuing something, which would just cause EBITDA to rise faster, sooner.
So I think that was well understood. And then I think the last piece we really tried to convey is that the reason we have this opportunity, and the reason we have these benefits, and the reason that margin has, of course, margin has risen the way it has, so on, so forth, is in part due to the investments we made over the last decade, and particularly the substantial investments in technology and in logistics. And so there's these kind of, kind of historic investments that have been made that we're gaining the benefits from.
And so when you look forward, a lot of the gains to come are off the back of money that's already been spent. And I think we were able to kind of detail some of those things in a way that I think were, you know, again, well understood.
And so we were pretty happy by having a kind of a multi-hour period of time to kind of let various different, you know, I think about a dozen or so senior leaders at Wayfair kind of talk through each piece. I think we were able to have folks external to the business better understand where we sit today, what's been done, and how the financial profile will play out... what we expect will play out and why.
Okay, great. We'll talk about most of those things. Just to follow up on that kind of the revenue and growth algorithm side, there were a number of factors there. What's--what are the most important parts of... So you're, you weren't it wasn't a guidance per se, but it was, kind of, if we hit on all these things, we'll have a much better revenue growth. What, what are the most important factors to you?
Well, I think the thing that's probably the hardest thing for people to kind of keep track of is sort of on one hand, to remember sort of what transpired. You know, we started the business in 2002, went public in 2014. Between 2002 and 2019, and to kind of separate that a little bit from kind of COVID of 2020, 2021, 2022, which was sort of a very kind of anomalous period, not just for us, but kind of, you know, for all these categories and companies, industry. And then think about where we are now.
Where we are now, we think, is a continuation of where we were up through 2019. And what you see is, like, you zoom out macro, you know, internet, e-commerce adoption, like, shot up, came down. Well, if you just took the curve up through 2019 and kind of that compounding, you know, 12% category kind of kept running forward, that's basically where we are now, and it's continuing to happen.
If you look at where our business is today, it, you know, we mentioned, you know, the category we think is, like, around -15% year-over-year in dollars, but there's a lot of deflation in that. So, you know, orders are probably, you know, flattish year-over-year in the industry. We mentioned our dollars are up. So if our dollars are up, and I think at the time of earnings, we said it was up low single digits-
Low single digits on the call is what we shared.
Yeah. So if you take that and you take into account the deflation, then, you know, our orders have to be up pretty substantially. Well, deflation anniversaries itself, right? As the deflation comes in, you know, and we're basically headed towards what suppliers pay for costs today for goods, they're not fully down to, but they're decreasing their prices as they get through the old inventory. And so we're approaching that. As you anniversary that, that order growth is your revenue growth.
And so I think everything we expect to happen is basically already playing out. You're also seeing competitively. What you're seeing is that basically, share does not get distributed equally. And during COVID, sort of everyone did well. That's not a true phenomenon normally. Wasn't true in the decades before that. It's not true now.
What you're seeing is the folks who are winning are taking share. I, I think it's playing out. I think just for the year-over-year and these types of metrics to be clean, you just need the changes that have already happened to anniversary.
Right. Okay, great. We'll dig into all that stuff, too. So hey, for Kate, let's jump to you. You took over as CFO in November amidst a pretty material turnaround there, both in around the cost side, especially. So just maybe kind of like, this is your first fireside chat, and thanks for doing it with us. But you know-
Happy to do it.
You know, nine months in, I know what you're seeing, how it's going, and just kind of like a lay of the land for you.
Yeah, so I'm not sure I would describe it as a turnaround so much as a return to our roots. I've actually been at the company 10 years, but new to this role, and one of the things I've always admired about the business and the way Niraj and Steve have operated is with an extremely cost-conscious mindset. At the end of the day, we're a mass market retailer, and so we need to be maniacally cost focused.
And candidly, during the COVID period and the disruption that came from that, we overhired, and we lost our way a bit on what had been, you know, really our roots and our operating history.
And so what we've aggressively pivoted to and, you know, sort of starting in the back half of 2022 and into 2023, has been returning our operating mindset to that cost mindset, making sure that we can, you know, take out that $1.4 billion in cost actions and really focus on execution around those cost initiatives that, in turn, are actually making the customer experience better.
So it's this nice benefit of we're able to pull out the cost, we're improving the logistics infrastructure, the operating costs there, and we're actually making the customer experience more meaningful and exciting. And so the combo of the two has been quite powerful, but, yeah, I would say, you know, if I reflect on sort of November to now, it's been really exciting to see how quickly the team has oriented, and sort of returned to our historical roots there.
Right. Okay. Just so a follow-up maybe on the cost side, yeah, I think at least based on how we look at it, you guys have been kind of executing maybe a little bit ahead of schedule on the cost side. Can you just give an update on where you are with the $1.4 billion?
Yeah. Yeah, great question. So, just as a reminder, that $1.4 billion had a few components to it. About $750 million was related to, labor cost, and that's not just cash cost, that's also stock-based compensation. About $500 million, and we said we actually thought we could take out more than $500 million, is relating to operating costs that would show up in the, you know, COGS line. And then the remainder was, some puts and takes on marketing spend relative to plan, CapEx, et cetera.
The labor cost is now largely out. We substantially achieved that through two RIFs that we, undertook over the last year. There is some ongoing improvements that we expect to see in our SOT G& A line, which is where most of our operating expense shows up in the P&L. That's really around ongoing efficiencies that we're trying to drive around software and other spend throughout the remainder of the year, and we've spoken about that a little bit on our calls.
So you can think about that portion as, you know, largely out. The $500 million, to your point, we obviously achieved some of that a bit faster than we, you know, originally had outlined to all of you. And, you know, you saw that show up in the gross margin in the second quarter, which actually came in a bit above, you know, where we guided you for the third quarter, which we do intend to reinvest that.
I would say we're nicely along our way there. And you'll continue to see the remainder of this sort of flow through throughout this year, and that's how we, you know, bridge, you know, sort of over time, getting from, you know, the sort of, you know, 4%, and we also guided to obviously lower than that for this quarter, but ultimately getting to those sort of sustained mid-single digits Adjusted EBITDA operating margins.
Okay, great. So let's do one more on the margins. So from, you know, kind of where you ended off there to the bridge slide-
To more than 10%.
Yes, so the more than 10%, which at the—if you add up all the high ends, gets you more towards the high teens, and, you know, we all tried at the investor day to get you to put a timeline on it.
It was a valiant effort, you know.
We can try again, see what happens.
I'll save the time. I know. So just maybe help bridge again from, you know, where we are now on the mid single digits, you know, up or down as we kind of go along these next few quarters to, you know, to the 10% + , and if everything's working really well to that, you know, high teens for me.
Yeah. And I guess the way that I... You know, so obviously the biggest driver in getting to that north of 10% is, you know, improvements in the gross margin, and then from there, it's leverage on marketing spend and the SOT G& A. And that's really starting already from that mid-single digits point. So think about us getting to that sort of sustained mid-single digits from the cost actions that are already underway and that are largely achieved.
To get from there to that north of 10%, it's really the, the timeline is really a factor of how quickly you think top line, you know, sort of normalizes and then returns to, you know, Niraj mentioned sort of this, you know, significant growth opportunities, and obviously, in the Investor Day, we outlined a number of them, and we talked about that being, you know, double-digit, you know, substantially double-digit growth. The timeline and pace of that will impact, you know, how quickly you get to that north of 10%.
What we did say is that from the, you know, sort of mid-single digits place to that north of 10%, you should see ongoing improvements in Adjusted EBITDA margin, you know, as we continue to see the top line return sort of march along that path.
And I think the key thing to sort of keep in mind as you think about that, and Niraj actually referenced it, you know, in his earlier point on the growth drivers, is that the way that that is able to pan out is that we are already investing in many of those growth drivers, in all of those growth drivers, actually today. So that cost actually already sits in that operating expense line. For us, most of that investment comes in the form, actually, of human capital cost, which sits in that SOT G& A line on the P&L.
So we are investing against Perigold, we're investing against the B2B business, we're investing against the SRBs, and on and on. And the growth of that, you know, substantially is still to come, and we have the headcount allocated to it now. So you'll see leverage, obviously, on that, you know, as the growth returns and normalizes.
Okay, great. So let's shift from the financials for a little bit and talk kind of fundamentals. And, Niraj, you mentioned the share gain, share loss, now back to share gain. So what is it about that? I think we know a little bit about what happened with the share loss, kind of with COVID, there was just a lot going on with the supply chain dynamics. But, you know, what is it about what you're doing that's letting you get that share gain, especially today, where you're seeing it, you know, pretty meaningfully the past couple quarters?
Right. So, so first, to be clear, like we're at all-time highs on share. We're at all-time highs on share, going back a couple quarters ago. So we regained the share that was lost very quickly, and then it's continued to climb, and we believe quite durably. Well, if what, what happened is the same thing that happened from 2002- 2019 is continuing now, which is the market share typically is not evenly distributed, right?
It goes to folks who have kind of the winning proposition, and in commerce, that typically means that you have a great offering, it's merchandised well, you offer fast delivery, you have good customer service, things are priced well. You know, relatively basic, you know, retail strategy, right? And so in, you know, kind of consumables, you know, that might be a Walmart, Target, Amazon, you know, or kind of large players online. Home Depot and Lowe's are more the home improvement side.
I mean, those five are sort of our major competitors. And what you were seeing in 2002- 2019 is that smaller folks were increasingly having a hard time competing online. There's substantial costs around technology, around logistics, and around marketing that are very hard for folks to basically invest in, and if you don't invest in it, you don't get the gains from it, which means you can't have that compelling offering. And at brick-and-mortar, you're seeing the same thing happen.
The smaller players were losing share to the bigger players and increasingly going out of business. Well, what happened in 2020, 2021, 2022, COVID added this weird anomaly, this excess demand, weird cycles to it. And in particular, what happened in 2021, 2022 is there was a scarce amount of goods. All the ocean freight congestion, supply chain congestion, production shutdowns basically resulted in there not being enough available goods in the market.
And so, you know, what you had there is, like, demand sort of ended up going to whoever had the goods, typically by paying an excess amount to get those goods or buying inventory very far in advance. That's a very unusual kind of anomaly. If it ever happens again, we actually know how to play it very well now. But what happened is that led to some share loss.
But as things returned to normal, and in this case, whether recession normal, which means there are too many goods relative to demand, or a regular normal, where there's kind of a relative appropriate amount of goods relative to demand, that's the model that we've won with for the 20 years before COVID, and we're back to winning with. So I think what sort of the anomaly is actually what happened in 2020 through 2022, rather than what's happening now or what happened in the 20 years before it.
And what you're seeing happening now is, again, it's the large platforms that are taking share. In home, we're the specialty platform that's winning, and there's other categories, but there's very few where a specialty platform can win. Obviously, you know, there's folks like Chewy in p et, or there are different folks in fashion in different parts of the world, or different folks in, like, things like autos. But there's not very many categories 'cause most categories are basically consumables, branded commodity goods.
These go to those general merchandise platforms like, you know, Target, Walmart, Amazon, what they're built for. It's just home goods, you want to buy unique items, they have delivery complexity, you need help with that purchase, the aesthetics and emotion matter. This is what we're built up around, both the technology and the logistics capability and sort of the whole business, and so that, that's what's driving it.
Okay, got it. A few follow-ups, maybe, on the demand environment, just to follow up on that recession normal versus normal, normal-
Yeah.
Are you planning for that? Do you think about, you know, when we kind of cross back to normal, or do you just kind of play it by how it's going?
We think about it, but it's largely an academic thing because we actually use demand signals from the customers to actually pivot. Like, we mentioned, it's a promotional environment, but if you look at our gross margin, there's nothing about our gross margin that says it's a promotional environment. The reason is with the promotional environment, what it really means is it's what is the marketing messages you're using in the market?
So for example, in a given quarter, how many kind of, how many kind of sale events do you wanna have where your email or your app notifications are talking about sale events versus talking about, you know, fresh trends and, and style trends? You're gonna, you're gonna moderate that because in a recession environment, customers are more keen for value and a little more reticent to spend.
So a seasonal trend story is a little less exciting, and a promotion event is a little more exciting. So you change the messaging and the around what you... You know, the communications of the marketing to increase the, you know, kind of number of promotional events. Customers get curious on those. "It's only a three-day sale. Let me see what they have." They see something compelling, and it's got a great price. Well, the truth is, on an everyday basis, it maybe doesn't have quite as low a price, but it has a pretty good price.
It's just when they're in a recession environment, they're not coming on the everyday as often. So that marketing message is more productive. Well, we could see that in a bunch of signals and kind of how they react to different messages and the behavior on the site. So we sort of change the marketing messaging based on the signals we're getting, more than on any macro estimation of when the economy improves. My feeling around the economy is, like, I do think, you know, when you...
This category has been in a recession since the spring of 2022. The beginning part was just a pivot from this category to things like entertainment, leisure spend, restaurants, travel, as sort of the world opened back up. Then what happened the spring of this year is this category weakened a little further, and other categories weakened, and that was more the macroeconomy sort of effect.
I think that probably lasts another, I don't know exactly, but, you know, say, say, till next summer, for argument's sake. Then you're gonna get back to where the category, you know, this category grew at 4% for years. I think it gets back to growing at 4% online faster. But the point right now is, like, the dollars are -15%, orders are flattish, and we're up, right? So our orders are already growing substantially.
That's revenue growth once you anniversary it. So we're already back to winning, and then prices will continue to drift down as suppliers exhaust the expensive inventory because they're not even yet selling at what they would sell at if they're buying at today's prices with their margin. So that's the other thing that I think sometimes gets misunderstood.
We're not winning by having ultra-low prices today. We're winning with prices that are durable, in fact, will come down off the strength of the recipe and the platform, the playbook. That was the same reason we were winning before. I think that's going to-
When is the pricing gonna normalize?
Um
on inventory front?
You know, it'll—if you basically think about now through, now through next spring, it'll continue to kind of anniversary. It started going down last fall, significantly, like last fall through last spring.
Right.
So once you anniversary it, that deflation doesn't show up. So there'll still be a little more to come, but a lot, most of it came in that sort of last fall through this past spring.
Got it. Okay. On the promotional environment, I think that's an area that investors often misunderstand, where can you just help clarify on when you're driving a promotion, you talk about there's that value's there anyway, it's more about the message. Are you changing your take rate up or down around promotional environments, vendors? How are you working with the vendors to kind of set the right price?
Well, so we kind of give our suppliers kind of the calendar of what we're doing. You know, these are, these are major promotions, these are minor promotions. This is what categories they're gonna focus on. And then, they generally ask us for guidance on how they should split their investment funds between promotions and every day. So we give them our recommendations. They then, of course, are able to do what they want on the wholesale prices.
Their wholesale prices, along with the ship costs incurred to deliver their item, then our margin or take rates applied on top, create the retail prices. So they, you know, there's effectively the competition they face is not with us deciding to push an item, it's really... The item obviously needs to be compelling for customers, but then from a pricing standpoint, it's them versus their peers and how much they want to lean in.
Right.
And that's why, you know, folks would say: "Oh, well, you know, I don't want to, I don't want to take my prices down just because there's a deflation." Well, the truth is, if you don't react to the price fact that prices are cheaper today, and your competitors do, you just lose a lot of share. So there's kind of a market force to keep them just taking a fair margin over actual costs. That's kind of a forcing function. But basically, you know, you saw our gross margin last quarter, you know, in what you'd call a promotional environment.
The gross margin is not. We're not, you know, we have a data science algorithm that determines our take rates, and it, there's price elasticity, there's a lot of things that go into it. But we are, our end of the promotions is really how we market the, you know, and the messaging, as you said. The supplier's end is basically how they decide to allocate the capital, and we guide them on that, but they then decide what to do.
Right. Let's talk about advertising, maybe from two lenses. One is your own advertising. We talked about it's a competitive environment. Your advertising's been elevated in a lower demand environment. Just what's the right way for investors to think about, you know, where you need to invest within advertising? So let's talk about that first, and then I want to talk about supplier advertising, too, which is kind of the other end of the-
Great. Do you want to start, or do you want me?
Yeah, I'm happy to jump in on, on the marketing spend. I, the way that we philosophically look at it is, and I, you likely know this, as I think we've spoken about this a bit before, but for everyone else, is we look at the efficiency within a given channel. So if you think about bottom of the funnel, high intent, there's an expected payback period that we know from a customer that comes in through that acquisition channel, and we will spend into that payback period.
And as soon as it becomes not efficient, if we start spending over that payback period, we'll pull it back. And if we see opportunity, the channel's operating very efficiently and effectively, we can keep spending into it. And the reason I share that is because I think the way the numbers get reported, and often the way they get digested, you can calculate a CAC, you look at the ACNR, and it may have looked like, oh, we're spending inefficiently, or we're spending, you know, beyond what our standard approach is.
We actually haven't changed any of how we look at the payback period. We continue to obviously fine-tune that, but we haven't, you know, said we're gonna run inefficiently here. It's more the optics of the free traffic having pulled back over the period, as we've talked some about, and some of that is the benefit of doing the promotions or trying to drive some of that free traffic back up. But the free traffic pulling back has caused some of that deleveraging on that ACNR line.
And that's what you're seeing impact the overall, you know, sort of total ACNR. I do think it's important as we think about marketing, you know, we obviously see leverage there over time. We spoke about that at the Investor Day. You heard from Paul Toms, our CMO, spoke to some of the work that we're doing on brand building. As you know, that work continues to take off, that should provide some efficiency to these other channels and also help to generate some of the free traffic.
We've also played around with some app-only promotion events, you know, things to drive app downloads and installs that, again, help benefit that free traffic when we return to sort of a more normal customer environment. So that's on our marketing spend. I don't know if you want to add to that. I think your second question was on supplier advertising.
Yeah, actually, yeah.
The only thing I would point out, too, is that part of that $1.4 billion cost actions plan we talked about in January of this year, one of the topics was basically a reduction of advertising in some areas relative to plan. What we did there is, you know, when we describe advertising, and I think Paul did a good job in the Investor Day describing this, but there's three buckets. There's sort of the kind of brand-building, upper-funnel bucket.
There's the sort of, you know, sort of highly quantitative, more transactional, lower-funnel advertising, which is, you know, highly, highly measurable. Top of funnel is measurable. It's a little softer measurability than the bottom funnel, but they're both very measurable. And the third is like this R&D bucket, emerging channels that are not at payback yet, and you're experimenting because you believe they can get there.
A lot of what we did there was in that, in that bucket; we really decided what size that bucket should be and, and, limited it. And so then, you have to make the hard decisions of, well, even though you have, exciting opportunities in a wide number of areas, maybe you don't have the budget ability to pursue them all. So, "Hey, you know, maybe I'm only gonna run two tests here rather than seven.
Maybe I'm not gonna pursue that, marketing vehicle right now because I don't think it's a better opportunity than that if I'm gonna allocate this fixed amount." And so I think we've actually increased the effectiveness of our advertising on a kind of a economic ROI basis.
Got it. Okay, that's really helpful. So onto the supplier advertising... It's the opposite end. It's
Yep.
Generates margin, not takes it away. I think you highlighted 200-300 basis points opportunity from there. So, you know, it's retail media, it's become really kind of big popular topic over the past couple of years. You guys are at about 1% of your total volume on supplier advertising. So just walk us through the margin opportunity, the overall opportunity.
I think, like, generally accepted, the kind of high water mark right now is about 5% of total volume that's coming through, and it's sponsored products. You're still pretty early. You know, just share a little on that opportunity.
Yeah. Do you want to.
Yeah. So, in the Investor Day, we highlighted that we think we can get to sort of 3%-4% of revenue coming from supplier advertising, which would actually be a tick down from where, you know, Amazon and Walmart and even Etsy is starting to run quite high there. And that's really a combination of being thoughtful about how we are impacting the customer experience with supplier advertising.
It's very important to us that we don't degrade the customer experience, even though obviously the advertising itself is quite accretive to margin, to your point, and, you know, high value. And so as we balance really, you know, growing that business, we want to do so while we're being mindful and judicious to the customer. What you've seen us do over the last few years is actually test and build a lot of the technology to enable us to grow the business.
So you know, we showed on the Investor Day, we grew from, you know, less than a 1/3 of a point of revenue to a point over a few-year period. We do see some acceleration from here now that the technology has been built and more developed, and we can roll it out more thoughtfully with our suppliers. That then in turn, to your point around, you know, sort of how does that all flow through?
In our bridge from that mid-single digits to the north of 10% Adjusted EBITDA margins, we said 2-3 points of that gross margin walk would come from supplier advertising. You know, obviously, the takeaway there is that it is quite accretive to the bottom line. So if we can do that in a way that is enhancing to the customer experience and the supplier sees value, that's obviously something we want to continue to grow and build.
Is that self-serve for suppliers right now or they're working with, account management teams?
The technology, it's—there's—they can do everything themselves. In addition to that, we have account managers who will work with them, often giving them advice on opportunities they think they're missing, or strategy, or pointing out, kind of based on what they've done, "Hey, here's some ideas," or. So, so we do have folks who work with them, but it's not—they're not manually—
It's-
You know, that you can have the capability of doing everything yourself-
Got it
... through the system-
Got it
... as a supplier.
Yeah. I think some of what you heard in the Investor Day, we had a supplier fireside chat at the Investor Day. We actually do believe that our relationship with our suppliers is a competitive advantage for us, and part of that is partnership on something like supplier advertising. The technology is there, the platform's there. We certainly don't staff it to have an account manager for everybody by any means, but we do want to provide hands-on support and ensure that they are getting the value from it.
Okay, great. Let's shift to physical retail. So, you know, we talk about the share shift to e-commerce. So obviously, e-commerce is the core and the bread and butter. You're gonna be opening up some retail soon—retail stores shortly. What's the strategy there, and why is retail, physical retail so important for you?
Yeah. So if you, if you zoom out, kind of a couple high-level thoughts, and then I'll get a little more specific. So if you zoom out, if you look at kind of early adopter categories like consumer electronics or office supplies, you saw their online penetration grow really fast in the kind of early days of e-commerce. And then you saw them asymptote out around 50/50. You know, I think one's 40/60, one's 60/40 in terms of online, offline. And you're like, well, why would you buy office supplies at a brick-and-mortar store?
Or why would you buy electronics at a brick-and-mortar store? Well, maybe you want to see it in person, maybe you just want it that day, maybe you want to see the selection, maybe... You know, there's different reasons. And so you've seen those categories sort of asymptote out around 50/50. Well, in our category, you know, things are visual. There's a tactile nature to certain categories. You may wanna work with a person who gives you design advice.
You may wanna work with a person who, you know, helps you with financing and different things that, while technically you could do those things online, you may prefer for certain purchases to do them in a store. So let's just say that the 20%-25% online penetration today, for argument's sake, asymptotes out at 50/50. So it keeps growing, but that's where it's gonna asymptote out. Well, you know, then the second concept is: What are the costs in having a brick-and-mortar store?
Well, you have the cost of the store, you have the cost of the supply chain, so the delivery capability, you have the cost of the inventory and the supply chain, you have the cost of the kind of brand or marketing or whatever you use to tell people that, "Hey, this is what we do, this is who we are," right? And then you have the cost of, like, the merchants who are creating the assortment. And in our case, basically, the last four are all sunk costs. Like, we have those things in order to have the websites, the apps, the print catalog, all the things we have.
And so the one thing we don't have is we don't actually have the store. But if you buy something in the store, the ability to deliver it to you, the ability to, you know, have that inventory available, the ability to, you know, send you an email telling you about the grand opening or whatever, we have all those things. We have that customer file, the tens and tens and tens of millions of people.
So for us, creating the store basically lets you attack that other, today, 75%, say in the future, it's only 50% of the TAM, in a very economic basis, where you get the revenue that you get in the store, and then the halo it creates for the aggregate in that geography. Sort of a playbook others have kind of talked about. In our case, there's sort of this kind of full home concept of what we've created online also does not have really direct competitors, you know.
And that's why our competitive field is, on one hand, you know, hundreds and hundreds and hundreds, thousands of companies, super fragmented, and at the same time, there's no dominant player because it's not been a concept that before the Internet, you could bring that selection to bear. We had to do is really narrow it down, and so the customer would fragment their spend amongst many people in order to find these unique items and find the items they wanted. And-...
And so the store is sort of a vehicle that lets us sort of monetize the other half of the TAM in a very economically productive way, give the customer kind of that full range of options of how to interact with us, and like kind of make sure that we take advantage of all the categories we're in, et cetera. And so the way we're doing it, though, is in a very pragmatic way. So for each of our concepts, we're opening a small number of stores, iterating, testing, making sure the economics are there, measuring the halo.
As that works, we'll open up some more stores. We'll make sure we build all the technology so that this is a very margin-accretive activity, and then it'll kind of over time build. And so it's not really a light switch type thing, but it's a very good opportunity, given where we sit and all the assets we have today.
And I think that's one thing that we really try to convey in the Investor Day is like the platform we've built, where we have all these supplier relationships, that selection available, where we've invested in the technology for all these years, and we have this technology, and then where we've built this logistics capability. Those investments are productive, not just in the past, but those will continue to provide a lot of financial benefits in the future. And one of the ways we'll monetize it, for example, is these brick-and-mortar stores.
Okay, great. On the logistics component, it's been a big investment for you guys over the years. Call it out as a meaningful differentiator. Is there a lot of investment to come there? Is it, you know, more or less kind of built out where you want it to be? And what do you think are the next steps that are really important for you guys on the logistics capabilities?
Yeah, so we, we've built out quite a vast network. I think it's well over 20 million sq ft of large warehouses that are 1 million sq ft warehouses, and then delivery terminals, where for the larger, bulkier items, like two-person delivery type items or three-person delivery type items, we deliver those on a proprietary basis in the larger markets. And we have around about 40 of those in North America and a number in the U.K. as well.
And so that's a real advantage, and we've built it out where it has a lot of capacity, and so we're not really building it out any more for capacity. I think in the next couple of years, we have a couple more buildings coming, but not very many.
We're at a stage where right now what we're doing is we're starting to really build what I'd call specialized or sophisticated capabilities on top of the logistics kind of operations that we've built. And so just to give you one example to make it more you know tangible. So one is the idea of consolidated delivery.
So consolidated delivery is basically, you know, "Hey, I want to order this series of different things, and I want them all to arrive on October fifteenth, 'cause that's the day my, you know, son's moving into a new apartment," or, "That's the day, you know, you know, whatever date we're moving into a new house," or, "It's just easier for me to be home on that day, you know, to you know, accept all these different, you know, items," or what have you.
And because a lot of our items are big and bulky, and then we have a lot of small items, it's sort of, it'd be really convenient if you could kind of like just build your whole basket across everything you're doing for a project or what have you, and have it all come. Well, if you think about what we built for logistics capabilities, that's generally quite an expensive service if you want a consolidated delivery, 'cause you pay someone to, you know, you ship all these items to a place, you pay for them to hold it, then you pay for them to deliver it.
And so it's, you know, there's a lot of organizational complexity, but it's reasonably expensive. Well, what we can do with our network is we can basically create this capability at effectively, incredibly low cost. And the reason is, we have items flowing through our network already, and if you think about a given truck that moves stuff from one place to another, the trucks are not always full. It's impossible for trucks to always be full because, you know, sometimes you have, you know, the full truck, other times only 80% full.
If you wait till it's 100% full, you need to basically add a lot of days in the delivery. You need to pad it a lot, and which can make deliveries, you know, much slower and much harder to predict, so you gotta run sometimes with lower utilization.
Well, if you basically build a software that allows you to basically reserve the inventory that someone's purchased in the appropriate locations, move it downstream towards the delivery location when you have excess space available in the transportation, then bundle it all and deliver it at once, rather than one by one, you've effectively reduced your delivery cost. While, in fact, we've provided this customer with is an incredible service.
What it requires, though, is not just the kind of logistics assets we built, it requires you to build the kind of the software capability on top. So a lot of what we're doing now is taking advantage of these logistics capabilities we built and adding a lot of finesse to them through software, which basically either lowers our cost or adds customer benefits in a way in terms of services they prefer or would like, that our competitors don't offer, because it generally doesn't make sense for customers to basically.
It doesn't make sense for competitors to generally offer these things. And in fact, you know, you'll see competitors are focused on things like same-day delivery, or Amazon does have a concept of a delivery day, but it's basically you pick a day of a week, because you order generally many times in a week, batteries, paper towels, whatever.
They'll bring them all, we say, "Oh, every Monday or every Saturday," or, "Let's bring it that day every time." Doing the same concept, right? Lowering their cost. But, you know, in our case, we can bundle the big things with the small things, and the average items you'll buy from us are not these small things like, you know, Dove soap or what have you. So the logistics you need are different.
Okay. Kate, are there anything else in the logistics side that are worth hitting on in terms of margin improvements that-
I mean, I think you've obviously seen us make substantial improvements this year through that cost takeout effort. And as we continue to see scale flow through what, you know, Niraj described as a largely built-out infrastructure, you should see ongoing benefits there, and that's some of that gross margin improvements. The other, you know, big component there is obviously CapEx.
You saw a significant investment, you know, in 2021, 2022, as we started to add on some more facilities that we needed. And as you think about sort of capital expenditure going forward, we'll be able to do more maintenance and investment in the existing facilities versus building out as many new facilities.
Great. I want to open up if there's any questions from the room. I have a few more, but if there's any? All right, well... Yeah, there's a mic just by...
Yeah, just to follow up on the top line, as you say, it's going, category is declining, and you guys are accelerating. So, it sounds like- ... you're attributing it to just the inventory normalization for the industry overall? Is there anything else that's—'cause obviously, everyone's kind of facing similar deflation impacts. But it's, you know, it's you're, you're a pretty stark contrast in terms of, like, it feels like you guys are, you know, you know, continuing to accelerate here as everyone else is going the other way.
Yeah, I mean, that trend started in Q4 of last year, so I wouldn't say that that's, like, a super new phenomenon. That trend started, you know, then, and it's kind of continued, and it really is the return to that... The normalized inventory allows the whole recipe to work. Meaning, it's not just the availability of goods, but the, you know, the pricing of goods being competitive, the delivery speeds becoming good again, the availability of the best items being in stock.
Like, the whole recipe's back intact, which is sort of what worked for us for 20 years. During COVID, different pieces of that recipe had challenges at different times, whether it was the inflation making pricing poor because we don't buy the inventory months ahead of time, when inflation got passed through, we didn't have a multi-month lag to where it would hit our retailers. It would hit right away, so that hurt.
Whether it's a scarcity of goods because we didn't buy inventory, you know, the goods that got scarce, we might be out of stock of that bestselling item. Someone who a few months ago ordered a bunch of it may still have it in stock. So different pieces of the recipe were under strain during different periods of COVID. Everyone is now back to an even playing field, where there's availability of all of the goods. There's no way to game it by buying a little earlier or a little later.
Like, prices are, you know, basically the same. So now the question is, like, what's the quality of your offering? You know, what selection do you have? How are you merchandising? How are you pricing it? How are you marketing it? What's your customer service? What do customers believe? What's the power of your brand?
Kind of the same things that are normally true, and the aberrations that arrived during the COVID period at different periods of time, you know, helping or hurting brick-and-mortar versus online, or helping and hurting the guy who bought more inventory than I... You know, those are all kind of behind us. And so this return to normalcy is basically, you know, we're not the only one taking share.
You're seeing the same folks who were taking share before are taking share, and you're seeing the folks who were struggling, you know, kind of, increasingly struggling. So, I wouldn't say we're the sole share winner, but similar to how we were the larg- large or largest share winner pre-COVID, I believe we're in that position now for the same reasons we were before. And other folks who've been successful, like HomeGoods, for example, is continuing to be successful.
Like I said, there's other examples that you see out there. In their case, I think they're the primary beneficiary of Bed Bath & Beyond, so there's maybe an accelerant there. But long story short, we're doing very well for the same reasons we did for 20 years, and I think that landscape is true for... You know, everyone's back to kind of that clean field.
I want to just have a few seconds left. Maybe just real quick on capital structure. It's been a big-
I thought I was going to get away without talking about capital structure, but 9 seconds.
Has that happened to you recently?
It might. But okay, so just real quick, it's been a big topic, a big focus for investors. Just the ability to kind of refi and deal with the converts. You mentioned it at the Investor Day ability. Well, first of all, free cash flow is improving, so that goes a long way to address a lot of that. You talked about new forms of debt at the Investor Day. Just elaborate on that a little bit, and how you think about the capital structure.
I think the starting philosophical point is that ultimately we're trying to drive free cash flow per share, which means, as we think about the sort of longer term management of the capital structure, we have to be mindful of dilution. The converts are obviously, you know, dilutive. We manage that some through capped calls, but they're dilutive. And so as we've matured as a business, typical to, you know, what you know, sort of the general maturation cycle, you know, other forms of debt do become available to us that are less dilutive in nature, right?
Or not dilutive in nature. And as we think about, you know, managing the existing converts, it's really that 2025 convert where we have about $750 million remaining. We would certainly explore, you know, other avenues to manage that beyond the, you know, our historical leverage of the convert market.
Okay.
The overall goal is really free cash flow per share and generating that free cash flow per share over time.
Okay, great. Great place to end. Okay, Niraj, thank you for the time.
Thank you.
Appreciate it.
Thank you. Appreciate it.
Thanks, guys.