Good morning. Thank you for standing by and welcome to the Wayfair Third Quarter 2021 Earnings Release Conference Call. At this time, your attendee lines are in a listen-only mode. After the speakers presentation, we will have a question-and-answer session. [Operator Instructions] As a curtsy to all callers, please limit yourself to one question and one follow-up question so that our callers may have a chance to ask their question. Please be advised today's conference is being recorded. [Operator Instructions] It's now my pleasure to hand today's conference over to Director of Investor Relations, Landry Ngambia. Please go ahead.

Good morning and thank you for joining us. Today, we will review the third quarter 2021 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; and Michael Fleisher, Chief Financial Officer. We will be available for Q&A following today's prepared remarks. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the fourth quarter of 2021. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 10-K for 2020, our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in our forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded and a webcast will be available for replay on our IR website. I would now like to turn the call over to Niraj.

Thank you, Landry, and thanks, everyone, for joining us this morning. We are glad to reconnect with you today to discuss the details of Wayfair's third quarter results and to share more about the various initiatives on which we are focused. In Q3, we generated $3.1 billion in net revenue and over $100 million in adjusted EBITDA. Though net revenue declined, this was not overly surprising given the quarter played out against the backdrop of customers eagerly embracing reopening trends, still having to anniversary an extraordinary moment of category demand last year and supply chain issues becoming more pronounced this period. Even so, we are seeing sequential acceleration in the year-over-year gross revenue growth rate in Q4 thus far, and product availability is improving, albeit slowly. As various geographies have reopened post pandemic, consumers have naturally shifted some spend towards travel and entertainment and from e-commerce towards brick-and-mortar. Demand and interest in the home remains resilient, but it will take a few more quarters for our growth and e-commerce growth in general to get back to normal. Through this period of transition, we are not standing still. Those of you who know us will appreciate that we manage the business with a horizon of years, not quarters. Therefore, we are focused on making the necessary investments against ongoing strategic initiatives to deliver the best possible customer experience. Our $840 billion total addressable market is huge. We're already a leader in the category, and we plan to only widen our competitive moat. While the macro situation may mean more financial volatility on a quarterly basis than we and you might have initially expected, we are fully convinced that we continue to make the right moves for the long term. I'd like to spend most of our time today on these longer-term…

Thanks, Niraj, and good morning, everyone. I'm excited to provide an update on Perigold for you today. We continue to see real strength with our higher income customers and Perigold is a core part of our luxury appeal. Our success here is also a good reminder that we have built our platform to extend beyond just wayfair.com and to support a family of brands that span various styles and customer profiles. We first launched Perigold four years ago as our luxury home brand and shopping destination, drawing on the insight that this part of the category was underserved and rapidly growing. Across the industry, households with over $200,000 of annual income have grown their spending on home furnishings by more than 40% since 2017. We estimate that high income households in North America now spend more than $80 billion on the home category annually. There are also new tailwinds here as many of these customers upgraded to larger spaces or second homes over the last 18 months. With Perigold, we have created a platform for consumers to learn about, engage with and ultimately, bring home the world of luxury design across every style. Leveraging our technology, logistics and merchandising expertise, Perigold has seen tremendous growth with a revenue CAGR of more than 70% since 2018, alongside strong bottom line economics. Historically, the industry's luxury selection was accessible in only a fragmented way, the exclusive showrooms and through interior designers. Our key focus with Perigold is to unlock the whole of the industry's luxury selection across all styles complemented with content on one digital platform whether a shopper is working with a designer or not. While many brands were initially hesitant to make the leap online, today, more than 1,300 suppliers embrace Perigold as their showroom. That's nearly 2.5x as many…

Thank you, Steve, and good morning, everyone. Let's take a look at the financial details for the third quarter before discussing the forward outlook. As you saw in our press release this morning, Q3 total net revenue was $3.1 billion, representing an 18.7% decline year-over-year. The quarter played out largely in line with our preliminary read back in August. During the early months of the summer, we started to see a rebalancing in consumer spend towards services as the U.S. economy more fully reopened. As the summer progressed, our international markets followed the same pattern on a staggered basis, which contributed to the quarter-over-quarter softness in Q3. On a segment basis, U.S. net revenue declined 20.8% from Q3 2020 while international net revenue declined by 6.8% year-over-year. On a constant currency basis, international net revenue was 12.1% lower than Q3 last year. Turning to the Q3 KPIs at the consolidated level. In the trailing 12 months, we had more than 29 million active customers, 1.5% higher year-over-year. Order frequency over the last 12 months was 1.92, essentially flat year-over-year. Both of these metrics were lower quarter-over-quarter, which was expected given the outsized customer activity during lockdowns last year is now rolling out of the LTM window. This is similar to what we saw in Q2. LTM net revenue per active customer was up modestly, about 1% quarter-over-quarter, but there is admittedly a fair bit of volatility underneath this metric. Specifically, offsetting the small declines in order frequency is a move higher in average order values. As you know, bottlenecks are contributing to inflationary pressures at nearly every point in the supply chain. We, like the rest of the industry, are working to pass these costs through where appropriate, which is what you're seeing play out in AOBs. I'll now move…

[Operator Instructions] And our first question is going to come from the line of Peter Keith with Piper Sandler.

Hi, thanks good morning everyone. I wanted to ask around the inflationary pressures as it might relate to some changes in pricing with Wayfair. So based on our supplier conversations and some of our own analysis, it looks like there has been a decision to raise prices even to a point where you're a little bit above the competition. So I was wondering if you could unpack that a little bit. Obviously, you have the house brand strategy, which should allow you to take price. But are you concerned about losing share in the current environment with this?

Thanks, Peter. Let me answer that. But let me start with just a real quick recap on how we think about setting prices. And I think that's important. So the way we do it, I think, is different than the way most retailers do it in the sense that we don't have individuals who are picking margin levels for categories or subcategories. Instead, what we do is we have a large data science model, and it is basically figuring out what tranches of the catalog to set at what margin levels. And it does it off the concept of really understanding consumers' demand response to pricing changes. And what we're really focused on is not so much substitution, because we view substitution as an advantage of our platform, which is someone might buy one item instead of a different item based on how they're relatively priced. But rather, what we're focused on is how do we make sure the customers stay on our platform and the price levels aren't such that they want to leave and go elsewhere. And over the years, we've been able to make that more and more sophisticated. We're constantly running holdout tests and control tests to basically make sure that the algorithm is well tuned, and that kind of science-based agenda has actually gotten us, we think, to quite an advantaged place. And so you'll notice when you talk about national brands where something has a specific part number, you know you have to be basically at market, the algorithm sort of does that. And at the same time, to your point, we need to have exclusive brands, house brand. We have items that maybe are on the platforms. We have items that we invested a lot into the merchandising of and identified that as…

Okay. Thanks so much. Maybe I'll ask a follow up and maybe for Michael, while, Niraj, you need to get your voice back. The one thought we've had around with CastleGate, certainly, it's a huge long-term opportunity. But with revenues running down and supply chain and inventories very, very tight, are you at a point where the CastleGate flow is actually running down on a dollar basis and thereby, could this continue to put some margin pressure on you as you deleverage some of the fixed costs within the network?

Peter, let me just chime in on CastleGate before I hand it over to Michael for your -- kind of the financial aspect question. CastleGate, the inherent advantages of CastleGate between our ability to access ocean freight at a competitive price and get availability in a congested time all the way through to our ability to forward position and therefore, offer customers both speed of delivery while the outbound cost actually falls, all of which manifests also in customers getting sharper retail, those benefits have actually been very -- they've been very -- kind of a very nice bright spot through this period. The fact that we built this network has proven to be quite a boon. That said, the mix effect, basically scarce inventory, has caused CastleGate to have lower inventory levels and run on a lower percentage of the total business than it was pre-pandemic. When we look forward to 2022, suppliers are now seeing inventory levels recover. We're seeing inventory levels recover. We have more ocean freight capacity. What you're going to see happen is we believe CastleGate penetration will hit all-time highs, and actually kind of meaningfully continue to expand. Some of this is what we talked about on the call about how we're bundling these services together, make it easier for suppliers, and some of it is suppliers are also seeing the forward positioning with the carrier congestion being something that they can't avoid on their own. They need to partner with us because we have that dense network. We can do different forms of sortation and injection. So CastleGate as you roll forward through time, not only are they kind of on a unit basis, as it is already showing that it's very beneficial, but as we roll through time, mix actually goes from hurting us to helping us, and it's actually I think you're going to see it be fairly dramatic in its benefits. But let me turn it over to Michael to kind of answer your question.

Yes, Peter, the only thing I'd add is, look, obviously, if you have a warehouse operation, you're running a little less through it, then there is some deleverage there. But I think you've seen the continued strength in our gross margin, right? And so north of 28%, north of our -- the high end of our range this past quarter and staying within our range for next quarter. And so as Niraj points out, there's many pieces to the supply chain where leverage happens, right, ocean freight is another example. And so I think as more -- think about it this way. As more suppliers now start to load more inventory into CastleGate, they're taking advantage of that ocean freight. That's an opportunity and creates leverage for us. And then as those units flow into the building, we'll flow more of them out of the building and we'll create leverage back on there, too. So I think it's -- remember, CastleGate and this entire supply chain network is a long-term investment with massive ROI. And so I don't think you can sort of look at it as sort of in any one particular quarter.

Okay. Thanks so much and good luck.

Our next question will come from the line of Oliver Wintermantel with Evercore ISI.

Hi. Good morning, guys. Thanks for taking my question. Very excited to hear about your multichannel strategy. Maybe, Niraj, I know it's early. You will announce more next year. But maybe after you gave us a little teaser, can you maybe give us a little bit more details what you're planning to do? You said it's across the family of brands, but maybe a few more details would be helpful.

Yes. Oli, great, let me just share a couple of thoughts on physical retail. So first thing I would say which I kind of covered in the script is we kind of view ourselves as in year four of the journey where the first couple of years had to do with pop-up stores and malls. Then we had a permanent store in the Natick Mall, small one though, 5,000 square feet, 3,700 square feet front of the house. And in each step along the journey, we feel like we had a learning agenda that we were able to complete and maximize which sort of lead us to now we sort of -- we have some ideas for different concepts that we think could be the late concepts that we would then want to scale. And so what we're going to do, you're going to see this over the next two years, is we're going to launch a series of these different concepts, and we're going to see by getting a couple of each up and running, how they perform in the real world. And then, there's a series of different things we want to try in them, kind of what I was referring to as a testing agenda that we've been doing all along the way. And if you think about stores, the cost -- there's obviously the cost of a store, but typically, the big costs that are associated with that are also the cost of the physical supply chain to enable the flow of goods and delivery, the cost of the inventory in the supply chain and the cost of whether you want to call it advertising or marketing or building a brand, but the cost for someone to know who you are and to kind of understand…

Got it. And just to clarify, these would be real like stores with inventory, not just showrooms or pop-up stores.

Yes, they would be permanent stores, so not pop-ups. Obviously, you have the inventory that's on the floor. So you have like the -- whatever you want to call it, the showroom itself. And then for inventory that people could take with them, if you think about our categories of goods, there are certain items people might want to take with them. It's going to overbias on the smaller items. When we get to the bigger items, we would expect they would want those items to be delivered. So there'd be a mix. We think the vast majority of the volume would be set up for delivery because of the nature of the categories. And that's where when you think about the fulfillment centers we have, if you think about the delivery operations we have, that would just flow through an existing infrastructure we already have that's set up for that. And that infrastructure doesn't care whether the order was placed in a store or the order was placed over the phone or the order was placed online. It's an order that we'll deliver. But of course, for smaller items, we would, of course, enable cash and carry as well.

Got it. Thanks very much.

Our next question will come from the line of Seth Basham with Wedbush Securities.

Thanks a lot and good morning. My question is around how you're thinking about customer acquisition in this environment because price of acquisition costs in the third quarter were some of the highest ever. And given the challenges to acquire new customers and the cost of it, how are you thinking about managing that in the current environment?

Yes, so let me just kind of recap how we think about advertising because I think the way we've managed it historically has proven to be a great benefit, and we're sticking with that approach, which is simply we don't preset a budget. But rather, what we do is we effectively tell our marketing organization, they have an infinite budget. However, we're very inflexible and have a very tight framework on measuring paybacks. And they have to keep it within that payback framework. And that payback framework is what makes sure that we don't find ourselves down the road having overspent on cohorts that will never pay back. And then frankly, it has a secondary but perhaps even a more beneficial role, which is by keeping that constraint tight, what it does is then the teams put a lot of effort in developing new channels. There's things like influencer marketing or podcasts. There's a lot of channels we're not in today. Or technology -- advancing the technology platform or better targeting or creative optimization. And these things are the things that lead to breakthroughs where we get increasing reach, more and more effectiveness of our ad spend, and we're able to grow the ad spend really productively. We have noticed what you've noticed, which is there's inflation out there, we've been careful not to chase it. And the reason we don't chase it is we generally feel like we know how to quantitatively measure the value of that traffic. And we noticed competitors who chase it tend to in the not-too-distant future later stop doing that because they find, they figure out that they're overspending. And we've, in fact, seen some of them already pull back. So that's a common cycle, and we feel like it'd be who's is it not to chase. And in fact, if you look at our ad spend and you kind of adjust for the repeat orders, which obviously keep taking share because that's the strength of our model. Happy customers come back. That repeat order growth is what drives the overall growth of the business, which is why we can keep doubling every two to three years. If you look at that and adjust for that, you'll find that our customer acquisition cost remains in the range that we've had, if you look back over the last few years, and we're still paying back in that same time frame, less than a year. And we think that discipline behooves us even if there are moments where someone is outspending us.

Got it. So just to clarify, since the beginning of the pandemic, your LTV to CAC that you're projecting for the customers you acquired during this past period has not changed much. And as you look at the near term, you're willing to accept fewer new customer adds in light of higher customer action costs that may make those ROIs unfavorable?

Yes. Well, I'll go a step further. Not only has the payback period since the beginning of the pandemic not change, but frankly, if you zoom out even longer than that, we've kept the same high-level framework on paybacks for quite some time. And if anything, we've only tightened it a little over time as we've been able to get more nuanced in how we account for cost. So that's not a -- we continue to tighten that up, but basically that what you're saying is true, we've kept it -- since the pandemic started, yes, we've kept it very tight. The thing about LTV to CAC, I'm talking about the payback, right? So they have in the roughly a year. If you zoom out and you really try to locate a lifetime value, three years, five years, pick a period, you actually find that the LTV, the IRR, is increasing because what you're seeing is repeat gets stronger. If you'll come back more and more often, as you look at years two, three, four, five; if you would calculate that in, which, of course, you wouldn't know until you can look back on years two, three, four, five, you would actually see the IRR then is increasing because we don't give that credit in that first year. We only give credit in that first year is what actually happens in the first year. So year two of a cohort stronger than year two used to be. You're actually seeing an ever improving return on your ad spend, but we won't put that into the first year. And so we will, therefore, not put that into the ad spend.

Thank you.

Our next question comes from the line of John Blackledge with Cowen.

Great. Two questions. First on the international expansion. Can you discuss the timing of the launch of Wayfair in Ireland and Austria and should we expect other launches in Europe in 2022? And then for Michael, on 4Q revenue, what's the difference between the consolidated revenue pacing down 10% in Wayfair U.S. being flattish? If you could just provide some more color there, that would be great.

So let me try to answer those, John. And then maybe, Michael -- I don't know if Michael would have anything additional or Steve, they can jump in. On international launches, the reason we highlighted Ireland and Austria, over time, we certainly would expect to be in more countries. But the same way we took the infrastructure we had in the U.S. and we leveraged it for Canada, an adjacent market, more underserved, smaller market. If you think about Ireland related to the U.K. or you think about Austria related to Germany, you have that analogous situation where you can actually pick up that volume, become the market leader much more quickly. It's a great way to start your expansion. Over time, we will certainly expand to other countries. But we were just more trying to point out what's going to happen next, which is what Ireland and Austria are when you think about next year. And then on your fourth quarter revenue question, I think what we were trying to do there is provide a couple of pieces of insights. So one is, look, quarter-to-date, we're down around about 10%. And I think we sort of said -- and that number is actually sequentially improving, and that's just to give you a directional feel for where we're headed. And as you kind of get through these kind of COVID periods from a year ago, and so if you kind of look to the -- to kind of the future a little bit, all of a sudden, you start seeing you're comping normal periods, all of a sudden, you're going to see those growth rates and tell you you're doubling every two to three years, so what I'm trying to tell you where we are in that journey. The only…

Thank you.

Our next question is going to come from the line of Steven Forbes with Guggenheim.

Good morning. Niraj, you mentioned the thesis of selling space is not just items. So curious if that's centric to just Perigold or if you see an opportunity within the Wayfair brand as well in those underserved households.

Yes. Thanks, Steve. No, we see it for the Wayfair brand as well. We see it for our specialty retail brands. The design services offering that we have inside our B2C sales team where we work with customers leads to multiple item purchases and thinking of projects. If you look at what we're doing in home improvement, if you think about what we have between the categories, flooring and tile, lighting, plumbing, vanities, door hardware, large appliances, you can start to think about laundry rooms, bathrooms, kitchens and those types of projects. We do those projects in addition to selling people just items, right? So we do both. So we see it applicable broadly. Obviously, Perigold is very applicable. And then we think about Wayfair Professional, we have series of verticals, a lot of whom have to do with projects. And so the interior design decorators there, obviously, the decorators doing a lot of the work, but then our team can provide a lot of support and help. And then, of course, we have the resource catalog. We have the logistics ability to help them. Then when you get over to whether it be contractors, who might be referring their customers or you get into what we do in hospitality where we've outfitted entire boutique hotels, there's a lot of project work in these various different segments of our business.

And then just a quick follow up, maybe for Steve, on Perigold. You talked about sort of the strength in that brand over the past couple of years here. Curious if you could give us any insight or data on how many high income households are you engaging with the platform? And then maybe what the average order value is on Perigold relative to Wayfair as a whole?

Yes, thanks. Yes, so we're not going to give real specific detail on Perigold at this point. But since we first talked about in 2019 to where it is today, we've really seen very nice growth in it. It's still early. I think our penetration in that category is quite low. The high-income luxury customer, we feel like, is quite underserved. And the Perigold offering is really key for them and who we're going after.

Yes. Just one thing I would just add to your point, I mean, the AOV is certainly many times higher than that on Wayfair, which I think it appears what you're asking, it's definitely -- we don't disclose the exact number, but it's multiple times higher.

Thank you. Best of luck.

Thanks, Steve.

Thank you. And with that, I will end the Q&A session. I'd like to turn the conference call back over to the Wayfair team for closing comments.

Well, thanks, everybody, for joining the call. We are excited to chat with you. Happy holidays to all of you, and we look forward to talking to you again next quarter.

Thank you. Once again, we'd like to thank you for your participation on today's conference call. You may now disconnect.