Wayfair inc (W) Q2 2021 Earnings Call Transcript | The Motley Fool


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Wayfair inc (NYSE:W)
Q2 2021 Earnings Call
Aug 5, 2021, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and thank you for standing by, and welcome to the Wayfair Q2 2021 Earnings Release Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Jane Gelfand, Head of Investor Relations, Capital Markets and Corporate Development.

Jane GelfandHead of Investor Relations

Good morning, and thank you for joining us. Today, we will review our second quarter 2021 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steve Conine, Co-Founder and Co-Chairman; Michael Fleisher, Chief Financial Officer; and Margaret Lawrence, Vice President of Wayfair Professional and Perigold, who will all 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 third 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 any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-GAAP financial measures as we review the company’s performance, including adjusted EBITDA 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 contains descriptions of our non-GAAP financial measures and reconciliations of our non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be available for replay on our IR website.

I would now like to turn the call over to Niraj.

Niraj S. ShahChief Executive Officer, Co-Chairman and Co-Founder

Thanks, Jane, and good morning, everyone. It’s great to reconnect with you all today to cover the details of our second quarter results and to share some of our observations during this dynamic period. Let me start off by saying that Q2 came in slightly differently than we initially expected, a bit more subdued on net revenue and stronger than we had forecasted on profitability and free cash flow. Many of you have had questions as to whether Wayfair can be sustainably profitable as the pandemic recedes. And this is clear evidence to make that case.

This quarter represented the toughest year ago comp as we lapped the surge of pandemic-driven demand in the spring of last year. Against that backdrop, vaccination rates picked up, the economy more fully reopened and consumer behavior understandably adjusted. At $3.9 billion, Q2 net revenue was down about 10% year-over-year but grew 11% relative to Q1, and the two year CAGR was north of 28%. As we discussed when we last spoke in May, sequential growth rates and two year growth metrics will likely be more telling for investors until we get past 2021. Despite any short-term noise, the underlying structural elements for continued long-term category demand and share transfer to e-commerce remain in place.

Consumer balance sheets are strong, and interest in the home is not going away post-pandemic, even if there is some shorter-term normalization. As an example, our annual Way Day event in Q2 proved to be the largest in the company’s history, even as consumer spending began to flow back to experiential categories. Our customers, in particular, tend to shop one item, one room, one project at a time. And while they may be rebalancing their spend some, home to-do lists are nearly endless, supporting the large size of the category. Wayfair should grow even faster as category demand shifts structurally online. At roughly 20% penetrated in our most developed geography and set of classes, there’s a long runway ahead for online share of the home category to grow.

While there may be some short-term rebalancing toward brick-and-mortar over the next couple of quarters, we are convinced the structural trends toward e-commerce will hold and potentially accelerate. History tells us that e-commerce gains tend to speed up when categories cross the 20% threshold, and the pandemic helped bring us to this point. Wayfair is furthering that e-commerce shift and our own wallet share capture by building out an unparalleled offering in more than 1,000 classes of home across four key verticals: furniture and decor, housewares, home improvement and professional. We’ll speak in more detail about our professional business today, but it’s worth noting that while furniture and decor is our strongest and largest vertical, we already enjoy good scale across each of them.

We’re also building our business across both North America and Europe, two immense markets which, combined, are more than $800 billion in size. These dynamics may be hard to see by focusing on Q2 alone, given the challenging year ago comparison. On the surface, what you’d see is a modest decline in active customer count and slightly lower order frequency. But zooming out, you would recognize that we acquired nearly 18 million new customers over the course of 2020, with about 1/3 of those in Q2 last year. In Q2 2020, we also saw more frequent purchasing with smaller basket sizes as customers outfitted their homes for the demands of sheltering in place, remote working and schooling.

While not all of our recently acquired customers will be in the active count at all times, they are now part of our customer file and are highly engaged. We now have one-on-one relationships with these customers which allows us to develop individual insights about them as they engage with Wayfair, which happens much more frequently than they purchase. We then use these insights to personalize our content and communication with them in low-cost ways. Meanwhile, we’re seeing repeat trends evolve, as we would expect, that is, except in Q2 of last year at the height of the pandemic, repeat orders typically outpace new orders, and this is continuing.

As a result, repeat as a percent of total orders reached new highs at more than 75% this period. We are focused on driving repeat orders in a few ways by converting new customers into repeating customers through building frequency with our shoppers and by reengaging past customers who may have lapsed. The pandemic provided a strong push on each of these fronts. We believe we are leaving the pandemic period with an even stronger repeat customer base than when we entered it, which should have long-lasting benefits given it cost us relatively less to drive repeat purchases than initial orders. As we go through this normalization period, we are very mindful of balancing the needs of our customers and our suppliers and believe the Wayfair platform is advantaged in doing so. One advantage is our access to selection and inventory.

That said, you are well aware that industry stock levels have been depressed for some time and exacerbated by bottlenecks at nearly every point in the supply chain. We are seeing sequential improvements in inventory availability and fulfillment, but the progress is incremental and does not happen overnight. Some port congestion is easing, and our Asia-based international supply chain services are growing quickly to support our suppliers. We’re also leaning into CastleGate as a solution with inventory availability improving.

Yet the industry still has to deal with narrower selection and longer-than-desired lead and delivery times, which are unlikely to normalize until some point in 2022. Our inventory-light model helps us foster substitution with more than 22 million products on the platform, and we’re leveraging our logistics and technology solutions to closely manage customer delivery expectations, both pre and post order. We believe this transparency is helpful…


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