Wayfair Q3 2024 Earnings Report

Wayfair EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.13
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: -$1.38

Wayfair Revenue Results

• Actual Revenue: $2.88 billion
• Expected Revenue: $2.87 billion
• Beat/Miss: Beat by +$9.27 million
• YoY Revenue Growth: -2.00%

Wayfair Announcement Details

• Quarter: Q3 2024
• Date: 11/1/2024
• Time: Before Market Opens
• Conference Call Date: Friday, November 1, 2024
• Conference Call Time: 8:00AM ET

Wayfair (NYSE:W) provides e-commerce business in the United States and internationally. The company offers approximately thirty million products for the home sector. It offers online selections of furniture, décor, housewares, and home improvement products through its sites consisting of Wayfair, Joss & Main, AllModern, Birch Lane, Perigold, and Wayfair Professional. The company offers its products under the Three Posts and Mercury Row brand name. The company was founded in 2002 and is headquartered in Boston, Massachusetts.

Wayfair Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, and welcome to the Wayfair Third Quarter 20 24 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks,

[Operator]

there will

[Operator]

be a question and answer session. Session. Thank you. I'd now like to welcome James Lam, Head of Investor Relations begin the conference. James, over to you.

[James Lamb, Head - Investor Relations at Wayfair]

Good morning, and thank you for joining us. Today, we will review our Q3 2024 results. With me are Niraj Shah, Co Founder, Chief Executive Officer and Co Chairman Steve Conine, Co Founder and Co Chairman and Kate Gulliver, Chief Financial Officer and Chief Administrative Officer. We will all be available for Q and A following today's prepared remarks. I would like to remind you that our call today will consist of forward looking statements, including, but not limited to, those regarding our future prospects, business strategies, industry trends and our financial performance, including guidance for the Q4 of 2024.

[James Lamb, Head - Investor Relations at Wayfair]

All forward looking statements made on today's call are based on information available to us as of today's date. 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 ks for 2023, 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, adjusted EBITDA margin and free cash flow.

[James Lamb, Head - Investor Relations at Wayfair]

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 any 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 Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Thanks, James, and good morning, everyone. I'm excited to share our Q3 results with you today. Q3 marked another proof point of resilience for Wayfair with further market share capture in the face of sustained challenges in the category. Once again, we navigated a dynamic consumer environment while driving further discipline on costs to achieve a mid single digit adjusted EBITDA margin for the Q2 in a row. But that's just one piece of the picture.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

As I've mentioned many times before, our North Star is driving adjusted EBITDA in excess of equity based compensation and CapEx, and we're pleased to be making noteworthy improvements across each one of these, totaling almost $100,000,000 year over year in Q3. The Q3 exhibited a continuation of choppy macro trends we've seen across 2024. Consumers remain trepidatious in their spending patterns and are demonstrating more price elasticity than we saw in the early months of the year. While we were pleased with the response we saw over Way Day at the start of the quarter, which we ran as an extended event for the first time this fall, it has become clear even as we exited September that we were seeing a broader pullback by shoppers in the lead up to the election. Attention is focused away from the home right now and when customers are in the market is increasingly for lower investment, lower consideration purchases versus larger ticket items that represent our traditional area of strength.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We remain optimistic that pieces are coming together to support a category recovery in the quarters to come. While it will take some time to play out, this improvement is poised to provide some relief in what has become a historic slowdown in the housing market. Redfin published an analysis at the end of Q3, noting that just 25 of every 1,000 U. S. Homes changed hands in the 1st 8 months of the year, the lowest level they saw in their study running back to 2012 and more than 30% below the turnover levels back in 2019.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Now, as we've said for many quarters, we are not running the business with the expectation of a recovery in any specific timeframe. For more than 2 years, we've done 2 things simultaneously, driving cost efficiency and spending discipline to run the business profitably in a recessionary environment and setting ourselves up to be a considerable beneficiary when the category does return to growth. You've seen the former quite clearly with what is now 9 sequential quarters of compression in our fixed costs and a 3rd quarter result that is the lowest SOT G and A we've had since 2021. The latter you've seen us demonstrate across several vectors. For much of 2023, our mantra focused on the core recipe, bringing the best combination of competitive pricing, fast delivery, and broad availability together into an offering that wins customer orders day in and day out.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Across 2024, we went a step further by concentrating on strategies to drive mindshare and frequency, including the 3 major initiatives we've spoken to several times. Even if customers aren't shopping for their homes at the moment, when that time does come, we'll want to make sure Wayfair is their first destination. These efforts include many things such as our brand refresh back in March and the launch of our first large format Wayfair branded store over Memorial Day weekend. One newer initiative is our loyalty offering, which just began rolling out last week. For $29 per year, Wayfair Rewards customers will unlock exceptional value and experiences with benefits including 5% back on purchases, free shipping on all orders, access to exclusive shopping events, special offers, and a dedicated members only support line.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We know how much investors love math, so let me walk you through the business model of Wayfair Rewards at a high level. Our average customer typically shops on Wayfair about twice a year, spending around $300 per order. Priced at $29 per year, the 5% back benefit would be roughly breakeven for our average shopper. Our goal is to push customers out of that 2 orders per year bucket into the 3 orders per year bucket or even higher. While we have more than 20,000,000 active customers who have placed at least a single order over the past 12 months, About a tenth of those are shoppers that have made 4 or more orders in the same timeframe.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We see an important opportunity to grow that figure given shoppers typically purchase in the category 6 to 8 times per year. There's a flywheel we see from customers that grow their shopping occasions on Wayfair as they increasingly spend more time on the site, browse a broader selection of the catalog and are more likely to shop through our app. These behaviors are self reinforcing and we see that the path for a shopper to move from 3 to 4 orders per year is even quicker than the path from 2 to 3. Customers who shop 4 or more times on Wayfair in any 12 month period not only spend more, but are also nearly a third more likely to come to us via free traffic. So growing that cohort is highly beneficial to margins.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

With the benefits of Wayfair Rewards, if that average customer now makes an incremental third order on Wayfair versus a competitor, we've grown our share of wallet by 50%. Those three orders at $300 apiece are worth $900 of total revenue, $45 of which goes back to the customer, thanks to the program. Accounting for the annual fee, we've now nicely grown revenue per customer per year profitably. That doesn't even include the efficiency on advertising as Wayfair Rewards customers are that much more likely to return on a direct basis. There's tremendous potential here to drive more frequency amongst our existing as well as new shoppers.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We're excited about all the different ways customers will be able to interact with the new program from deal hunting in our member exclusive sales to saving up rewards over time for big aspirational upgrades. One of the areas we're excited to stimulate is in the frequency portion of our catalog like kitchenware, tabletop, decor and bedding where the benefit value really stands out. We plan to lean into the treat yourself angle of the program and encourage customers to use their rewards for all those upgrades and finishing touches they've been dreaming of, but may not have had the budget for. We're also eager to bring the program to new movers and project shoppers like renovators or remodelers. These are customers with high category needs who can draw a lot of value from the program.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We've been focusing on these audiences for some time across our marketing and sales organizations, and we're excited to incorporate the value proposition of Wayfair Rewards in those outreaches to better attract their full business. You've likely seen some of this marketing outreach since the launch of our brand refresh. As we discussed right after the debut in the spring, this was years in the making and we've been extremely pleased at the results we've seen in the months since. Much of our work has been focused higher in the customer acquisition funnel as we've increased our investment in television, social media and streaming audio and video. Since Q1, we've seen nice improvements in qualified recall ratings, which measures how well customers recall seeing any advertising from Wakefair across any channel.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

This is an important high level view of how our advertising is resonating with consumers and to what degree they recall key details like our product message and identity. In fact, we are now ranked in the top 10 among major retailers. When we launched the Waybrihood, we talked about driving creative content that could exist across our portfolio of advertising channels and serve as a foundation for many years of marketing campaigns to come. In fact, in the past few weeks, we've rolled out our 1st major update to the Waybrihood with our holiday chapter and are in active development on more content for 2025. We've seen very healthy ROI on the first iteration of the campaign with strong results when it comes to brand linkage and awareness as customers are quickly coming to recognize the Wayverhood as a symbol of Wayfair.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

This has translated to positive movement in our core metrics, direct traffic and even more importantly, revenue per direct visit. Back in the spring, I noted how the launch of the campaign came alongside a refreshed view of our channel mix as we step more holistically into parts of the advertising funnel where we had been lagging behind. It should come as no surprise that influencer marketing has grown to be an incredibly important way that customers are exposed to the category. Shoppers are now routinely looking towards creators across YouTube, Instagram Reels, TikTok, and more for inspiration on their next home purchases. Our reach in influencer marketing today is quite small relative to potential, and we're excited to scale it.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Based on feedback from the creator community, we've made significant investments in improving the terms and technology supporting our program. Creators are eager to work with Wayfair because we treat them with the same mindset we treat our suppliers. We succeed when they succeed. This plan is working. We have dramatically increased our monthly piece of content produced by the nearly 4,000 and growing creators we've partnered with.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Over the summer, we've amplified our influencer content and are seeing promising return on ad spend for the dollars we've tested. In fact, we've seen payback windows that are on par with what we find on lower funnel social ads, all while attracting what we expect to be higher lifetime value customers. We have a dense product roadmap that will allow us to scale breadth and depth of activities with influencers in partnership with our suppliers across the major platforms. This will open the door to working with an even wider field of creative talent as we get into 2025. The ROI here is clear to us, but we want to make it clear to you, we're still operating within our rigorous payback thresholds that extend up to 1 year, but are often much quicker.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

As I mentioned at the outset, we remain laser focused on driving healthy profitability, while setting ourselves up for success as the category rebounds. That has been the core goal across all three of our major initiatives in 2024, to foster customer loyalty and spur repeat business while driving economic value. By leaning into marketing strategies that build brand affinity and introducing programs like Wayfair Rewards to enhance the customer experience, we're not just aiming for short term gains, but building long lasting relationships with our customers that will be accretive on both the top and bottom lines. Thank you. We hope you all have a festive holiday season.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And now let me pass it to Kate to go through our financials.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Thanks, Niraj, and good morning, everyone. Let's dive into our Q3 results, beginning with the top line. Net revenue was down 2% year over year in Q3 or down about 7.5% on a sequential basis, closely in line with the sequential pattern we saw in 2023. This is driven by orders down 6.1% versus the year ago period, modestly offset by AOV, which was up 4.4% year on year and down 1% sequentially, again in line with what we would typically expect to see in the seasonal cadence moving from the 2nd to the 3rd quarter of the year. Let me now continue to walk down the P and L.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

As I do, please note that the remaining financials include depreciation and amortization, but exclude equity based compensation, related taxes and other adjustments. I will use the same basis when discussing our outlook as well. Gross margin for the quarter was 30.3% of net revenue. Back in August, we talked at length about the changing dynamics we have seen in customer price sensitivity and the opportunity we identify to lean in on take rates to drive incremental order capture. We heard many questions from investors around how this differs from funding promotions.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

So let me take a moment to address that because the answer fundamentally comes down to magnitude. For years now, we've seen robust interest by suppliers to participate in promotional events, where you'll see headline items at prices that are 20%, 30% off or more. These discounts are aligned in partnership with our suppliers and are funded through reduction in their wholesale price, which we then reflect by lowering retail, while our gross margin remains resilient throughout. That's part of the reason why we've been happy to ramp up the number of promotional events and grow existing events like we did with Way Day last month. Promotion remains a critical marketing tool to drive customer engagement at a moment in time when the focus is just not centered on the home and supplier demand to participate in promotions remains quite high.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Now when we talk about making our own investment into lower take rates, the scale is very different from the discounting you'll see from suppliers and promotions. The magnitude of the investment here is in the tens of basis points at the consolidated level, hence targeting gross margin in the lower half of our 30% to 31% range. Across our nearly 10,000,000 orders per quarter, we're able to collect a tremendous amount of data on price elasticity and can with a highly tuned degree of precision determine exactly which classes and geographies would see an order lift from a very modest reduction in the take rate. As we said for some time, it's considerably more valuable to multi quarter gross profit and adjusted EBITDA dollars to have an incremental order come in at a gross margin in the low end of that range than miss out on that order because we were keeping our gross margins at the top end. We're pleased with the results we're seeing so far as we've made this price investment and you should expect that this will continue as we exit this year and enter 2025.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Of course, the other question we hear from investors is why make this investment if you still are seeing orders and revenue contract year over year. Our response to that is to once more point to the share picture. As Niraj said earlier, our ability to outpace growth of the category while still driving a strong margin profile for the business allows us to capture share now and sets us up for significant strength when customers begin to shop for the home in a more robust fashion once more. Now moving further down the P and L, customer service and merchant fees were 3.7% of net revenue, while advertising was 12.3%. That was slightly higher than where our advertising margin had been in recent quarters as a result of the renewed investment opportunities Niraj outlined.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We're excited for the major unlocks we are seeing across the advertising funnel, but are keeping a steady hand on the wheel as we ensure that each dollar is spent with strict adherence to our payback windows. Our selling, operations, technology, general and administrative expenses totaled CAD388,000,000 in the 3rd quarter, a more than $70,000,000 improvement versus the Q3 last year and $274,000,000 improvement on a trailing 12 month basis. As I talked about investing in gross margin and advertising earlier, those of you who have followed Wayfair for years may have had flashbacks to our history of investment cycles at the expense of profitability. What we've made clear over the past 2 years is that Wayfair is now fundamentally a different company than we were in the past. We are at a level of scale and maturity where we can both invest for growth and drive profitability at the same time.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

So when I talk about compressing take rates or leaning into advertising due to their quick payback, you can see that we are funding these investments through further discipline as we manage our fixed cost base, a paradigm we will continue to uphold. Ultimately, we are focused on growing adjusted EBITDA, less CapEx and equity based compensation measured in dollars. Our plans that are underway are progressing well and this is part of why we are comfortable committing to 2025 adjusted EBITDA dollars being higher than 2024. Altogether, we generated $119,000,000 of adjusted EBITDA in the 3rd quarter for a margin of 4.1% of net revenue. As Niraj mentioned earlier, this was our 2nd consecutive quarter of mid single digits adjusted EBITDA margins and we have now proven that we can operate at this level despite year over year revenue contraction.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We ended the quarter with $1,300,000,000 of cash and equivalents and $1,900,000,000 of total liquidity when factoring in our undrawn revolving credit facility. This was of course before we bolstered our cash balance further with the close of our inaugural high yield debt offering in early October. We saw investor demand many times larger than the $800,000,000 that we raised, which was a testament to the tremendous work we've done on driving profitability across the business. With the rapid improvement in our financial profile and movement across rates and credit spreads, we saw this as an opportune time to de risk the balance sheet by effectively pre funding our upcoming convertible maturities in 2025. As I've said from the beginning of the year, we are laser focused on delevering the business over the years to come and we will use these proceeds in combination with our own free cash flow generation to handle our coming obligation.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Now rounding up the cash flow statement, cash from operations was $49,000,000 in the 3rd quarter, offset by capital expenditures of $58,000,000 This CapEx was a bit lower than our guided range due to a combination of timing and further expense rigidity on our part. So while there will be some catch up in Q4, the net will still be lower than the run rate or Q3 guide implied. The end result was free cash flow of negative $9,000,000 in the 3rd quarter. Let's now turn to the Q4 guidance as we round out the year. Beginning with the top line, quarter to date we are flat to down slightly year over year and expect to end the full quarter down in the low single digit range.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

This contemplates sequential seasonality in line with what we saw last year. While we're pleased with the strength we saw in Weyday and are excited for the holiday season ahead, we're also cognizant that the weakness in the category on top of all the distractions facing consumers right now create a challenging operating environment. Turning to gross margin, we would guide you to the lower end of the 30% to 31% range once again, as we continue to lean in on take rates in the strategic areas where we see valuable payoffs in order capture. Customer service and merchant fees should be just below 4% again as well. Advertising should end up in a range of 12% to 13% of net revenue and likely toward the upper end of this range.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

This is higher than in the past few quarters as we see clear demonstrable evidence of high value opportunities to lean in here to drive further share capture as we get into 2025. It's important to bear in mind that many of the dollars spent today are driving order capture in the next few quarters. Finally, SOT G and A should fall in the $400,000,000 to $410,000,000 range. We saw some spending that had been planned for the Q3 shift to Q4, so there's a slight normalization here as you think about the sequential trends. Following this guidance down the P and L would lead to a 4th quarter adjusted EBITDA margin in the 2% to 4% range.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Even with a challenging top line environment, this puts us right in line with the commitment we made to drive at least 50% growth in 2024 adjusted EBITDA dollars, which is a testament to our steadfast focus on cost efficiency. Now let me touch on a few housekeeping items. You should expect equity based compensation and related taxes of roughly $90,000,000 to $110,000,000 depreciation and amortization of approximately $90,000,000 to $95,000,000 net interest expense of approximately $14,000,000 weighted average shares outstanding of approximately $125,000,000 and CapEx in a $60,000,000 to $70,000,000 range. Layering this on top of the expectations for adjusted EBITDA and the working capital benefit with revenue up sequentially in the Q4, we would expect healthy free cash flow generation to round out the year. I want to make sure investors appreciate just how unique 2024 has been in the context of Wayfair's long history.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We spent many years post our IPO focused primarily on growth and then over the past several years appropriately pivoted to prioritize profitability. 2024 has marked a return to the pre IPO form of this business, balancing the dual mandate of driving progress on both the top and bottom line. And there is more to come in 2025. As we close out the year, I want to draw back to Niraj and Steve's remarks from their shareholder letter from February. Our mission is to make Wayfair the best place to shop for the home over not just the next quarter or year, but the next decade and beyond.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We believe the best is yet to come and have never been more excited to execute against the tremendous opportunity in front of us. Thank you. And now, Niraj, Steve and I will take your questions.

[Operator]

Thank you. And we are now open for Q and A. And your first question comes from the line of Agarwal Arounian from Citi. Please go ahead.

[Ygal Arounian, Analyst at Citigroup]

Hey, good morning guys. Maybe just first on the share gain that you're seeing, if

[Ygal Arounian, Analyst at Citigroup]

you can, I don't know,

[Ygal Arounian, Analyst at Citigroup]

quantify or qualify that a little bit more? Is it do you see it all coming from the pricing that you can deliver? Are there other factors that you're seeing? And how do we think about that as the market gets better as you're positioning for that? And then on the 2025 EBITDA commentary, any more color we can get around that, the level of confidence as you talked about the mid teens incremental EBITDA margins?

[Ygal Arounian, Analyst at Citigroup]

Just how do we think about that in a category that maybe doesn't improve as we work our way through the beginning of next year at least? Thank you.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. Thanks for the questions. Let me run through them and then Kate, if there's anything you want to add, Kate, you can jump in. So on the first one around the share gain we're seeing. So I would say since the end of 2022, since Q4 of 2022, we've kind of consistently seen ourselves gaining market share every quarter, hitting all time highs in the credit card panels that we get on market share.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And in terms of how we're doing it, you mentioned pricing. I'd say optimizing our pricing to maximize our profit dollars is certainly one thing. Again, we didn't really change pricing that much. I just want to quantify that, right? That was a low tens of basis points.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

But that's just the kind of an ongoing optimization we do on the demand elasticity to maximize our position there. But that's just one of many things. So we talked about pricing, but for example, we could talk about improvements we've made in our logistics network. Like for example, on our prior calls, we talked about consolidated delivery, which is right now live in Houston, Las Vegas. We're rolling that out nationally.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We've done a whole series of kind of logistics features and functionality that increases speed, increases customer service levels. That grows the business. Or on our website or apps, what we call our storefront experience, that's a team that had spent a lot of the last couple of years working on replatforming big pieces of the technology. But as they've done that now, the developer velocity is much faster, the feature function we can roll out and optimize is back to a very high rate and we're seeing gains from that. So the way we can kind of take market share is actually through a long list of things we can do to improve the customer experience, drive up conversion, gain customer reach, optimize the outcomes we're getting.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And so when we look to 2025, we see a lot of ways to continue to grow market share regardless of whether the macro economy in this category is something that's getting better or not. So we're not counting on that. We know it's a cyclical category. We know that consumer discretionary durables are under a lot of pressure now. That is where we play.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Despite that, we see a pretty good outlook for how we're going to grow on the back of taking market share. And then for the 2025 EBITDA, the way to think about the 2025 EBITDA is what we said is, we see 2025 EBITDA dollars being higher than 2024 EBITDA dollars because the ongoing roadmap we have around what we can do around market share as I just described and kind of scale our business that way, while we also continue to have a good cost roadmap. And as you've seen on that SOT G and A line, for example, yes, I don't know, I forget the numbers, 8 or 9 quarters in a row, you've seen that come down in dollars. And that's just us being very smart about how we're spending money and continue to find ways to optimize that. But Kate, let me just turn it over to you.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Yes, I just want to jump in to clarify. Obviously, we haven't given any 2025 guidance and we don't typically give annual guidance.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

But all we have said to 2025 is exactly as

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Niraj said, which is But all we have said to 2025 is exactly as Niraj said, which is we are focused on growing adjusted EBITDA dollars. And that continues to be our focus and commitment and we can do that through the combination of the cost discipline that you've seen us execute on over the last few years and the investments that we're making now to grow revenue. And so that revenue growth, which we see come in on this multi quarter basis on a positive front from adjusted EBITDA dollars will help us grow adjusted EBITDA dollars in combination with that cost discipline, Nir referenced how that's showing up on that SOT G and A line.

[Ygal Arounian, Analyst at Citigroup]

All right. I appreciate it. Thank you.

[Operator]

Your next question comes from the line of Christopher Horvers with JPMorgan. Your line is open.

[Christopher Horvers, Senior Analyst at JP Morgan]

Thanks. Good morning. So my first question is, you're in the 4th quarter revenue guide, you're assuming some modest slowdown in revenue growth in the balance of the quarter. I know parsing a little bit here, but flat to low single digits quarter to date versus down low single digits. You also mentioned pre election deferrals.

[Christopher Horvers, Senior Analyst at JP Morgan]

So can you bring that all together for us? Why wouldn't trends get better if consumers are slowing into election and pushing holiday sales later into the quarter?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes, Chris. So I think on that, you've got you get the election coming up. That's something that may or may not really be determined in one day. That could take a little bit of time. We've got a calendar, the number of days that you're talking about kind of in the holiday season is a little shorter.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And you have what's been a challenging macro. So you have a bunch of uncertainty. So we feel very good about how we can continue to take share. But as you're kind of looking forward to the quarter and you still have a lot of the revenue yet to come and you have some of these uncertainties, you're trying to like figure out where you think you're going to be.

[Christopher Horvers, Senior Analyst at JP Morgan]

And I guess how significant has the I mean, obviously, Way Day, you purposely extended that earlier. But do you think that how significant is that slowdown ahead of the election versus maybe just timing shift around having a longer Way Day?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. I mean, I think Way Day, we on hindsight, we're pretty happy with how we played that. We had planned for a 3 day event. We built some flexibility in how we did that. And then as we saw the calendar playing out, we saw a bunch of other major retailers planning a 2 day sales event right after Way Day.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We said to take advantage of the online shopping that was going to happen over that time. That certainly maximized how we did, but I don't know that that dramatically affects when you get a week or 2 out from it, how health demand is going. I think it's just that the macro, it just makes it harder to predict. I think that's basically the biggest thing I would just say when you look to the forthcoming holiday season and you're like, hey, how is this going to exactly play out? You can come out with a range of possibilities that all seem plausible.

[Christopher Horvers, Senior Analyst at JP Morgan]

Got it. That makes sense. And then on the operating margin forecast for the Q4, Kate, you talked about we're hitting our goal of mid single digits. You did 4.1% in the 3rd quarter, but at the same time, the midpoint of the 4th quarter guide is not mid single digits. So I guess to what extent does that sort of undermine the view of hitting that goal that you've sort of said you would get to and have said that you've achieved that?

[Christopher Horvers, Senior Analyst at JP Morgan]

And then is any of that just seasonality from a mix perspective versus timing of spending?

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Yes, Chris. Thanks for the question. I guess the way I look at it is, obviously over the last two quarters, we've proven we can operate at that mid single digits, right? And we've shown, I think very nice discipline to get to that point. What you heard with the Q4 guide is a little bit of incremental investment on that marketing spend.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

And as a result, we've stepped up that range a little bit. And then the net of that is that we think that that is going to drive incremental revenue and incremental adjusted EBITDA dollars over the next few quarters. So I want to be clear that bottom of the funnel marketing spend is a place where we are quite disciplined and we have very good visibility and we feel confident in the ability of that to drive both the revenue and the adjusted EBITDA dollars and that's really where we're driving forward.

[Christopher Horvers, Senior Analyst at JP Morgan]

Thanks very much.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Thanks, Chris.

[Operator]

Your next question comes from the line of Peter Katz of Piper Sandler. Please go ahead.

[Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies]

Thanks. Good morning, everyone. So just sticking on some of the advertising and election dynamics. So you're highlighting the elevated ad spend from the stepped up influencer marketing, but we're also hearing that ad rates are very high right now around the election season. So how do you think about the ad spend going forward?

[Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies]

Do you think the overall costs are going to come down as we get in further into November, December and going forward?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. Thanks, Peter. So the way to think about it is certain parts of the ad market will definitely have elevated rates pre election. So think about this as like local television. Think of this as some of the upper funnel channels, which you could use for any variety of messaging.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And we just to remind you, we're very quantitative in how we spend the money. So in other words, we won't chase that spend. So if it's not economic, someone else can buy that media. And of course, if it becomes economic again and makes sense to us, we would buy that media. And so that's sort of one thing.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Think of that as like, what do you think about influencers or separately we're talking about some lower funnel fast payback channels. Those are channels that are very narrow and specific to different types of advertising. And so those aren't ones where you'd find political ads. And so that's sort of a different segment of the advertising market. But I think the main thing to just to kind of keep in mind is that we're just very quantitative in when we're talking about this ad spend.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

So we're not we don't really participate in anything that's not economic. And yes, those channels like local television do get much cheaper after the election, but we don't really do that much in that in local television, for example.

[Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies]

Okay. Helpful. And then, Niraj, just a couple of questions for you. It's just on Wayfair Rewards. So, it's likely to have a loyalty program out there.

[Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies]

I am recalling with 6 or 7 years ago you did have a loyalty program called MiWay, which was ultimately disbanded. So maybe just talk about the learnings from MiWay and what's different this time that ultimately might make this new loyalty program stick?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. So I think our biggest learning from MiWay was that the kind of customer value proposition that we had associated with the program, it just wasn't that strong. Now in contrast, if you think about what we're offering on Wayfair Rewards, what I talked about on the call already, you think about that average customer $600 a year, they're getting 5% back. That tranche of customers will be basically breakeven on the program right off the bat off their annual spend. They pick up those other benefits, the members only customer service line, early access to the sale then.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

But obviously, the way it works is if you're getting rewards dollars every time you make a purchase, you have a balance you could use against your next purchase. And that customer is already spending a few $1,000 in home today spread across many, many retailers. So you think about that next $2,000 $3,000 that they're not spending with Wayfair, well, if they spend some of that with us, the programs are some cost for them and they're going to get rewards on that incremental spend. And so it has some of the basic engineering you want in a program that makes it very obvious and easy for the customer to change kind of where they choose to drive their spend. And then there's a bunch of other benefits tied to the program that you say are not economic, but they could be exciting to consumers.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

So I think we've got a very good setup. And I don't think in hindsight, MiWay did not have as good a setup. And for that reason, we didn't see the traction we wanted with that. Wayfair Rewards, it's new, right? It's only been out there for a couple of weeks, but we're happy with the start of the

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

game.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Yes. I would just add, you heard Niraj speak to on the call the value of loyal customers. And so we have a very good understanding of when someone is increasingly loyal with us, the overall ROI that that drives in customer lifetime value there. And so this program is really designed at driving incrementality from folks who we're getting a portion of their spend, but we know we can be getting that 3rd and that 4th order. And we tested the concept with customers.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We have good reactions. So we're really excited about both how the customer perceives this value prop and what it can do for us.

[Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies]

Very good. Thank you so much.

[Operator]

Your next question is from the line of Simeon Gutman from Morgan Stanley. Your line is open.

[Simeon Gutman, Analyst at Morgan Stanley]

Hi, good morning, everyone. A couple of questions. 1st, on the category, home furnishings, if turnover or housing turnover picks up, I think the category would rebound. If it doesn't, curious what you think about pent up demand to drive is that going to drive some life in the category? Where do you think we are in that continuum?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. So, I think you're kind of you're phrasing it well in the sense that obviously if housing demand and existing home sales picks up, that's obviously highly stimulative to the category. We are seeing signs that there is pent up demand, but how much time needs to elapse before that becomes top of mind enough to be stimulative on its own is less clear, I would say. This is why just think about our strategy we've had for 2 years during which the market's gone down, what, 25%, but we've basically been able to take significant market share. And so we're doing far better than that.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

I think our strategy is really not counting on a rebound in the category, but it's actually calling out the fact that use rough numbers, the category was whatever a little over $400,000,000,000 in North America and now it's whatever over $300,000,000,000 North America, it's still $300,000,000 whatever plus $1,000,000,000 of spend that's out there. And we think that there's a lot of argument on why we can take share very nicely with all the things we're doing. And if you kind of think about that, it being a long tail, very fragmented, and you're increasingly seeing players who are having a harder time being differentiated in the middle, sort of losing share or going away. And you've kind of seen that from major players, either declining a lot or have been a handful, most recently what Khan, Bat Gakimor going out of business. And so there's definitely things that are changing.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And I think this is the real opportunity for us. And yes, of course, when the category turns, there's going to be tremendous amount of growth too. But it's sort of like timing that I don't think it's very easy to do and I don't think it's really pertinent with given the strategy we have.

[Simeon Gutman, Analyst at Morgan Stanley]

And then the follow-up on just the construct for 2025, which I know once you give a construct, we're going to ask all sorts of questions. There's obviously a lot of room where you say EBITDA dollars north of 2024. The question is, you could let's say that's up couple of $100,000,000 or are you going to lean in to market share to the point where you'll just drive a modest outcome? And I'm not looking at dollars and how much it will be up year over year, but more on your posture of how much you want to lean in to take market share to just achieve that goal of growing them or actually taking market share in a more meaningful way, if that's the essence of the question?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. The only thing I'll say, and I'm going to turn it over to Kate, those are interrelated, meaning that the things you do to take market share, some of those do not have costs associated with it, that's not already sunk. Meaning like, for example, when I talk about the storefront experience, That's a team of people we have on payroll. They're doing hard work every day, rolling out a lot of features. That will have an outcome that will drive market share.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

There's no incremental cost. I mean the ongoing payroll is the cost there. There's other things you would do like if you talk about advertising or you have a cost associated with revenue. But what we're seeing is we're going to do the cost associated with profit dollars that it generates. So those who have a very direct relationship, they're not unrelated.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

But let me turn over to Kate for any clarification.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Hey, Simeon. Yes, I would just reiterate, we are very focused on driving both the top and the bottom line. And we believe that we can do these things in concert with each other and we have a high degree of conviction around that. So what you're hearing us say is there are select places where we have made investments and are making investments. So obviously, last quarter we started to talk about that in the gross margin line.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

You saw how that showed up this quarter. We talked a little bit about the marketing spend. We are doing these things because we think that they drive incremental order growth and revenue capture. And ultimately that drives adjusted EBITDA dollars growth. And we can do that while continuing to be quite disciplined on the cost side and you've seen that pan out over the last few years as well.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Niraj already mentioned that SOTG and A expense, we've taken that down 9 quarters in a row. On an LTM basis, that's down over $250,000,000 that's on top of the cost takeout that we took out the end of 2020 2 and throughout 2023. So you're seeing really nice discipline there where we can manage the fixed costs and you're seeing us say, hey, there are some places where we think there are pockets of opportunity to invest that will drive on a multi quarter basis revenue, gross profit dollars and ultimately adjusted EBITDA dollars.

[Simeon Gutman, Analyst at Morgan Stanley]

Okay. Thank you. Good luck.

[Operator]

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

[Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.]

Hi, good morning. So I have a couple of questions. My first question on market share. So I know this has been a big topic and you've highlighted consistently the numbers show that clearly Wayfair in a tough environment is taking market share broadly. The question I have is, if you look at that the data you have maybe closer, is there any indication that some of these more mass merchant, more value oriented retailers or sites that are performing well in this environment, were they actually you're having a more difficult time taking market share there or are they potentially taking market share back from Wayfair?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. Well, I guess just to clarify what I would say, so it's a large and fragmented market. There's quite a few people losing share. But just to clarify, we're not the only one winning share. And so 2 other folks I've highlighted, who I think have done a very good job also over the last few years.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

One is Amazon. Now they played at the kind of opening price point commodity item is really where they specialize, but they've done a good job. Another one is HomeGoods, who's purely brick and mortar and they really play in sort of the decorative accents, decor, textiles space, lower ticket items, but they've both been taking market share. So there's a handful of folks who are doing well, much longer list of folks who are not doing well, and that's kind of the landscape. And so I wouldn't say that we expect to be the only winner, But I think there's actually kind of only a handful of winners and quite a few folks who are on the other side.

[Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.]

That's helpful, Niraj. And then my second question, and please, it's probably more for you, but look, again, you've done a great job taking your cost infrastructure down, controlling costs and get this top line weakness. But as we look into 2025, and still the top line there is still somewhat of a wild card. But I guess the question is, and you look at your cost infrastructure, how much incremental opportunity is sort of take costs down further? And then philosophically, if sales were to stay weaker, are you looking to take more cost down or you at that point start to prepare for the eventual recovery in sales and kind of keep the cost infrastructure in place?

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Yes, great question. So, first, let me just start with how we look at the cost efficiency and the cost opportunity. You've seen us focus sort of up and down the P and L on cost. Obviously, the place where you see that continuing to show up is on that OpEx expense, that SOT G and A, although you've also seen nice discipline, for example, on the CapEx expense. And as we're driving towards our sort of ultimate goal of growing adjusted EBITDA dollars less the CapEx, less the equity based compensation where you've also seen nice gains from a cost control perspective, you're seeing that sort of combination of those 3 continuing to improve.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

So as we look at it, we do see ongoing opportunity for efficiency. You've seen us do those restructurings in the past and then you've seen ongoing tightening on a quarterly basis on that SOT G and A line. And as a reminder, that line is not just labor, right? That's labor, but it's also P and E, it's R and O, it's some overhead, it's some software expense. And you're seeing us be really disciplined in all of these pockets as well as CapEx, equity based compensation, etcetera.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

So when we look at it, yes, we see ongoing places for tightening and places to be quite thoughtful. And as we think about a 25%, again, what I will say and reiterate is we are very focused on growing those adjusted EBITDA dollars. So we intend to balance things appropriately to continue to drive that and that in combination with CapEx, equity based compensation so that adjusted EBITDA less CapEx less equity based compensation continues to improve.

[Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.]

That's very helpful. I appreciate it. Thank you.

[Operator]

Your next question is from the line of Curtis Nagle, Bank of America. Your line is open.

[Curtis Nagle, Analyst at Bank of America]

Great. Thanks very much for taking the question. I guess the first one just on the AOV, came in above expectations, but pointed to high price elasticity and press for small versus large ticket items. So just curious what drove the better expected and higher AOV in 3Q?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. Kurt, so I think the way to think about AOV, AOV is really an output metric, right? So if you think about our business, we're doing a lot, for example, to sell lower ticket items. When we talk about like the frequency agenda and what we're doing with housewares items decorative accents and one of the benefits on Wayfair Rewards for example is free shipping on every order. And so you say, oh that will decrease ALB.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

But then we have a luxury platform Perrigal that's actually growing at a very nice rate and say, oh that's going to increase ALB. And so we're doing a whole variety of things that, our real goal is to grow the dollars per customer per year. So the way we think about getting market share is we think about market share is more customers and those customers each spending more with us. And an outcome of that is obviously a number of orders times AOV is the revenue. But again, because our strategy is not around low ticket orders or high ticket orders, AOV is an outcome metric of the combination of things we do.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And so I would say AOV is kind of like a pertinent topic when you're talking about inflation of like for like items or deflation of like for like items, meaning your 2nd quintile price for beds. Is that moving? But that's not really what's happening right All that inflation with COVID and the ocean freight rates and there was a deep cycle of deflation of that coming back out. That's all behind us right now. And so this AOB is more these moves are more an output metric of the seasonality and us executing the business on all the dimensions we talked about.

[Curtis Nagle, Analyst at Bank of America]

Okay. Got it. Then just would love to ask a question on tariffs. Yes, I mean effectively just kind of how we should think about the framework if we were to go to 50% or 60%. I think last you spoke and it was a while ago, China exposure about 50%.

[Curtis Nagle, Analyst at Bank of America]

So in terms of just kind of implications on revenue and margins, how the industry reacts, right? I mean, pricing is probably harder to push and capacity to move right out of China might be lower. So just kind of piecing all that together and maybe an update on what your exposure is at the moment would be incredibly helpful.

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

Great. Niraj, let me give some thoughts on this and then I'll hand it over to you. This is Steve. So yes, tariffs are something we've certainly seen over the history of this business and you've seen antidumping and we've seen tariffs and they've certainly can have an impact. I would say on the launch side, we're running a marketplace.

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

And so we really have selection across a broad spectrum of suppliers and that allows our customers to see a lot of options for products they have and swapping different things. And so we're able to sort of move demand around in that regard. We certainly have some practice now navigating tariffs. And so I think when we look out in the future and certainly it's uncertain exactly how that might play out, we feel much better about the playbook we will run and the approach we will take to help consumers buffer whatever price increases they may see selectively in certain imported products. The other side of it is our suppliers are obviously more directly impacted deeper than we are.

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

And so they've been working over the last year or 2 here to just to modify their businesses so that they don't have single source problem as quite as much as they have in the past. And so I think the combination of all those, we think we'll buffer this as best we can and shouldn't should be very navigable.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. The only thing I would mention though too. So in the 5 years, there's some anti dumping things that happen in like wood some specific categories of wood goods, certain factories from China, which happened years years ago. But then really the notable things were the tariffs during the 1st Trump administration where it got to 10% and then 25%. Well, ever since then and that was for goods from China in our categories.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Ever since then, what you've really seen happen is there's been a lot of suppliers who built manufacturing capabilities in Cambodia and Vietnam and Malaysia, Indonesia, other places so that they actually have more control over their future should the tariff landscape change etcetera. So I would say that the industry now is much more cognizant of that risk than they were 5 years ago. And so I think we have kind of a couple benefits going for us. One is that the industry is definitely in a different position than it was 5 years ago. The second is, as Steve mentioned, we have 20,000 plus suppliers and we have domestic suppliers.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

We have import suppliers. We have suppliers who make goods in Brazil. We have suppliers who make goods in Eastern Europe. So we have suppliers that are quite different from one another. And so we have the benefit of how they compete on our platform for the customer.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

So yes, I think, it's you never know quite what's going to happen, but I would say that that's certainly a topic that folks have been thinking about and doing things about.

[Curtis Nagle, Analyst at Bank of America]

Okay, got it. Thank you.

[Operator]

Your next question is from the line of Colin Sebastian from Baird. Your line is open.

[Colin Sebastian, Senior Research Analyst at Baird]

Thanks guys. Good morning. So I know there's a lot of focus here on the category challenges and efforts in pricing and advertising. But Niraj, if we sort of zoom out on broader e commerce platform and technology trends, I mean, there's a lot of change happening around shopping tools and digital assistance and personalization within apps. And so I wonder how important those initiatives are for Wayfair?

[Colin Sebastian, Senior Research Analyst at Baird]

And are you seeing any positive impacts perhaps in metrics like just time spent or discovery and browsing even if those aren't converting yet to sales in this environment?

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

Yes, thanks for the question. This is Steve again. Let me just kick this off. We have been doing a lot of things internally. Actually just this morning, I sent out an internal sort of pre earnings little video and I did it completely with AI.

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

And I think part of this we're all going through this learning curve together right now of how to best use these new tools. And so when you look out and say, if we don't adopt the best practices in the business, we're going to be in trouble. And so it's on us to really push our teams to make sure they're using these new tools and experimenting and trying new things and pushing the cutting edge so that we can be a leader, and not be kind of at risk of the market changing around us, without us catching it. So we have a number of initiatives internally that are some are very tactical and some are having a very direct efficiency paybacks where teams are using them to improve process flows that they have today. And then some are much more experimental where they're trying to go after things that could be disruptive in the future, that could be very exciting for our customers or could change the efficiency curves in different parts of

[Steve Conine, Co-Founder & Co-Chairman at Wayfair]

our business.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And what you've seen, Mike, so we've been a large adopter of machine learning data science for a very long time. That's how we price the catalog, how we do sort order, how we do a lot of personalization. But with the kind of more recent advent of Gen AI, we've also been an aggressive adopter there where we have a lot of use cases where you can kind of do things and you see the return very quickly. For example, we have a very large catalog, millions, millions tens of millions of items.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And so finding dimension inaccuracies and correcting them, auto tagging a lot of merchandising attributes, those are things that we've actually put into production. They're driving a lot of value at very insignificant cost. And similarly, on how we empower our customer service agents to be able to take care of the customer and do a good job, we've been able to create tools there or for our software development teams and they become the copilot type products out there for increasing productivity of coding. So there's been a bunch of things we've been an aggressive adopter on. On the customer side, I think what you're also getting at is it could change how customers shop.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And there I think we actually do have some kind of pilots and proof of concepts of things that we're trying that we do. We have one that we're setting small amounts of traffic in and it actually shows really amazing customer engagement. It's still early. But we are basically we're certainly I think we're being prudent about how much we're investing. We're not over investing, but I think we're also not ignoring it.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And I'd say we definitely are pretty happy with some of the progress we're making. And we're in a good position because it's a category we're not selling commodity goods. I think the biggest challenge with agents are if you're a seller of commodity items. Now you can have an agent say, hey, I want to reorder those Bounty paper towels that dish soap, some more Dove soap bars. Well that agent can basically figure out, hey, is it cheaper at Walmart, at Target, Amazon or does it make sense?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

So we're ordering enough from Walmart automatically sign me up for Walmart Plus or whatever, execute that order. I don't care who's kind of brown cardboard box shows up at my door, right? But if you're selling items that are exclusive, there's a lot of consideration in how you pick the right item. There's a lot of fine distinction between different items. The agent role is going to be a little different.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

And I think there's things you can do to kind of enhance the customer experience in a way that's really engaging. But it's not I think the real challenge is if you're more of a commodity provider.

[Colin Sebastian, Senior Research Analyst at Baird]

Okay. Thanks Niraj and thanks Steve.

[Operator]

Your next question comes from the line of Oliver Wintermantel from Evercore. Your line is open.

[Oliver Wintermantel, Analyst at Evercore]

Thanks guys. Kate, I think you mentioned you're looking forward to a healthy free cash flow generation in the Q4. Maybe can you confirm that free cash flow that you guys expect free cash flow to be positive this year? And then maybe the capital allocation into next year, maybe talk a little bit about how you want to invest and what is driving CapEx next year?

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Yes. So a few thoughts. So just first relative to the Q4, we do typically see positive free cash flow in the Q4. As a reminder, part of that is the working capital dynamic, right? So seasonally, the Q4 is typically a bigger revenue quarter than the Q3.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

And that in combination with our ongoing discipline around adjusted EBITDA growth and CapEx should drive nice free cash flow in the Q4. Obviously, we haven't given any 2025 guidance, but as we think about CapEx, I'd sort of look at what we've done over the past year. And so what you've seen is ongoing discipline on that line as well. There are really 2 sort of components to CapEx that we break out here. 1 is the CapEx labor piece, and you've seen that continue to come in quite nicely as we've been very thoughtful and disciplined on our team and our structuring.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

And then the other is that PP and E line. And within that PP and E line is the investment in our logistics network and the investment in physical retail. And what we've spoken about there is in the logistics network, we're very pleased with where the network is today. So we're not in a growth mode on that network. There's some maintenance CapEx there, but it's really not about expansion.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

We have ample capacity for the growth that we intend to have. And then on the physical retail side, what we've also said there is we're excited about that opportunity. We're obviously quite pleased with the results from that first large format store that opened in the spring, but we intend to be very disciplined about the rollout there. And so you should overall, you've seen us throughout this year bringing CapEx nicely from last year as we maintain that expense discipline and rigor up and down the P and L.

[Oliver Wintermantel, Analyst at Evercore]

Got it. Thanks. And then maybe on international, looks like that had a nice improvement in EBITDA versus the first half of the year. On your comment about next year's EBITDA dollars to be positive versus 2024, how much of that is international improvement?

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. So I'll just make a quick comment and turn it over to Kate for the details. But I think what you're seeing over time is a lot of the work we did over 2 years really streamlining our cost structure, focusing on the key things for each business line that we think are important to drive them forward. And then as time plays out, we're seeing that the business we're pretty happy with the progress we're making on the key drivers in each line of business that we want to see progress. I'm not really allowed to give guidance.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

I'll turn it over to Kate.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

I'm also not going to give guidance. But I reiterate what Niraj said, which is as we thought about the cost discipline and the selective areas where we invest, that's across the business, right? That's not just specific to the U. S. And what we said it was we started some of the cost restructuring is that, that would be sort of global in nature and how we look at that.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

And as we sort of think about what we're driving for the business, we're really focused on the business overall and what that looks like across Wayfair Inc.

[Operator]

And in the interest of time, we will conclude our Q and A session here. I would like to hand back over to the Wayfair team for closing remarks.

[Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman at Wayfair]

Yes. Thank you everybody for joining us today. As you can probably tell, we're pretty excited with where we are now with the business, the things that are rolling out and coming and we're pretty we really like the prospects we have as we're looking forward. Thanks for your interest in Wayfair. Hope you have a great holiday season.

[Kate Gulliver, CFO & Chief Administrative Officer at Wayfair]

Thank you all. Thanks.

[Operator]

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.

Participants

Executives

• James Lamb, Head - Investor Relations
• Niraj Shah, Co-Founder, Chief Executive Officer & Co-Chairman
• Kate Gulliver, CFO & Chief Administrative Officer
• Steve Conine, Co-Founder & Co-Chairman

Analysts

• Ygal Arounian, Analyst at Citigroup
• Christopher Horvers, Senior Analyst at JP Morgan
• Peter Keith, Managing Director & Senior Research Analyst at Piper Sandler Companies
• Simeon Gutman, Analyst at Morgan Stanley
• Brian Nagel, MD & Senior Analyst - Consumer Growth & eCommerce at Oppenheimer & Co. Inc.
• Curtis Nagle, Analyst at Bank of America
• Colin Sebastian, Senior Research Analyst at Baird
• Oliver Wintermantel, Analyst at Evercore