Thanks. Good afternoon, everybody. My name is Chris Horvers. I'm the broad lines and hard lines retail analyst at J.P. Morgan, and it's my great pleasure to have Wayfair's Chief Financial Officer, Kate Gulliver. Thanks for coming again this year.
Happy to do it. Thank you for having us. Good afternoon, everybody.
I have a series of questions. With about 15 minutes left, we'll go to audience questions as well. There's some you can also post online for those who are listening online. Setting the stage and kicking it off at a high level, over the past three years, there's been a significant amount of change at Wayfair. The strategy has pivoted from growth to profitable growth. You've exited Germany. You're opening stores. Can you talk about what drove that change and how you think about the strategy going forward?
Yeah. You know, taking your question sort of took a step back. So I'll take a step back as I answer. We spent considerable time in the immediate post-COVID period working to get the P&L in the right shape. And so since sort of late 2022, throughout 2023 and 2024, we've been extraordinarily focused on cost and managing cost effectively. That's taken the form of significant cost takeouts on our OpEx line, our SG&A line. It's been improvements in gross margin. It's been tight management of CapEx and our stock-based compensation. So really up and down, we've been really focused on getting the P&L to a place that as the top line returns to growth, you would have really nice flow through. And so that took us from a position of actually negative EBITDA to this now sort of mid-single digits adjusted EBITDA that we've been operating at.
What we have said is that within that context, as the category recovers and the business returns to growth, you should see a mid-teens flow through on that incremental revenue that comes in. I think that is really an exciting position for us to be in because prior to COVID, we ran this business, to your point, Chris, primarily for growth. We were a significant grower. The year prior to COVID, we grew sort of 40%, right? This is a very high-growth business, but it was not profitable. Obviously, the COVID period was a unique period, so let's leave that aside for a minute. Then post-COVID, we were both not growing and we were challenged from a profitability perspective. We fixed that profitability problem. I think we have done a fantastic job on that change.
We're able to focus on a number of different things that should accelerate growth and put us back in a position of, to your framing, growing profitably or being able to grow the top line and grow adjusted EBITDA dollars. That's not something we've really had the opportunity to prove out yet, but we're excited to be able to do that.
Just thinking about maybe this is a good point to just think about the long-term algorithm of the business. A couple of years ago, you set out some profitability targets. You set out a gross margin target. Can you expand on that a little bit and help us think about sort of what sort of backdrop is necessary to ultimately enable getting to those targets?
Yeah. About a year and a half ago or almost two years ago now, we outlined a path to 10%+ adjusted EBITDA margins. There are two primary components of getting to that point. One is growth on the gross margin line from where we are operating today, which has generally been sort of 30%-31% to like a mid-30s gross margin. The other is leverage on the SG&A line, that OpEx line that we've brought in quite substantially. To get from sort of the 4%-5% point that we're operating adjusted EBITDA margin today, you pick up a few points on gross margin, you get a few points of leverage. We show in the model actually getting to north of 10% because we also show another bit of leverage on our ad cost as a percent of net revenue.
We show sort of wider ranges on some of these things. At the low end, it gets to this 10%. I think we've proven that OpEx point in that we've taken out just substantial costs there. We've said that should be able to hold for some time even as growth returns in the category. To get the leverage, you obviously need to see some growth returning, but you should be able to hold that in. We've not impacted teams that are focused on our growth drivers like physical retail or Perigold or the B2B business. I think the point that sort of remains to build over the next several years is that gross margin one and how we start to go to that over time. There are three components on the gross margin line that really drive that improvement. One is supplier advertising.
We actually spoke about that on our most recent call. We said in 2023, it had been a little under one point. In 2024, it had got up to sort of a point and a half of total revenue. That is growing quite nicely, by the way, while the category has been down. That has largely grown through our expansion of supply and our work with suppliers to help educate them and help them understand. Most of that, to date, we have been reinvesting in price. You have seen us reinvest that back into the consumer experience. We do think that can get to about 3-4% of revenue. We show that providing sort of 2-3 points of lift on that gross margin line. The other big piece on that gross margin line is leverage in our Castlegate network, so logistics leverage.
Again, we've taken significant cost out there, but we also saw a little bit of deleverage in that line in 2024 and in early 2025. Frankly, volume has been down, and we have a fixed cost basis in that network on the fulfillment centers that we have. As you see volume getting back in, incremental volume flows in at a higher gross margin because if it comes through the Castlegate network, it's coming in at a much more efficient gross margin. Those two things, plus we do about a point of merch mix. That's really Perigold and the SRBs, which come in at a higher gross margin, growing faster than or continuing to become a bigger piece of the whole of the ink-wide business. Overall, that's what gets us to that mid-30s. Nothing has changed about our view on our ability to do that.
We feel very good about the potential to get to that point. I think we've started to prove out some of the proof points on it relative to supplier advertising continuing to grow. However, over the past year, you and I were talking about this sort of when we walked in, we have reinvested some of that. We felt that that was the right trade-off to reinvest and grow gross profit dollars because we've been in a mode where we've been very focused on, to your point, profitable growth and really driving gross profit dollars and ultimately adjusted EBITDA dollars. As we looked at our pricing curves, our efficiency or elasticity curves, we saw opportunity to invest in selective areas of price, and we have made some of those investments.
We think that that has been the right thing to do for the business to grow these gross profit dollars, particularly during this challenging period of the category.
That's great. And just to clarify, the mid-teens incremental, that's on SG&A?
What we've said is incremental revenue should come in at that mid-teens flow through for a few reasons. SG&A just holds. If you're at like a 30%-31% gross margin, you have, say, 12 points of ACNR on sort of incremental revenue. We've said it's like three on the incremental, three to four on the customer service and merchant fees. That's how you get flowing through at that sort of mid-teens.
Got it. There's always the question of your structural strengths and weaknesses versus a competitor like Amazon. Now Walmart's adding a lot of SKUs, mostly in apparel, but a healthy amount of the home furnishing side as well. Can you talk about, because I know you get this question a lot, what are the structural advantages that Wayfair has against these very scaled competitors?
Yeah. I first speak to some of the dynamics that we've been seeing in the category over the last few years. If you look at where share gains have been during this period of disruption in the category, it's primarily been share consolidating towards the major players, so us and some of these broad lines players away from regional and sort of pure play. Within that, we see three major share gainers. We see ourselves, Amazon, and HomeGoods. That's been the three primary share gainers during that period, all for slightly different reasons. HomeGoods has been a nice, healthy share gainer in the space that we play in, but we're not as large in. That would be things like decorative accents, seasonal decor, kitchen, that sort of stuff, dining. Amazon has done really well in opening price point.
Sort of that entry price point into parts of the furniture and decor part of the business. Where we see ourselves really excel is in a few areas, and this is why I think we've been able to grow share even with competition across these broad lines players for many years, as well as significantly structurally well-done pure play players. A few areas of differentiation. One, we think we have the best selection at that sort of mass price point. Not the very bottom opening price point, which we do offer, but is not the focus of our business, but just a tick above that. We have the best breadth of selection. We have a delivery experience that is unique for our category. That's on a few fronts.
Certainly a large parcel, we're the only people that do that kind of delivery experience at mass for the large parcel products. Even things that come small parcel, these are very complicated categories to ship. They have multiple components. We call that multi-carton. We think we do that better than anybody else. That's quite a complex thing to do and get right in the space. The delivery and logistics is tailor-made for home. Then you have a shopping and discovery experience and a customer service and returns experience. It's once again all tailor-made for home versus home being one of many categories that a broad lines player is in. I think that's why you've seen that share gain continue to accrue to us over this period and why we've been able to not just hold, but actually grow share against pretty significant competition.
We feel very good about the ability to continue to do that. In fact, we have a number of things that we're working on that we think will actually accelerate that share gain over the next several years as the category starts to recover.
Absolutely. Shipping large items that are subject to damage is a very, very complex business.
It's very complicated. Yes.
Maybe before we go to some consumer questions, as you think about the self-help growth drivers that you have going forward, could you maybe talk about near, medium, and long term how you think about those opportunities to drive share?
Yeah, it's a great question. There are some growth drivers that are already underway and are contributing today. Those would be things like Perigold, which is our high-end brand. We've said that that's actually continued to grow nicely during this period and has been sort of a nice overall contributor at the B2B business. Similar thing, continue to be sort of a nice overall contributor to the Inc-wide business during this time. Those are very near in. We're already seeing benefits from that today. We've been working on those for some time, obviously. It's not surprising that we're seeing benefits. There are things that are more recently launched, but we think will give us benefits in the sort of midterm. I'd put in that bucket things like our Wayfair Verified program, which we launched publicly about a month ago.
This is where we put our stamp on select products that we have vetted. We've done quality audits on. We know from a bunch of data that these are great products within a category segment, a price point segment, and an aesthetic segment. One of the challenges that consumers have when they're shopping for the home or when they're shopping our catalog is it is so vast and there is so much selection that they want to know, how can you help me narrow this down? This is the answer to that question, which is something we've heard feedback on consumers from. That's very early days. We're seeing nice traction, though, really nice consolidation of conversion and demand on these products. That should be a differentiator over time.
Something like the loyalty program I'd put in that bucket as well, where that launched about seven months ago. We see nice overall incrementality. The program is small today, but we think it can grow really nicely. That's a place where you're taking a customer and maybe today we're picking up one to two points of their shopping a year, but can we pick up that third or fourth occasion of their shopping in the category this year and really expand our share of wallet with them? Those are things that I would say we're working on. It's early days. We should get some benefit in the midterm. There are longer-term plays like physical retail. Physical retail, we have one large format store open. That's outside of Chicago. We have a few small format stores in the other brands, but for Wayfair, it's just one store.
We announced that we'll have another store opening in Atlanta in early 2026. We're seeing really nice traction at the store. A few stats that we've shared that I think are helpful to illustrate how this can be a share gainer over time. More than 50% of the customers shopping, sort of purchasing in store, are new to file. They've actually not shopped at Wayfair before, which is pretty surprising given the sort of breadth and scope of the business. We also see a really nice halo effect. The state of Illinois, the stat that we gave was up 15% relative to the U.S. baseline. That's the entire state of Illinois. That's not just the area, the catchment area around Wilmette.
If you think about the new customer acquisition, the way that the customer is sort of increasingly shopping multi-channel, this gives us a really nice way to get significant growth, I think, over time out of that. Obviously, we have one store open. The next one is not opening until 2026. It is going to take some time for that to have a meaningful impact on the P&L. That is why I would put that in the sort of farther out drivers.
Great. That's a big number for a state.
It's exciting. It's really exciting.
Maybe talk about there's a lot heading towards tariffs. There's a lot of questions on the consumer right now. What is going on with the consumer? What happened in the post-holiday lull period? How much was weather? How much is what's going on? Is there a pull forward of demand? Maybe you could just brush broad strokes across all those questions, which I'm sure you've heard a lot today.
Yeah. Obviously, it's a very complex macro environment out there changing by the day. When we started 2025, what we said on our Q4 call, which we had in sort of mid-February of this year, we said that our focus was on assuming that the category sort of stayed where it was. Not that the category recovered. Obviously, we're at cyclical lows for the category right now. At some point, it will certainly recover, but we were not going to predict a recovery. Instead, staying where it was, not deteriorating further, which we also haven't seen, our focus was on trying to drive growth within that context. I would tell you, as we look back at the last four and a half months of the year, there's obviously been some spikiness within months, as you noted.
There was a really nice holiday season and then a pullback, January-February, but then everyone's talked about a really nice March-April again. What we said on our most recent call and what I would say again today is we've seen really healthy demand. On the most recent call, we were obviously speaking sort of in a very complex dynamic on tariffs at that particular juncture and trying to help folks sort of understand how to frame up the next quarter. We did not provide a quarter-to-date number as we typically do because a lot of the sort of noise in the quarter-to-date number, and we did not provide a revenue guide because of the noise and sort of the overall macro. What we said then, and I want to make sure people hear now, is things have been healthy. That was not anything respective of us specifically.
It was more of the overall macro context that we're operating in. When we look at the category over the total of these months, we would say it's been sort of clearly at a cyclical low, and it's been sort of hanging out at that low point. We feel good about where our trends are relative to that.
Other retailers have talked about pull forward of demand in different categories, and it does seem like it did touch the home more than other parts of the consumer wallet. Can you talk about what you've observed from a category from pull forward of demand?
Yeah. What we said on the call just a few weeks ago was that we did see pull forward, in particular in the appliance category. That's a very small category for us, but we saw a notable uptick in demand there. We actually didn't see—we've seen healthy demand, but we haven't seen anything that suggested a notable pull forward sort of more broadly for us in the furniture categories. Some other folks have asked, well, how would you know? What are you looking at? That's when we look at things like traffic, conversion across different categories, higher ticket categories versus lower ticket categories, Google search trends, sort of overall things that we look at to sort of get a sense of health and demand. We haven't seen what has been any sort of sustained or discernible pull forward.
Other retailers I follow in this space have talked about raising price ahead of cost already, the branded retailers. What are you seeing on the price side? Dovetail this to the marketplace concern out there and how tariffs might affect your business.
Yeah. I think the marketplace actually gives us a significant advantage during the complexity right now. That's because we work with over 20,000 suppliers from around the globe. For us, frankly, as we see disruptions in certain geographies, these products are highly substitutable. A similar product from a place where maybe there's not as much of a tariff impact would then push up in the search order, and the demand would consolidate towards that product. If you have an individual supplier that is raising price on their products, their products will sort of move down in the sort order. The other products that are similar that are maintaining an efficient price will then consolidate demand.
Our focus is always on to deliver what's best for our consumer, to serve up those products for her that are sort of the best combination of delivery speed, quality, and price. For our suppliers, their incentive, if they want to maintain volume, is to be very thoughtful around any moves that they're going to make on price. I was with a large number of our suppliers last week at a few events, including our U.S. supplier summit where we had sort of our top 200-ish suppliers here. This is a category that has been, as we talked about at the beginning, that has been challenged for many years now. Most of the suppliers are very focused on how to not lose demand during this time.
They really want to make sure that they're able to, frankly, over time, start to build volume growth because everyone is eager for the category to come out of these cyclical lows. As they look at that, there's not really an incentive within our marketplace for them to raise price. What we said on the call in May is we haven't seen a discernible change in price. I think the other thing to note is because of the way our model works, our margins can be protected even if there is, even if there are changes on price. We may want to think about what are the right moves to make sure that we're maximizing these gross profit dollars. We're quite thoughtful about that as we look at our elasticity curves on these products.
It is not as if if the supplier raises the wholesale, our take rate goes on top of that. So we can manage the margin through that.
You have not seen any notable price change.
We have not seen a discernible price change as of the call a week or so ago.
As you think about historically, what's been inflation like in the category? I'm not sure if you know this exactly, but AOVs did pick up in the back half of the year. What would you say inflation was for you in 2024?
Yeah. Actually, let's take a step back. Let's go back to sort of 2021, 2022, where you saw significant inflation in the category. The category was very supply constrained at that time because it had just been through the biggest surge in demand that anyone could ever anticipate. You did see AOVs rise pretty rapidly for us and for everybody, right? There was a significant inflationary increase in prices. That came pretty rapidly back out in 2023. You actually saw our AOVs have similar declines to what they had in 2022 in terms of increases. In general, if we look at a more normal, so you've had the categories operating within that backdrop. If you look at a more normalized AOV growth rate over the last, over sort of the pre-COVID period, it would be something like 3-4% a year.
Now that's not solely price because AOV is a combination of things. There's unit price, there's items per order, there's the merch mix within that. As brands like Perigold that come in with higher AOVs mix in, that can move the AOV up. There's always general times of stability. There should be an upward AOV movement. We obviously saw it a little bit higher than that. It was like 5% over the last quarter and the quarter before that. I think it's important to note that the seasonal trend was very consistent. Q1 versus Q4 was very consistent. There wasn't some people looked at that and said, "Oh, that must be inflationary price increases going in already." That movement had already started before because you had that sort of same seasonal pattern that we typically see.
As you think about how did you think about the rest of the year? You had a bunch of vendors move a lot of inventory into the U.S. across a bunch of different categories. That certainly affected your business. As you look forward, how do you think this plays out? We have a 90-day window. Retailers are going to rush product into this country. Are there any implications to that for your business, whether share or margins? To the extent that let's say that it just stays at 30% forever from China, how does that affect you and your competitive set? Maybe versus the 145, maybe the 145 is not the right reference point, but maybe it's just the 30.
Yeah. Let's start with sort of what might be the dynamic. What was the dynamic heading in, and then what might be the dynamic over the next 90 days? We actually said on the May call that we had actually helped our suppliers move more inventory than would be typical into the country ahead of the Liberation Day announcement so that suppliers had more inventory on hand than they would typically have. Obviously, we're a marketplace and inventory is not on our balance sheet. We're not the importer of record. That's the supplier in every case. We wanted to leverage the capacity, frankly, that we had in Castlegate. We thought that was actually to our advantage to be able to use that to help ensure that we had enough inventory in. Now we have suppliers that are in the midst of two different pauses.
Non-China suppliers had a pause starting earlier. We've been working with those folks to bring product in. China suppliers now have a pause starting as of Wednesday. We'll be working with them to bring product in. We'll be using similar work and engagement with our suppliers that we did in Q1 to help them move that product in advance to ensure that we have appropriate availability at these sort of 10% and 30% tariff levels. I think that speaks, frankly, to our deep supplier engagements. We partner very closely with our suppliers to the point I made earlier that they're quite focused on how do they continue to grow volume during this period. We want to help them with, "Here are the tools that we have that we can help you on that journey." One is Castlegate and the availability metric.
If you can get more product into Castlegate, you're going to be sitting good on availability, and that's a good position for you to be in. One is supplier advertising. That's how you can get your product seen. One is your wholesale. That's how you can help improve retails. And one is promotions. That's how you can sort of move a lot of volume quickly. In our conversations with suppliers, our focus is sort of how can we help them with all of these levers to make sure that they're able to grow volume during a complicated period. Certainly, using Castlegate to bring product inbound ahead of any other change in tariffs is quite important from that perspective. On the 30% out of China specifically, and as a reminder, we source from everywhere. We work with suppliers from all over.
I think the thing that you'll see at the 30% is goods will continue to flow out of China. To your question that you were just asking, that's why we're going to be able to work with them to help bring in product in advance of any future change. I also think you'll see some movement into manufacturing out of China as well. You certainly saw that in 2018, 2019 when a round of tariffs went in. There were about 25% during that period. That's where you saw across the industry as a whole movement out of China and into other parts of Southeast Asia, India, Turkey, etc. I think you'll see that trend continue if the 30% were to hold. For us, we're somewhat agnostic as to where the product comes from. We can work with you in any geography that you're in.
It's mostly important that we have these supplier relationships and that we help you get that product into the country.
Are there any questions from the audience? Yep. Oh, we have two.
Thanks for the time. I was hoping you could talk a bit about Wayday this year and the extended sales period and how Wayday performed this year versus last year. Could you just talk a bit about just housing fundamentals and how they're impacting your business?
Yeah. Let me start with the Wayday question, and then I can go into housing. We haven't provided a year-over-year compare for Wayday, but the way that we thought about the sale this year is, one, we wanted to maximize the opportunity for the physical store, and we knew that a weekend was going to be helpful for that. We also wanted to maximize the opportunity for our B2B business, and we knew that weekdays were going to be helpful for that. We had a longer sale period this year. We had about a five-day period. It was marketed as three days, and then we extended. We used those tactics to help with urgency and to stay top of mind for folks. You've seen us sort of test that out a few times.
We're overall pleased with how things went, and we feel sort of very good about the contours of the program this year. One thing that somebody asked me in another discussion, which may be sort of where you're getting at, folks were worried that were Wayday discounts impacted because it came sort of post the Liberation Day announcement. We did not see, we felt very good actually about where the discount level was and where the wholesale costs were for Wayday. Overall, quite pleased. Housing trends. This is a category that obviously has a relationship with housing. Certainly, one of the things that would help the category move off of the cyclical lows would be momentum in the housing market.
Part of that is because in the first year of owning a home, you spend significantly more or moving into a new home, you spend significantly more than you do otherwise in this category. Part of that is that it drives a lot more purchase occasions, and we want that volume. Part of that is when the overall market is so contracted and nobody is really moving. We do not have the knock-on effects that we often see with some movement and mobility. Niraj, our CEO, will speak to the phenomenon where your neighbor moves and somebody moves in next door and they redo the patio and you look out and you think, "Oh gosh, that looks really great. I should probably be redoing mine." You go and start to redo yours. We are not even getting any of that right now.
It's obviously the category itself is at, we believe on a dollars basis, it's below 2019, right? It's been in a pretty contracted state for some time. Any movement or flow in the housing sector would be unquestionably good for the category.
Thank you. Can you give us some color on the gross margin? You mentioned that there are three line items. Excuse me. One is advertising, which was up almost from 1%- 1.5%, but you chose to reinvest in pricing. It sounds like that percentage is going to keep on going up, and that's probably at a very high margin. So that should naturally push your gross margins higher. What are some of the offsets this time around that will keep the gross margin from not expanding maybe 100 or 200 basis points over the next foreseeable future? Thank you.
Yeah. The primary question always is, what are the right price levels? Where do you want to be on that elasticity curve to sort of optimize at the point for gross profit dollar growth? If the business is declining, by the way, Castlegate is a drag, and you do have some drag from Castlegate. In a period where volume is growing and you're therefore growing supplier advertising, you're getting leverage from Castlegate, the question then becomes how much do you want to reinvest in price? Again, the philosophy that we have around that is what's going to maximize gross profit dollars. We're very focused on that. What does that look like on this multi-quarter basis? Ultimately, because that flows through to adjusted EBITDA dollars, which we've committed to growing in 2025, and free cash flow.
We want to be very focused on less around the specific margin point and much more around are there investments that we should be making to be driving gross profit dollars, ultimately adjusted EBITDA dollars. Over the last year, that's led us to this sort of 30-31 point. That's been sort of the optimum place to be at. That could obviously change depending on sort of consumer and competitive dynamics.
I was curious post Liberation Day.
What did the market get wrong about the company? Obviously, they went into a panic on your stock.
It was super fun.
Peel the eyes out of the back of the head.
It's a really great question because I think we tried to spend a lot of time explaining it in media post the fact, but I think the benefits of the marketplace are just not well appreciated or understood. I think there was a lot of concern that you would have maybe three challenges. One, that there would be an availability challenge. Two, that there'd be inflationary pricing. Three, that the U.S. consumer was going to be challenged. I'll leave aside the third because that's not Wayfair specific. On the first two, I think that there was a lack of understanding of how flexible our marketplace model is and sort of what the competitive dynamics in the marketplace model enable, particularly in a category where there is so much substitution and there's not brands, right? This is not a branded category.
This isn't where you have a specific product that's a best seller and nothing unseats that. Most people have no idea where the product, what the brand is or where it's manufactured or anything. They just have a general idea of the kind of couch that they're looking for, and they go and search. If yesterday there were 5,000 couches that matched that, and today there's 3,999, it doesn't really matter that much to them. I think that was not well understood. Obviously, as you've seen the tariff noise start to subside a bit, you've seen some reaction the other way, clearly.
There's a question in the back.
Yeah, you can ask.
You had 40 million orders last year. What percentage of them were serviced through Castlegate, and how do you see that number going forward? If I may, on your active customer count, that continues to come down. How do you plan on making it go higher? Thank you.
Yeah. So we've said that Castlegate is up to about 25% of revenue. That's not technically a percentage of orders, but you can think of that as pretty similar. Even products, though, that dropship in some way engage our logistics infrastructure. If they're dropshipping a small parcel product, that will be through our FedEx rates and our account. Large parcel will ultimately end up in one of our home delivery operations, and we'll do the final mile delivery to the customer. In most regions, there's a few regions that don't have enough. I'm from Maine, and Maine is annoyingly one of those places where my mom is always calling me to ask about her deliveries because it's with a third party, not with Wayfair, because it doesn't have enough density.
In most other parts of the country, there's enough density, and so it goes through one of our home deliveries. Even if it's not technically in Castlegate, 25% is the revenue in the sort of Castlegate network specifically, meaning within the fulfillment centers. I apologize. I forget your second question. Oh, active customer number. Part of what you're seeing is as order volume was contracted a little bit, and active customers and order volumes tend to go hand in hand. Q1, you had an additional thing, which was we exited the German business. We took out an entire business out of that. The only disclosure we gave around that was that it was about point of revenue growth on ink wide.
As we sort of think about how does that number build back up going forward, as order volumes grow, that number should build back up. We obviously have a number of initiatives underway to continue to drive that number, like the loyalty program, like things like Wayfair Verified.
I think we're—is that time?
12 seconds.
Who can ask the question in 12 seconds? Thank you all.
Thank you so much, everybody. Thanks, Kate.