Ready to rock? All right. Thanks, thanks, everyone, for being here. Good morning. The Citi Global TMT Conference. I'm Ygal Arounian on the internet team. Really excited to have Wayfair CEO Niraj Shah, CFO Kate Gulliver here with us today. Really appreciate the time. Thanks for being here. This mic feels a little loud. I don't know if it's annoying everyone or not, but.
It sounds good.
Yeah? Okay.
He's saying it sounds good in the back.
All right. Okay, let's start with the macro, everyone's favorite topic. But it's been such a big factor, I think especially for Wayfair. You know, you talked last quarter, Niraj, about at earnings about the peak trough being as big as it's been since the great financial crisis or maybe even bigger than that, inflation-adjusted. So it's clearly a factor. Maybe just talk about how you're seeing the macro, what you think about. I know a lot of it is outside of your control, but just starting with that framework I think might be a good place to start.
Yeah, sure. So what I'd say is, unlike the normal cycle you see, you know, the business cycle, the recession, et cetera, this cycle is a little different, and the main reason it's different is the COVID influence on this cycle, which is, there's a very beginning period of COVID where there was a pretty big boom for home goods, particularly big online at first, and then brick-and-mortar to follow. But there was a boom, so you could say that that was like a pull forward or whatever, but there was, like, an excessive amount of demand relative to, like, what would be trend. But then it was followed by what's now a prolonged bust, and the size of the bust is significantly larger than the size of the boom.
The reason for the bust is one. The first thing that happened is the COVID sort of boom, then moved to a COVID boom of travel, entertainment, leisure spend, because that was sort of precluded during the kind of goods boom, which turned into a goods bust and a kind of travel, leisure, entertainment sort of boom. That effectively rolled into what has been a weakening economy. The weakening economy is what you'd normally expect in the cycle, but this kind of boom-bust, sort of COVID-related, supply chain-related, is what you wouldn't expect. What it's created is an oddity where you had a bit of a pull forward, which is now years ago, and then you've had a kind of prolonged drought-type period.
One of the things that kind of happened during the scarcity is all the inflation, and to dampen inflation, obviously, interest rates had to go up a dramatic amount, which really slowed the housing market. One of the drivers in our category is, you know, obviously the everyday purchasing, which people are replacing items, buying new items. Another driver is when you move, you spend six to 10 times as much as you would in a kind of normal year. What you have is you have sort of this boom-bust cycle, you have this recession impact, and you have this sort of housing market malaise. If you look at just the housing-specific data, you see there's a lot of pent-up enthusiasm for housing, but it's sort of rate-dependent to get flowing again.
Right.
So you kind of have an odd confluence of events. So what we've basically focused on is, "Hey, let's just worry about Wayfair. Like, how do we take market share? How do we execute well? How do we do things ourselves to really, you know, drive the business and do well, despite the fact that the market we're in has this impact that I just sort of described?" And that's sort of what we've been executing now for almost two years. It's been working well, but that's also why, you know, when you look at this category, how far it's off trend, you say, "Okay, when it picks up, it's really gonna pick up, and rates will obviously help, and the years since the, you know, kind of pull forward is gonna help," but that's kind of where we are now, right?
Got it. Is there a balance between the housing market picking up and the consumer feeling better, or are they just-
No
... both kind of tied together, the way you think about it? Like, can the consumer feel better before the housing market gets better and that picks things up?
The thing that can happen before the housing market gets better is, you know, when you think about buying items and the regular replacement cycle and, you know, things age, you know, that's continuing to happen, right?
Right.
Regardless of sort of housing-specific activity. And so when you say, "Oh, there was kind of a boom in 2020," well, you say, "Well, it's now 2024," right? And so what's happening is, you know, as less goods are bought, the kind of odds that you buy those goods are gonna increase because of the aging effect. So there's sort of, like, that macro effect, which kind of can grow the market. Then there's obviously what we can specifically do as a company to get more than kind of our, you know, pro rata.
Right. Got it. Okay. I forgot to mention, by the way, we'll have mics passed around later for Q&A, so if anyone has any questions. We'll get to that later, in the discussion. Let's talk about what you can't control. You know, you mentioned share gain, and that's been very consistent over the last few years, really. But that's also, probably after the macro and the cost side, which we'll get to, the most frequent question we get is just on the share gain, what's driving it and the sustainability of it, especially if we get into an environment where, you know, people might be more comfortable to shop off market more.
Yep.
So what are the core factors of your share gain? How do you see the sustainability of that? How do you kind of drive future share gain from here?
Yeah, great. So, to make it really simple, just think about how we would get share in, like, two sets of activities. The first set of activities are what we'd call just driving and improving the core recipe. So that's basically the price of items, the selection that we have available, the availability, so in-stock availability of these items, and the speed of delivery of these items.
Mm-hmm.
As you improve those things, the value proposition to a customer is better relative to other sources you could go to, other competitors. You then buy from us more, and that's a very measurable effect. We know how to measure that. We kind of know the activities to do to drive this. Remember, our model, even though we're the first-party retailer to a customer, we don't do the traditional thing of buying inventory. So instead, on the supplier side, we look a lot like a marketplace. So we have a huge selection from thousands of suppliers. They know that there's a huge amount of demand from the tens of millions of customers. When you talk about it being a tough market, it could be a tough market for retailers, but equally be a tough market for suppliers, right?
So these suppliers need to drive volume to be efficient, to drive their cash flow, to sell through the inventory they're purchasing in advance, et cetera. So when the suppliers see an opportunity to get volume, and they see that we're taking share, they kinda know, "Hey, here are the factors that will allow me to do better than the competitive suppliers." 'Cause we don't have it where a buyer decides to buy the hundred bar stools from you and not from you. Well, you already got your order. No, every day, you know, a customer could choose to buy it from you or from you, right? So we keep driving that recipe. We give suppliers opportunities to lean in on promotions, for example.
In this environment, promotions do well, or we facilitate their ability to deliver more quickly through kind of continued advances we make in our logistics network, et cetera, et cetera. We kind of give them an opportunity to lean in, make this core recipe better, get themselves more volume. Obviously, it's helping us get more volume. That's the first set of activities. The second bucket of how we get share are what you could think of as kind of longer cycle activities or programs. So we've referenced we launched a new brand campaign earlier this year. We talked that we have a loyalty program that's gonna roll out actually shortly this fall.
We talked about, we just opened our first physical retail store in May, and part of the physical retail store is not just that the store can sell items, but what we believe it will do for the overall demand from those customers. So in other words, the halo it can create just on a customer spend per year with us, through the combination of online and offline, and how it can really bend that curve. So there's, you know, quite a few of these activities that we're driving in the business, and each of those make Wayfair a more attractive place than, again, the competitive set - broad range, competitive set of people you could go to. And so we're kind of continuing to drive those. Some of those would also be things...
I mentioned improvement in logistics for speed in that first bucket, but there's also nuanced things, for example, you can do in logistics. Like, we just, we're starting to roll out something called Consolidated Delivery. So in our category, it's not uncommon that you may wanna buy multiple items to have them delivered on a specific date in the future. You know, if you're moving, you're helping your son or daughter move into their first apartment, you're setting up a summer home. You're, you know, there's all these different use cases where you may say, "Hey," doing a whole bunch of things, or even if you're just refreshing your living room, it might be convenient to know that, okay, these 10 items will all arrive on this Friday in the future, you know, four weeks from now or whatever.
So what we've done in our logistics network is set it up so that you can, on our site, you can choose to say, "Hey, I want all these big and small items," so not just small items, "consolidated to this date in the future." And, and it's not just that folks will drop it at your front door. They'll bring in the items, they'll put them in the room that you want them in, they'll set up the big, the big pieces of furniture for you. And so that's a very valuable service that you really can't get from anyone else, unless you were gonna go through the big expense of contracting with a moving company, having your shipments sent there to stage them, and then they'll deliver them, which is a relatively expensive proposition. It's what interior decorators, for example, normally have to do.
So this consolidated delivery offering allows consumers access to a service that's very economical for them and rare, and it allows our B2B customers, like designers, decorators, contractors, to take advantage of a service that otherwise costs them a lot of money that they then have to tell, you know, their customer that they need to pay extra for.
Right.
So there's, there's all these things we can do in the second bucket that allow us to take share. So kinda the first bucket thing about that core recipe, I don't wanna under-emphasize how important that is, and how our model of being a marketplace on the supplier side and a retailer on the customer side helps us there. And then the second bucket are these types of strategic initiatives, or whatever you wanna call them, that very expressly help the customer wanna buy more from us.
Okay, got it. So let's dig into those two buckets maybe a little bit more. But, we'll start with the second one on the frequency. Right, so you've talked about increasing frequency.
Yep.
I think it's twice a year on average in the category, right?
Yep.
And to drive that higher is the loyalty program is launching. Probably too early to really give anything around that, but maybe just your views around what that can drive or what it looks like.
Yeah.
And then the brand, brand marketing, I guess, to kinda get that message out on some of the things you're talking about-
Yeah
... how those can drive.
Yeah, so everything about the loyalty program will be public information shortly, 'cause it's launching in, you know, the very near future. But the way to think about it is, you know, those two purchases amount to around about $600. So we're getting about $600 per active customer per year. The customer spend on average is in the few thousand dollar range, so $3,000-$4,000 for the category, for the home category, for the categories we sell. So you say, okay, $600 out of $3,000-$4,000. All right, you're getting, you know, 20-ish%, 15%. Not terrible, but obviously a lot of room there. Where are they going? Well, they're not going to one other place for everything. It's actually a category where things are quite fragmented.
You say, well, how do you incent a customer to want to buy more from you? If you think about a loyalty program where they're getting benefits, where it might be in service levels, where it might be in economic benefits, where it might be in things that just make it the path of least resistance for them, whether it's in kind of emotional benefits, like early access to sales. Like, there's a set of benefits you can give them, both emotional and financial, that would just make you the more top-of-mind place to go. We already see some of this behavior with our most loyal customers. They tend to download the app. You know, there's a series of things that change their behavior. We get far more purchases per year.
And then some of the initiatives I mentioned, you know, whether it be consolidated delivery or whether it be a brick-and-mortar store, those, each of those, we think, contribute to the ability to give us more frequency as well.
Yeah.
We would think of it as dollars per customer per year as the outcome we want, where you can only drive dollars per customer per year if you drive frequency up, and so frequency is kind of a key driver to get to the outcome we want.
Right. Okay. Yeah, frequency is always a big target for retailers, just driving that higher. On the first bucket, so pricing. So you talk about being a marketplace, vendors doing most of the pricing, but last quarter, you guys talked about stepping more into the pricing, the promotional environment, right, people are purchasing around promotional environments, and not at all, but a lot less outside of that, or a lot less than typical. So you talked about doing more on the promotional environment yourselves, being on the lower end of that 30%-31%, gross margin target. Talk about what you're doing there specifically. It sounds like it's not a huge impact, but it is something, and why that's the right strategy?
Yeah, so the way to think about the way we do pricing is, if you think about a marketplace, say, oh, they have a take rate. So they're, you know, the suppliers are responsible for all these costs. They're taking this take rate off whatever they wanna sell it for, and then they have to pay for the shipping, they have to pay for, you know, advertising, whatever. If you think about us in that lens, 'cause you say, "Hey, we're a marketplace, all these folks are competing with each other. We don't buy inventory," so that, you know, it is the economic model to a supplier of a marketplace. Think of it as our take rates are more surgical.
Rather than one number, which is the average of what you'd wanna do for these, you know, ten categories and the different tranches of goods inside that category, we would have a specific percentage we might do for, like, opening price point bar stools. We may have a different percentage take rate we're taking for, you know, kind of, mid-priced wooden bar stools, et cetera. So there's these collections of goods, they all have the same margin rate we're taking on them. But we set those margin rates using this big data science model, which basically is measuring the price elasticity of these different tranches of goods, which lets us be a little sharper, lower take rate in spots where we think that gets us more benefit, a little higher in spots where we think, again, it gets us more benefit.
And that's the advantage we can get by being a retailer on the first-party side. Because if we want to be a marketplace on the first-party side, then you gotta... it'd be very complicated, 'cause you'd have to just always you would basically end up using the same kind of blended take rate for big, broad sets of categories. Because otherwise, it's impossible to explain how it works to the supplier participants in a way that then causes the outcomes you want. So depending on the environment and, you know, kind of continued innovation, how we measure the data, et cetera, you know, you'll find that there's times where the optimal number changes in a way that we wanna then react to that because we get a better outcome. And so what we did is...
You know, 'cause if you think about the change in gross margin, we're talking about low tens of basis points.
Right.
It's not, like, a big change, but what we found is there are tranches where we would get far better results by being a little lower on these kind of take rates in these specific pockets. We didn't change it everywhere, but we took a set of pockets, and we changed it there.
And-
Oh, sorry.
No, I was gonna say, as a reminder, what we're looking for when we say, "Hey, we're going to invest in these areas," is we're trying to maximize the gross profit dollars, right? So we're looking at gross profit dollars on this multi-quarter basis, and so we're making that trade when it makes sense, to Niraj's point, in a specific, you know, subcategory. Because we're gonna drive, you know, volume or sales in such a way that over this multi-quarter period, we actually see those gross profit dollars increasing. So it's not that in one quarter... You know, you framed it very promotional, and certainly promotions are what's hitting, absolutely, and we do choose to invest, you know, co-invest in promotions with our suppliers, although that's largely funded by the supplier.
This is saying the elasticity curve data is showing us in a few areas we can selectively invest and help maximize those gross profit dollars on that multi-quarter view, which was something that we spoke to last year. We said, "Hey, we may do this.
Right.
You know, we've done all these savings that has driven this gross margin up, and the supplier advertising is hitting, and that's driven it up, and we may choose to reinvest some of that back in the customer experience if we see this outcome, and that's what you're seeing happen here.
Right.
You kind of took the words out of my mouth. This sounds like it's not just a. It sounds like it's something independent of the macro, some learnings that you can kind of use over time, where you're trading off margin basis points in certain places to maximize sales and gross profit dollars. Is that the right way to think about it?
Well, I'll start, and you should jump in. I would say, we always. You know, Niraj mentioned leveraging, you know, data science models. We've always thought about pricing as, you know, from these large data sets that we have to sort of understand the elasticity, and done it at this very micro level. So that's always been how we've operated. Frankly, due to our scale, we have better visibility into that than most, right? Now, right now, what we're seeing is that the elasticity curves are suggesting that we can come in a little bit. You know, that suggests the consumer is a little bit more price sensitive, right?
And so that could be due to the macro, could be due to other factors, but it's not a shift in our operating approach to, you know, be evaluating this and constantly sort of tweaking, you know, where should, within a subcategory, these take rates be?
Okay.
I don't know if you wanna-
I think-
Okay, got it. While we're on the topic of gross margins, maybe we'll just talk about the other inputs. There's been a number of operational efficiencies, and re-investing some of that into the pricing. Vendor advertising is something that you talked about being early and a potential driver. Can you talk about some of the other factors within the gross margin that you're seeing, whether it's those two or other things?
Yeah, so I can start, and then. So we spoke at sort of end of 2022, beginning of 2023, about, you know, the cost takeouts that we were gonna take in sort of the logistics space, right? And Niraj spoke to some of the changes that we've been able to make in our network, and how that's actually driving better outcomes for the customer, candidly, while we've also done cost savings. That was a more than $500 million cost takeout there, so that's a large bucket. The second bucket is supplier advertising that you spoke to, and we're seeing really nice. We spoke about that on our last call. We're seeing really nice engagement there from our suppliers that's moving, you know, along the path that we want it to move along.
The reason we speak about that in the gross margin line is that hits as a contra COGS, so that hits in gross margin. The third bucket that we often talk about, 'cause we've spoken about sort of this path over time of growing gross margins, is what we would call sort of merchandising mix, and that's a few things. That's one, some of these other brands that come in at a higher gross margin mixing in, so the specialty retail brands and Perigold operate at higher gross margins, as you might expect for the type of products that they sell. So as you know, those mix in, and we've spoken about Perigold doing, you know, quite nicely even during all of this time, and then within our own products, you know, our...
We can drive better whole sales and better margin as we, you know, go deeper with certain suppliers on products that maybe are exclusive to us, or that, you know, are moving more volume with us. We call some of those our proprietary brands and our proprietary products.
Okay, so maybe if we take that point and broaden it out a little bit, at your investor day last year, you kind of set the multi-year growth strategy, the growth algorithm. There were multiple points in there. I think, you know, fast-forward a year later, the macros were made more challenging. Does that change anything in your approach, or, what key factors are kind of the biggest components of that growth algorithm as we look forward here?
I think you're speaking to the page where we talked about sort of getting to double, you know, back to sort of meaningful double-digit growth.
Right, right.
And just to give the walk of that. So, short answer is no, it doesn't change. You know, to give the walk there, it's the categories historically say a 3-4% grower. Then you have online, you know, growing faster than that. So we've always enjoyed a significant outperformance relative to the category. To your point, we've seen that hold up even in, you know, this downturn. And then added to that. So, even the category returns, plus you get, you know, the sort of return to online, which we've already seen online recover and get back to sort of its normal, you know, share and growth trends. On top of that, then you have our other growth levers.
And so Niraj mentioned a number of them, you know, physical retail, our B2B business, our specialty retail brands, our ex-US business, so Canada, Europe. So all of those growth drivers, even with all of this cost takeout, we've maintained our teams that are invested on those growth drivers, and we're continuing to invest in them and see those as ongoing levers for us.
Okay. Maybe we could stick on some of those for a second. I don't know, international, the international had a much better quarter last quarter. It's often been a topic of discussion from investors on the underperformance, the margins are lower there. How do you envision that? What's happening in international? And I think generally international's still been a tough environment, but kind of bounce back-
Yeah
... for you guys, how do you envision that going forward?
Yeah, well, so I'll say the macroeconomic climate in the countries we're in outside the U.S. is worse in all those countries than it is in the U.S., so the degree to which the category is challenged in the U.S. is still less of a challenge than it is in the other countries. What I will say, though, is, you know, part of what we did from kind of summer of 2022 through the end of 2023 or through January 2024, and when we took out the kind of $2 billion odd of cost, is we did basically get every business line, every activity, kind of right-sized from a team standpoint, focused on the priorities that matter.
We made sure that the advertising spend that's in kind of the R&D bucket of new things we're trying to figure out is kind of capped to a certain size portion of the ad spend. We didn't let it sort of expand, you know, it had expanded, we kind of cut it back, et cetera, et cetera. So some of the improvements you see in various parts of our business now is when you anniversary changes that were made a year ago. And so that's sort of been kind of the story for a number of quarters now, where you sort of see something, but it's not like the thing that was done now, it's you're seeing it now comping over a per-... So in other words, in international, some of the ad spend, which was non-productive, we kind of limited that down.
When you take out that ad spend, you take out some revenue, but it was not economic. So you say, "Oh, well, you know, so then revenue looks bad for a period of time," but then when you comp the kind of new setup, you actually see how the business is improving and performing. So there's kind of a set of things that, you'll see as time passes. The second thing is the international PNL does, you know, we have certain, we have quite a lot of corporate costs, and so then we have to have an allocation methodology of how we assign these to the different, segments, SEC segments.
Right.
And so there are certain costs in our business, you know, whether it's our technology team or some of our corporate executives, what have you, they get allocated out. So some of that you see kind of, obviously we've reduced the cost of some of those things, so then you obviously the costs overall go down, but then the allocations hitting the different segments, you see that kind of happens. But then what happens on the international segment is it's much smaller than the US segment, so the revenue size is not able to carry a certain amount of cost load as well. So as that segment grows in size, what you'll see is that, you know, the economic benefit might look disproportionate, because it'll be able to cover that overhead cost much more easily.
Got it. Okay. And then, on the physical store strategy, and the halo effect. So on one hand, you're building out stores, but you're doing it kind of a slow, measured pace. The halo effect would kind of be localized, right? So how do you think about that? I was in the store in Chicago. I was really impressed by it, and certainly saw a lot of things that you don't normally register with Wayfair.
Yeah.
So how can that... How do you tie those two things together, the kind of measured approach, and then that halo effect actually driving an impact for the business?
Well, actually, the measured approach helps you measure the halo effect, right? Because you know, you know the trade area for that store. So the store is in the Wayfair store is in Wilmette, just north of Chicago, in a kind of good suburban, dense suburban area that kind of would fit our demographic. And so customers, the majority of customers, you know, certainly, if you buy something, we know exactly who you are, 'cause it's tied to your account. But if not, even if you don't, if you just visit, you know, customers tend to use, we encourage them to use the app in the store. So we can basically know the trade area through kind of the same thing as traditional retailers would do to know the trade area.
We then obviously can measure the impact on that trade area. We can also just look at what happened in the broader, you know, kind of Chicago area, and we can look at other, you know, sets of cities, twin cities, that behave similarly, where we don't have a store, and we can kind of see what's happening. We can also look at more direct halo effects of, you know, someone who came to the store but didn't buy in the store, what did they buy in five days and thirty days, and so there's a series of ways we can triangulate in on the halo, and that's important because that's, again, one of the goals we have, so obviously, the four-wall economics of the store matter, but the total economics, including the halo, also matter, so we want to know what that is.
The other thing is, you know, it's a 150,000 sq ft store, and you have to make decisions on the size of departments, how you set it up, how you organize it, and we try to set up flexibly so we can change those things, but certain things are harder to change or more expensive to change. So what you wanna do is be able to iterate in that store before you have then your next one, where you're gonna have a set of decisions that would be expensive if you, if you made it 10 times and you wanna change it 10 times, more expensive than if you're iterating as you go. So, so we're excited about this store in Chicago.
We are intending to open one next year, and so the measured approach is to enable us to kind of get to a position where we can then be very confident in the economics, know exactly what it's providing, and we can go at a faster pace, you know, down the road.
Okay. Have you seen the halo effect? Has it been measurable yet? Has it-
Yes
... influenced any of your decisions so far?
Yeah, we said on the last call that we're seeing, you know, nice benefits there.
Okay, and, you haven't said where the next location's gonna be?
No.
You don't want to today?
Nice ask.
Okay, let's shift to costs and margins. One of the big things this year has been, at a minimum 50% more in EBITDA dollars, no matter what the environment is. So, you know, let's talk about that, and then the other big one has been if you've got flat top line, what was it? Came out $600 million, which is a 5% EBITDA margin. So can you talk about those two things, how confident you are in that floor, and what else to think about in that kind of flat to 5% margin framework that you put out?
I'll just throw out one thing, and I'll let Kate really take you through the detail, but I'll just point out, you know, we talked about at the investor day we had last summer, about a year ago, August, of last year-
Right
... we said, "Hey, we're, we have these three milestones. We're gonna become Adjusted EBITDA profitable, quickly. We're then gonna ramp quite quickly to mid-single-digit EBITDA, and then, then we're gonna ramp to, you know, 10-plus% EBITDA," and we showed a bridge of how you get there to a number that gets you to higher than 10 if, depending on how you add up the different bars-
Right
... you know. What we've done in that year is we got to Adjusted EBITDA profitability very quickly, and then, like, last quarter was 5.2% Adjusted EBITDA profitability. So, so the way to think about it is kind of we're on the track, the trajectory we talked about, and, you know, I don't know if we've really detailed it, but one of the things we're on track for is next year, regardless of what the macroeconomic environment is, we expect that the EBITDA dollars will continue to grow, and we have plans underway that will continue to drive that. And so the way we're thinking about it is, you know, obviously, as the environment recovers, we think, you know, the growth opportunities are fairly substantial given the kind of depths of the categories at, you know, of lows right now.
But we're not sort of waiting for the EBITDA dollar ramp for some indeterminate point in the future.
Got it.
Right?
Uh.
Through kind of things we can drive ourselves, but I'll let Kate kind of answer your question.
Kate
... in terms of, I'm not allowed to talk about guidance.
I love to hear things that you haven't talked about before. That's, I think that's great.
There you go. Yeah, but I would echo that, right? We're very committed to continuing EBITDA dollar growth. And in a very challenging top line in the macro, I think we've done that quite successfully. We've taken out, you know, nearly $2 billion of cost, you know, dollars out in cost avoidance.
And if you think about that sort of more than 50% EBITDA growth, you know, story that we talked about for 2024, that's really taking all of the cost actions and saying, "Here's what we expect that impact to be throughout 2024." You know, pretty significantly, where you're seeing that right now is on that SOTG&A line, where we, you know, had another large cost action in January, and then, you know, saw Q2, you saw that come in even more, and we're very focused on continuing to control what we can control right now. And we think we've done that in a very prudent and thoughtful way. We've maintained our growth investments while we've been driving that down.
And so that's why we have that conviction around, you know, even if the top line is soft, that, you know, more than 50% Adjusted EBITDA growth, because it takes those savings and those dollars out that we know we have driven and can continue to drive, and sees that, you know, continue to flow through.
Okay. I might be getting a little greedy here, but in that next year, EBITDA dollars grow-
Yeah, we're not giving 2025 guidance. I just wanna-
That, the-
... clarify that at this moment.
That's fair, but that would imply that even in a we, God forbid, have another no-growth or, you know, negative growth environment, and that's what the macro is. There's more costs that could come out of the system.
Yes, we're very, you know, I would focus you on that SOTG&A line, and we're very focused on where can we continue to pull out here? And we wanna do that in a way. You saw us do several large, you know, cost actions, right? Several large restructurings, but even when we've not been doing restructurings, we've brought that dollar amount has come in every quarter for the last eight quarters. So we're, since we started on these cost actions, we've brought it in every single quarter. And so we're quite disciplined about that, and we continue. You know, you take out some cost, you uncover more. You take out more, you see a better way to structure the team, you see some efficiencies in tech, you see opportunities there, you see lower cost options for folks.
And as we've done that, we've just continued to uncover. Now, it's not to say that it's not incredibly challenging, you know, difficult work. It is, and we wanna be thoughtful about how we do it, but we do see ongoing cost efficiency opportunities.
Okay. One of the things you talked about has been the incremental margins on the next billion.
Yes.
So, does that change your potential incremental margin profile of the growth, or is that making a bridge too far?
Yeah, so what we've spoken about when you know what Niraj and Steve wrote about in their shareholder letter was sort of the mid-teens incremental margins. I think that's a good framework for right now-
Okay
... you know, when we return, obviously, to growth.
Okay. And what about on the advertising side? It's been, you've been spending on advertising in this environment. Is that an area or how should we think about advertising? And just kind of frame it broadly there.
You're talking about the supplier advertising-
Marketing.
Or you're talking about us?
For marketing, for marketing dollars.
Yeah.
Yeah. Yeah, so, you know, when I was describing pricing and how we do that very scientifically, you know, you should think about the advertising very similarly in the sense that we really try to measure the impact of each of the advertising we do. And so we have, you know, again, data science models that try to attribute any revenue we have back to specifically the advertising that we're doing. Some of it is lower funnel advertising, and it's more trackable. Some of the upper funnel advertising, you know, television ads and the like, is a little less measurable. But again, there's ways to measure it, and we have a few different models that triangulate in on it.
So the way we think about it is, driving customer traffic and attracting customers is something we're very happy to spend money on, as long as the payback remains in a, you know, quite a tight manner. And if it's lower funnel, the payback period is much shorter than if it's upper funnel, where it's still relatively short. So everything is less than a year payback. And when we get to lower funnel, it's much faster than that. And that's what lets us have the comfort to continue to spend the money on the advertising, because if you're sort of counting on a multi-year payback, you could easily be wrong in your measurement, and then it turns out your advertising was uneconomic, and then you have kind of a challenge.
So the way to think about our advertising is there's channels that we, you know, have been in a long time, very savvy at, whether it be mailing catalogs or, you know, Google Search ads or television. And then there's always emerging channels that are growing very quickly, whether that be some of the social media channels or some of the streaming media products. And so we kind of always have a test budget where we're working on the new channels to figure out what sort of targeting, and creative, and what combination of things get it to be economic inside that payback. And then we'll ramp it, but only once it's inside that payback window. And so that's how we develop new methods of advertising.
Right. Okay. I'll stop here and open it up if there's any questions from the audience. Go up here.
On the retail stores, can you talk about, is there a percentage that the suppliers are helping you pay to open retail stores from an advertising perspective?
So, the main thing about our stores that would be different than, I think, a traditional retailer is that we don't own any of the inventory, including the inventory in the store. So they're providing the products. When you walk in the store, all those products are provided by the supplier, and then obviously, any sales that are made, the inventory that we're shipping out to them is inventory that's owned by the supplier. So once it's sold, you know, we ship it, then, you know, the supplier invoices on the net terms, we then pay them. So typically, one of the biggest challenges for brick-and-mortar retailers as they grow stores is the cost of the inventory that they need to continue to add to kind of scale the stores. We don't need to do that.
I guess the way to think about it is, like, if you think about opening stores, you have the cost of the store itself, obviously, but then you have the cost of the inventory, the supply chain capabilities, the delivery kind of logistics, and then the marketing brand. How do you build a customer file? And in our case, those latter four, we basically have covered between the suppliers handling the inventory, us handling the supply chain delivery, and us, having the advertising. So we have 90 million people on file, we have, you know, 20 million sq ft of logistics. We're delivering, you know, all these orders every day. All these store orders are flowing through that same supply chain. So we're basically paying for the cost of the store.
Suppliers are paying for the cost of the inventory, and the rest are already sunk costs in our operation.
Any other cross benefits between your logistics network and having a, over time, a broader physical retail footprint that can cross, kind of cross benefits?
Yeah, I mean, obviously in our business, like if you look at the kind of the bridge to how you get to that, you know, kind of, you know, more than 10% EBITDA over time, you'll see there's kind of like different buckets. And, you know, one of them is like ramping supplier advertising, where you say, "Well, that really is unrelated to the store." But there's also a piece around, logistics, for example. And logistics, you know, some of it is continued innovation on the technology front, but some of it comes with volume.
Right.
So there's things on that bridge, you know, and some of the SOTG&A leverage. As Kate mentioned, we've been very disciplined about taking out costs. In addition to that, there'll be a lot of leverage from a margin standpoint when there's revenue growth, right, and volume. So there's a volume benefit to a bunch of pieces of what we're doing. And you could say stores add volume, both in terms of what comes out of the store, but also what the halo creates. And then it creates it in a dense geographic area, which then makes the logistics much more efficient, right? Because we have a warehouse in Romeoville, Illinois, you could imagine the inventory that we know when people in the store, these items are very likely to sell. We're not storing that inventory all over the U.S.
Right.
We're gonna concentrate it in Romeoville.
Right.
Then the delivery costs can be very efficient, low delivery costs, because we're only moving it, you know, modest distance, right? Because those customers live in that sort of northern, you know, north of Chicago area, et cetera, et cetera.
And the speed can be quite good relative to other, you know, furniture retailers, where you go in, and you buy the product and, you know, it gets delivered to you. And you may also be thinking about sort of buy online, pick up in store, buy online, return to store. Obviously, once you have a denser network, those kinds of things, you know, become interesting for the consumer from a value prop.
Right. Maybe one more on the halo effect. I just think this is really interesting right now. So you go in the store, connected to your app pretty easily-
Mm-hmm.
you scan the barcode and put it in your shopping cart. How much are you seeing people do that, and then go home and maybe buy what they saw in the store, plus something, versus pick the item-
Yeah
... and pay in the store?
I mean, this is where we were talking about the halo.
Right.
It's been a significant, significant impact.
Okay. Great. I have a few minutes left. If anyone has more questions, just raise your hands. Well, I've got more, two different ones. Let's start with tariffs. It's come up more close election cycle here. It's top of mind for a lot of people. This has come up from you in the past, with the previous Trump administration. How have you kind of managed that? How has your risk to China tariffs changed?
Yeah.
How are you positioned around that now?
What I'll say is one of the benefits we have. I mentioned on the kind of supplier side, we're more of a marketplace. We've got these thousands of suppliers that have, you know, that basically create this product catalog of 20 million plus items. As you can imagine, there's a benefit when you have, you know, upholstery suppliers out of China, but also upholstery suppliers out of other parts of Southeast Asia, and upholstery suppliers who are domestic U.S. manufacturers. You have this benefit where if something happens, that advantage is one relative to the other. We're already working with all of them, right?
And so we have a much easier way to respond than if we're directly sourcing goods, and we've picked one of these suppliers, and if it happens to be one that then gets disadvantaged, we then have a bigger problem. What you've seen the trend since the tariffs that were put in during the Trump administration is the percentage of goods sourced from China has been trending down. And the reason is suppliers are increasingly seeing that, you know, "Hey, it's less risky for me to have goods manufacturing in other locations.
Right.
And so you've seen a lot of rise of manufacturing in other parts of Southeast Asia, and some other locations, a little bit in Mexico or Brazil or India. There's a bunch of areas that have been growing.
Okay. Is it still, like, what's the impact if we kind of get that scenario kicking in again?
You know, what you saw when the tariffs went from zero to 25% is that, you know, there was a impact, but that upheaval was relatively temporary because folks were sort of restarted responding very quickly. And that time there was very limited advance notice. The 10% happened more or less overnight, and then it went from 10 to 25 fairly shortly thereafter. This time, I would say it's a much more top-of-mind activity. So most folks, when you talk to suppliers, they are very cognizant of the potential impact. And so if they're still continuing to source certain categories from China, they're doing it because it's still very economic to do it, but they sort of I wouldn't say that, you know, they've already been thinking through what they would do, I guess is-
Okay, great. In the last twenty seconds, Kate, I imagine your favorite question, just on the, so free cash flow conversion, and then with the convertibles coming due over the next couple of years, that you've talked about switching to more traditional debt, but just how do you approach that?
Eight seconds on capital structure.
Yeah. Go, you... I'll give you an extra.
Yeah, I think it's actually what you've heard from us before, which is our focus has really been on increasing our optionality. And the first step in that is improving, you know, Adjusted EBITDA and free cash flow such that, you know, our financial metrics were better, so that, you know, we had an option to use cash pay as part of the, you know, management of the 2028s,2 5s. And then also so that we'd be accessible to to, you know, sort of get regular way debt, and use that, you know, potentially as an option for the twenty-fives. And so that's really been our focus. I think we've done that.
I think we've increased optionality, and so our, you know, expectation is that we'll be thoughtful and prudent about how we manage that within the, you know, macro construct that we're operating in. You know, I would, you know, as you've heard us say before, we're focused on options beyond the convertibles because we are quite cognizant of managing that dilution, and, you know, really focusing on trying to maximize free cash flow per share. So we're very thoughtful about, you know, how do we want to solve the converts and not using convertible debt as an ongoing, you know, financing source.
Great. Thanks for squeezing that one in. Thanks, thanks for your time, guys. Thanks, everyone, for joining. Enjoy the day.
Thank you.
Thank you.