Wayfair Surges on 3Q Beat, 4Q Guidance, AI Success

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2:04Carol Massar:Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank N.A., member FDIC. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. We're thinking a lot about the U.S. economy. We do get a Fed decision. 24 hours from now, we will have that Fed decision, and we are expecting a rate cut. But we wanted to talk a little bit more about the economy and do it through the lens of Wayfair. Those shares are surging as much as 24 % higher in today's session.

2:45Carol Massar:The stock trading near the day's high, even at this hour, which is the highest level since April of 2022. The e-commerce home furnishing retailer reported net revenue and adjusted EBITDA for the third quarter that easily topped expectations, Tim. We've got Kate Gulliver, chief financial officer of Wayfair, back with us. She joins us from Boston. Kate, good to have you back on the program. Thanks for joining us. Investors certainly loving the update on the business. How is business? How is it kicking off in this final quarter? Yeah, you know, thank you for having me back. Happy to be here. We're obviously quite pleased with the third quarter results and the subsequent reaction to them.

3:23And I I do think it shows, you know, all the work that we've been building to over the last few years and the enduring strength in the model. And so you saw that top line come in pretty nicely at eight percent, nine percent adjusted for the German business. And that really is compounding share gains there on the top line. And that, of course, flowed through quite nicely to adjusted EBITDA gains.

3:44Carol Massar:How would you describe the consumer? Yeah, you know, it still remains for us that the consumer is quite focused on promotional events. And so she, you know, our consumer is typically a woman, you know, mass market, and she needs those promotional events to really come in off the sidelines and get excited to shop. We've talked in the past about, you know, how the promotional events really work as a marketing banner to get someone interested in the category and to then bring them into the site. And that is still the case. Those promotional events are pretty necessary to get the consumer engaged and excited.

4:19We do see relatively more strength in that higher end consumer. For us, that's consumers that are transacting on our Paragold site, which is our luxury brand or specialty retail brands. We've said that those are actually growing at a faster rate than the core Wayfair.com business. And you are seeing more strength in that consumer segment. Are you are talking about promotions? You mentioned them. You have to get consumers excited. Do you have to get them more excited now than you did any other part of this year? We're really trying to understand the economic environment out there. You know, what's interesting is this category in particular has been down for so long.

4:56So the category, you know, obviously boomed during COVID and then had a pretty significant pullback 22, 23, 24. So throughout, you know, 24 and 25 for this category, promotions have been critical. You know, I would say what we have seen, you know, really throughout 25 is there's also been some mixed shift dynamics in addition to sort of higher end consumer and mass market consumer. You do see consumers that are shopping or shopping for, you know, things like decorative accents, decor, you know, maybe things with a lower ticket than, you know, buying a new couch or a new chair. And I think that's the idea.

5:36someone wants to refresh and is excited about that, but they want to be mindful of how much they're spending. And so they're looking for the smaller pieces, maybe opposed to the big piece.

5:44Carol Massar:Well, you know, to that point, you know, Kate, I think about the pandemic, we realize that's the anomaly. I mean, I'm looking at your stock is up 142 percent this year, which is quite a run, but it's still down about 69 percent from 2021. We know everyone was at home spending on their home. That's why people were working at it, spending on their pets. There was a lot of stuff going on. So I am curious about when you look at the third quarter growth, how much came from intrinsic share capture versus category stabilization? Because it does sound like we're seeing a lot of stabilization here. It's a great question.

6:20We think the category itself is roughly flat to slightly down. So I do think the category has stabilized. And we see that we look at a variety of different data sources and, you know, they're all slightly different, but they coalesce around a flattish category. This is in contrast to last year where the category was down maybe, you know, mid single digits to high single digits. So that's certainly an improvement, but we don't yet see the category as having returned to growth. So when we look at sort of 8 % growth, right, that's definitely us gaining share on a category that is, say, flattish. When consumers are buying from Wayfair, are they buying to replace stuff or is this trade-up activity?

7:00What is the data telling us or telling you? Yeah, that's a great question. We're certainly starting to hear that a bit from folks. Have we hit replacement cycles? And really, to the conversation we were having around the pandemic, it speaks to so much of the pull forward in demand that happened during that pandemic period. I think we see a few things that drive purchase events. One is moving, and obviously that part of the category has still been quite suppressed. One would be life cycle changes. So your kid, you had a baby and now they're moving into a toddler bed or the kid's leaving the home and you're turning their bedroom into an office.

7:38So sort of as your life cycle evolves, regardless of if you're moving. And then a third would be replacement categories or sort of zhuzhing up your room. In replacement cycles, I think a lot of folks are eager to see if what was bought in 2020 and 2021 needs to be replaced at this time. And I think what's helpful to understand there is it's just very category by category specific. So if you bought, you know, opening price point outdoor furniture and you live in the Northeast, maybe five years is, you know, an appropriate time frame. But if you bought a, you know, nice couch, you know, you're certainly not hitting the replacement cycle on that yet.

8:16Carol Massar:I got to say, I love judging. I love buying pillows, but I'm afraid if I bring any more pillows home, my husband's going to divorce me because he's like, I can't even find that. I can't find the bed anymore. Hey, listen, you talk, Kate, about the higher end brands like Paragold. You're seeing some strength, certainly in that area. I am curious, too, about your retail expansion, the physical store retail expansion or your loyalty program, if that's adding incremental customers versus shifting existing digital ones. What are you seeing on that front? Yeah, great question. So on the physical retail side, we are adding incremental customers.

8:50We're actually seeing in our first large format that Wayfair store that's been open for a little over a year now, more than 50 % of the folks who are transacting in that store are actually new to the customer file. We have a hundred million customer file, right? So to be getting new customers at this stage is pretty exciting. So it's definitely acting as a way into the brand. Paragold, we actually just opened two stores for Paragold. So we opened one in Houston in the spring or sort of early summer, and then we just opened in West Palm Beach in Florida a week ago. So it's very early days on those stores, but we do think that they should work as a nice customer acquisition channel.

9:26The loyalty program, which is about a year old, I would say that's acting more for existing customers to get them to be increasingly sticky with us. So what we're seeing from loyalty customers is nice incrementality, meaning if they were going to purchase six or eight times a year and maybe they're buying one to two from us, hopefully we're getting that next purchase, that second or third purchase as well now. Kate, on the layoffs that we've heard from other companies, just in recent days, Amazon planning to eliminate roughly 14 ,000 corporate jobs. This, as Andy Jassy warned that AI will shrink the company's workforce.

10:01You have a 2 ,500-person tech team. How are you thinking about headcount? Are you reallocating headcount toward AI applications? Or are productivity gains allowing you to do more with a similar cost base? What are the numbers there? Yeah, it's a great question. Actually, our CTO, Fiona Tan, was on our earnings call this morning, speaking to some of what we're seeing from AI, both on the top line perspective and where we're going with, you know, personalization, but also on, you know, efficiency. Every employee in the company, not just in tech, is actually enabled with AI, you know, tools and AI resources.

10:32And right now what we're seeing is really nice, you know, efficiency and enhancements to individual employee work. And then in different pockets throughout the company, including within tech, you know, as we use more specialized AI tools, you see, you know, uptick in efficiency there. I frequently actually talk about our legal team. So not a tech team, but a team that, you know, has been able to adopt AI quite rapidly for document review and the ability for them to sort of manage, for example, increased lease load as we've been expanding the physical retail network without having to add incremental folks has been pretty impressive.

11:06And so we certainly are seeing gains, you know, from that efficiency internally.

11:09Carol Massar:Hey, do you feel like, though, in this environment that you want to be lean and mean? I mean, I guess I feel like all companies want to be lean and mean, Kate. But I do wonder if you're seeing, you know, as you look down the road, we are in this funny environment, funny, not funny, ha ha, but funny, difficult in that with the government shut down, we're not getting data. So we're trying to figure out by talking to folks like you where we are in our economy. So do you feel like there's pressure to be leaner and meaner than maybe, I don't know, a month ago or so? Or you feel more confident about what's kind of coming down the road here?

11:42You know, I think you framed it well, Carol, when you said you should always feel the importance of being lean. I mean, we're a mass market retailer, right? We operate on basis points of margin. So we absolutely need to be maniacally focused on cost at all times, regardless of the macro that we're operating in. And over the last several years, you saw us go through a number of restructurings, frankly, to bring down that overhead cost pretty significantly. Our most recent restructuring was actually March of this year. We're in the conversation on tech employees. We did lay off some of our tech team as we completed our replatforming exercise.

12:15And we're able to actually increase some efficiency on that team, pointed more of those resources towards AI, et cetera, as they have stayed. So we continue to be quite focused on efficiency and efficiency gains. we feel good about, you know, where the team is right now and the efficiency that we're seeing from that operating team. But that comes on the heels of, you know, several rounds of restructuring over the last 24 months. Well, on AI, on the consumer side, when it comes to AI, I'm wondering about the traction from Muse and Decorify, the decorating platform, the new pilot. How has that been with shoppers so far?

12:47Is it driving broader consumer adoption of AI-led design? Yeah, so we've tested out a number of AI tooling as it relates to how the consumer can experience our website. We offer millions of different SKUs across thousands of suppliers across a wide range of styles. So the holy grail is really personalization. And how do you, you know, all three of us may be searching for, you know, those throw pillows for the bed that Carol was talking about. And we all may have a different aesthetic. So how do we land on the site and get to our aesthetic as fast as possible? Decorify and, you know, now we have a tab on the app called Discover.

13:25These are ways for individuals to sort of browse and engage in a way that should be more personalized for them. And we do see great engagement there. But even on, you know, the main part of the app, so not using one of these specialized tools or the main part of the website, we are using generative AI to make that experience better. We spoke on the call this morning about combining generative AI from a merchandising perspective with actually human designers. And for folks that landed on those SKUs that were the combo of the both, we saw a third uplift and sort of engagement with that SKU. That's really exciting because that means that SKU is probably far more relevant to you than where you were going to land before.

14:05Carol Massar:All right. Great stuff, as always. Great read on what's going on in retail and certainly the consumer. Kate, thank you, thank you. Kate Gulliver, Chief Financial Officer of Wayfair. When you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, risk can affect multiple parts of the organization at once, from property and liability to cyber and regulatory challenges. At that level, managing risk becomes an ongoing discipline. At the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive.

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