Wayfair Aktie

Thanks. Good morning, everybody. My name is Christopher Horvers. I'm the broadlines and hardlines retail analyst at JPMorgan. And it's my great pleasure to introduce Kate Gulliver, Wayfair's Chief Financial Officer.

Good morning. Happy to be here.

Thanks for coming again this year.

Yes.

Really appreciate it. So it's an exciting time to cover the consumer. It's an exciting time to cover Wayfair. I want to talk about your share gains and what's driven your share gains. You've been outperforming the market by high single-digit percentage. We all operate in spreadsheets and want to, like, rank order things and loyalty and CastleGate. Like how would you think about this acceleration of share gains? What have been the biggest drivers of that?

Yes. So if you think about sort of when the share gain -- well, sort of stepping back, Obviously, for the vast majority of our history, we've been a pretty significant share gainer. That is what has fueled our outsized growth. Obviously, that fell back a bit sort of '21, '22, early '23, returned to a share gain in sort of the back half of '23. We were able to start -- I know it is a very -- we're very spread out here. We were able to start accelerating those share gains sort of towards the end of '24 and throughout '25.

And what I think you really start to see happen there is once we got what we call our core recipe back into place following the post-COVID period, so price availability, speed, we were then able to start adding in a number of newer initiatives. And it's those newer initiatives that are really starting to hit, and then it's sort of the benefit that -- of those initiatives sort of all hitting together because they do all play off of each other.

So the first and most obvious one that I talk about is the loyalty program. We launched that in October, rather, of 2024. So we're a little over 1.5 years into loyalty. The intent behind the loyalty program is to really expand incrementality of spend among a group of customers. We know that many of the folks that are shopping us are in the market 6 to 8 times a year for the breadth of what we sell. They're probably shopping from us about 2 times a year based on what we see on the customer data. And so there's a significant benefit for us if we can get even one incremental purchase and get half of the time that they're in the market, let alone another incremental purchase beyond that.

What we're really seeing that we're excited about in loyalty is, one, from loyalty members, we are seeing this incrementality. So the program is bearing out the way that we designed it to. And then two, we're also seeing spend in other categories or sort of more frequency categories that we want to continue to expand and grow. We're obviously known, first and foremost, for sort of core furniture and decor, but we have a really great selection in housewares and accents and seasonal decor. And those categories tend to be shopped more frequently. And so it's a great way to sort of keep the customer engaged on your platform and not have to reacquire them. So loyalty, a pretty big driver ongoing of share gains today, but also into the future as we grow that program.

The second piece that I'll mention is Wayfair Verified, which we launched in the summer of '24. So you know it's a theme here. Everything sort of started launching in '24. Wayfair Verified is where we really put our stamp on a product and say, we think that this is -- if you're looking for a mid-price point barstool, we think that this is the best mid-price point barstool for you.

We actually touch and feel all these products that we put our Wayfair Verified stamp on. They are actually -- we often, in many cases, have a designer talking about the product and explaining it to the consumer so that she can understand it better. And it really helps folks sort of distill what is a very large catalog. So if you're not interested in the breadth and you want more of a sort of clear, here's what I should buy, this helps you with that.

I point to those as there are sort of 2 very clear product launches, if you will. On top of that, though, there's been a number of improvements in the storefront experience. So -- we went through our replatforming efforts sort of '22 through '24 or '21 through '24. And most of our tech time was dedicated to the replatforming work. As we completed that towards the end of '24, early '25, we've been able to really improve the pace of change on the storefront experience on the site. Some of that is because we freed up developer capacity. Some of that is because in the replatform world, it's just easier to make changes on the site. The site is more sort of nimble and flexible, if you will.

So when you start to think about what adds to share gain, it's overall better site experience, it's Wayfair Verified, combined with Wayfair with the loyalty program, combined with ongoing improvements in delivery. For example, we just launched Delivery+ actually about a few weeks ago where in this market in Boston, which is where we've launched it first, you can have sort of enhanced delivery experience as the product comes into your house. And so things like that, that we're now able to sort of roll out in a faster cadence as well.

So if you think about loyalty, it's interesting because most loyalty programs start in very high-frequency categories. And we've seen other retailers try to launch loyalty in big ticket categories, and they've struggled with it. So can you help us think about how this program is different? And what are you seeing in terms of taking that average 2 purchases a year, those 1 million or so customers, what's happening over the past 18 months?

Yes, it's a great question. So first, certainly, for purchasing, our AOV is a little over $300, right? And purchasing a couch, you do somewhat infrequently, a bed, you might do somewhat infrequently. But to the point of, like, is this a high-frequency category or a low-frequency category relative to consumables, obviously, extremely low frequency. Relative to luxury furniture, certainly higher frequency because we're selling all those other pieces as well.

So I do think within each category, while the big furniture ticket items are lower frequency, buying kitchen accessories is actually a few times a year. And so when I say that we want to sort of move our customer into spending in those categories, which we already sell, we have the selection, we have the great price points, all of that, we know that there are some things that we can do in loyalty to make that more appealing to her.

So part of what we've done is work with our suppliers to make sure that for loyalty customers, we have really compelling offering in certain categories. So we can differentiate more of the catalog in something, say, like, housewares or we can do special promotional events in those categories that are access for loyalty customers only. Generally, the vast, vast majority of what we sell ships free because the average AOV is $300. But even if you're buying -- if you just want to replace 2 glasses, if you're on loyalty, that will ship for free even though it's below our threshold, right? So we're trying to make those incremental purchases easier for her. And what we are seeing is that we are getting that incrementality.

We gave out a stat when we updated on the loyalty program in the sort of fourth quarter call of last year around the number of loyalty program members that are buying -- the vast majority are sort of buying 3-plus times a year, right? So they're actually coming into the market and sort of buying on a regular cadence.

We've also seen really nice renewal rates. So we had sort of the first renewal class start to come through. And we're seeing really nice renewal rates, which means it's not just folks wondered if we may just get folks coming into the loyalty program for a specific project and then cycling back out. And what we have seen from the renewal is that we are starting to see behavior where folks are staying in the program. So maybe they initially came in for a project, they're seeing other benefits from it and therefore, are holding on to the program.

And just as an aside, in a little bit, we will open up for audience questions and then also take online questions. So please engage with any questions. So I want to -- didn't want to jump into margins, but it's a good just quick tangent as we think about investors get nervous when they see gross margin pressure.

Do you think they get nervous? I haven't noticed in the share price, but...

20, 30 basis points. Well, it's indicative of customer acquisition costs. It's indicative of pricing power, so to speak. So can you maybe talk about that? And is it -- should we think about it as more one-for-one offset to advertising leverage? Or do you think actually between these 2 lines, it ends up being a net benefit?

So let's step back first and talk through, again, the philosophy around sort of where we drive gross margin contribution margin and ultimately, EBITDA margin. We are very clearly marching on this path to north of 10% adjusted EBITDA margin. Nothing has changed about our objectives there from when we launched that at Investor Day in August of '23.

And if you remember at that time, we were basically breakeven. So in 2 years -- 2.5 years, whatever, we've gotten north of 6%, right? And so we're quite confident in our ability to get to the 10% plus adjusted EBITDA margins. When we think about how to do that, our focus is generally on how can we grow gross profit dollars, contribution margin dollars such that we're sort of maximizing the growth to ultimately drive that EBITDA dollar and EBITDA margin faster. So our sort of North Star that we're looking at, we actually focus even more internally on owners' earnings. So the EBITDA less the SBC, less the CapEx because we do think about the SBC as a real cost. But in general, we're far more focused on EBITDA dollars, EBITDA margin. That is the direction that we are going in.

In terms of the puts and takes on that, -- we -- when we make an investment like the loyalty program, which does have an impact on gross margin, we are doing that because when we look at the math, we see that it actually optimizes on those gross profit dollars, optimizes on these contribution dollars and therefore, actually helps us achieve that EBITDA margin, EBITDA dollar growth rate that we're targeting faster than we otherwise would. So that's why we make those investments.

Now when we think about the loyalty program specifically, obviously, it has a drag on gross margin because of the 5% back, but those customers come to us increasingly direct. So that's probably actually accretive on the contribution margin line because it's probably more than offset on the marketing spend.

Now on the other hand, there are investments that we make on the marketing spend that we think makes sense. So we said, hey, we're just going to hold that at 15% right now because we think that's the right place for contribution margin to be to again maximize that EBITDA dollars and EBITDA margin. And so that's sort of how we think about the puts and takes up and down the P&L.

So maybe the strength of your top line against what's been a very uneven market. So maybe we can talk about the market backdrop a little bit. Last year, we got to -- it was a flattish market. And then we sort of tilted down low singles, down mid-singles quarter-to-date. So what do you think has happened? What do you think is happening? And as you look ahead, do you worry that sort of this whole cauldron of energy prices and post-stimulus consumer behaviors? How do you think about how the category might shape out for the rest of the year?

Yes. I was laughing at the beginning because I think we've used every possible word to describe the category over the last few years, flattish, choppy, bouncing along the bottom. All of this to say the category has not been great, right? The category has not been a tailwind, yet for us, at some point, this is a cyclical category will recover. But our expectations for 2026, our guide for the second quarter, none of that assumes a category recovery. So when we think about what could happen in '26, our operating mode is that the category basically stays where it is.

If we think about sort of what happened over the past few years, generally, this category is sort of a GDP-plus grower, right? So it should grow 3% to 4%. That's been the long-time historical CAGR of the category. And we obviously have not seen that even if you were to take 2019 and CAGR it out to 2026, where we think we're sort of double digits below actually where that trend line would be. That's not the annual comp. I'm just saying sort of overall in terms of sales that have been missed out and sort of are being held back in the category right now. So there's quite a bit of pickup at some point to happen.

We did start to, we think, see the category start to stabilize towards the back half of last year, as you pointed out. And then I think at the early part of this year, some of the challenges were weather comps. You heard us and other folks in the space talk about that. I think that sort of sounds a little bit silly coming from an e-commerce retailer. But as we've learned, when the customer gets very distracted by significant weather, they do not shop our category. They are getting what they need. They're focused on getting their kids -- getting the driveway cleaned up, getting their kids back to school, getting whatever their heat working again. And so it tends not to be a time that they shop. So the beginning of the year was actually quite choppy from that.

We started to see some recovery and then obviously, the consumer has been a bit under pressure. You, Chris, have actually had a number of reports that have shown sort of the tax refund benefits. I do think there's been -- the consumer has been able to hang in there a little bit because of stimulus sort of helping when gas prices have gone up. They've had the stimulus benefits of sort of helping to buttress that a bit right now.

When we think about sort of where the category can go, what can drive the category, certainly, if the consumer feels under pressure, discretionary spend in general takes a bit of a hit. Our category is already so far off its trend line, though, I think there's a reasonable question on how much further of a hit could this category itself take. And then from a housing perspective, at some point, housing will turn around. We're not projecting any sort of recovery this year from that, but that will be a tailwind when that does happen, not if, but when.

So as we look at the rest of the year, though, we're saying, let's assume the category sort of stays where it is, which is down from even '25. Even within that, we believe because of our share gain efforts, we can continue to nicely outpace. We obviously guided to a mid-single-digit number for Q2, so sort of a 10% 2-year stack there. So we're continuing to sort of see expansion. And I think that's all the pieces that we talked about at the beginning from the share gain really starting to hit and drive that.

And so April was -- as you think about the category down mid-single-digit quarter-to-date, obviously, April is a big month for tax refunds. So -- and it got -- did get worse from the first quarter, which was down low single with definitely significant weather issues overall. So is that like the -- I guess, how do you think about that trajectory, especially as you think about how maybe energy prices hit the consumer?

Yes. I think what you start to see in March and probably into April is a bit of the impact of energy prices. And again, pulling on the consumers' wallet and more share of their wallet has to go to nondiscretionary items, they are going to pull back in discretionary categories. You also did have some Easter timing. Easter moved around quite a bit. So I do -- as we look at April, I think that's an important thing to keep in mind in terms of sort of general retail comps, obviously. Even within our category, you had pretty significant movement there. It was like a 3-week difference this year. So that was sort of all factoring in, in March and April as we looked at it.

Right. So I guess said succinctly that down low single, down mid-single could have just been the Easter shift.

Yes. I mean, I think, the down low singles in the Q1 was weather, then you start to, in March, get some Mid East impact, April, probably a combination of those things.

Yes. Got it. And then as we -- I guess you've talked a lot about share gains, obviously, have had good traffic, generally good traffic overall, but the category has also seen a fair amount of tariff inflation coming through. And so can you help us think about maybe how much has that benefited your business? And then as you think about the lack of inflation theoretically, if tariffs stay at this current level, do you think that has any impact on your ability to gain share? Because asking the question in a better way, if the marketplace did suppress pass-through of price, that would have accelerated your share gains. Are you concerned about lapping that in the back half?

We -- short answer is no. We are not concerned about lapping that. Again, we're quite confident in the ongoing share gain story. What we had actually said in Q3 of last year is that in general, we believe that suppliers are working quite hard to maintain where their prices are, particularly on the products that are moving and that are selling.

Now we've been asked, as there may be refunds, we'll see how -- the sort of the pace at which those might get paid out. As a reminder, we are not the importer of record. So those refunds would go to the wholesalers. As there may be refunds as the tariff world keeps moving around, do you think that prices could come in even more? I don't expect that to happen. I think these suppliers have been under pressure. They did their best to hold in there. Anything that they get -- they will sort of use to offset some of what they sort of had to absorb last year as they were moving through that.

On the other hand, we have not seen revenue being driven by inflationary pricing, to your point. In general, if you look at our own AOVs, those have moved and our own order volume, you've seen revenue growth a pretty nice mix of both. And again, normalized AOV growth in this category is roughly 3%. So that's like the 20-year long sort of history of AOV growth in this category. So generally speaking, that's a pretty normalized pricing environment for us.

Folks have also asked and this is sort of a piece of your question, do we think we sort of disproportionately benefited last year during the tariff environment. I certainly think that our model is set up to do well in times of complexity. I would argue we're operating through another time. It's been nonstop complexity for the last 5 years. But our model does tend to do well there because of the marketplace dynamics. So because of the marketplace dynamics, we're able to really keep pushing towards the customer what is best at that given moment. And that allows us a lot of agility in how we operate. So even now, while you may have some suppliers sort of managing fuel surcharges and sort of container rates, again, we're able to help our customers sort of get the best value that's out there. And I think that, that continues to be a strength of ours.

I'll pause here for any questions from the audience. If you do have a question, we just wait for the microphone. We got one right here.

I really like the point around Shopify -- or sorry, Wayfair Verified and kind of the customer discovery journey. Could you talk a little bit about the Universal Commerce Protocol initiative? And maybe what's the scenario analysis that you and your team have done around the long-term impact of the business? And would be really appreciative for any color specifically on any potential impact to the cost structure around like sales and marketing and things like that.

Yes. Great question. So just so everyone is aware, Universal Commerce Protocol or UCP is Google's shopping protocol that they're developing for agentic shopping. We were announced as an early partner in developing this with them. Google is a long-standing partner of ours. But I think it speaks to our overall philosophy and approach here, which with agentic shopping. Sort of generally speaking, then I'll go into sort of how we think this category might evolve.

Generally speaking, our view is we want to be where our customer is at. And if that she's on Gemini or she's on ChatGPT or she's on Claude and she's searching, we want to show up there. We want to be well positioned there. We tend to do well when we're at the forefront of helping to develop these products. So we're -- we will work with the breadth of LLMs and help them develop what agentic shopping in this category may look like. That's sort of how we've always approached ads, for example, in the past. And given our scale in the category and the breadth of first-party data that we have in the category, we are an attractive partner as folks start to understand what this looks like.

I often get asked, okay, so if agentic shopping takes off, won't many of your manufacturers start to go direct to the customer? And I do not believe that, that will happen. This is a very complicated category. There is a reason why, frankly, it has been challenging for others to build the online platform that we've built because it's not just the upfront discovery, which is critical and important, I'll get to some of the changes that we think might happen there in a minute. It is the entire back-end process, which really requires the logistics network that we've built, which is a very important moat for us.

This is a category that has high incidence rate. It's a category where people come into your home to bring the product into your house, where the AOV is relatively high. And so if you have an issue, you want to be able to know that you can talk to the retailer that they can solve it. And all of that requires a pretty significant sort of back-end experience. And so unlike a consumable where you're sort of replenishing that on some sort of regular cadence and maybe your agent can go across multiple platforms and sort of tell you where the best tie pods are from a price perspective at any given moment, this is a place where you do need trust in the retailer to make sure that it is fulfilled the way you want it to be fulfilled.

On the front end, this is a category where breadth matters, right? That's why we've always operated across millions of products. We know that the consumer values choice here. It is highly emotive, right? The consumer wants -- she feels that this is sort of a part of how she defines herself, right? What her home looks like is part of her reflection to the world. And so similarly, in the way that for many folks, fashion and apparel could be that this for our customer is sort of quite reflective of her. And as a result, the discovery process is really important. And it's not the kind of thing where you'll sort of be able to -- or you may be able to have the agent complete the entire process for you, but it's generally a place where consumers are going to want to actually think about what they're buying and look at it, at least in our 25 years of experience in the category.

So when we think about discovery, I do think that, that will evolve quite rapidly, and we're really excited about what we can do on our platform as well. So there's what we can do with our partners as we work with the LLMs and then there's what we can do on the Wayfair platform. How can we help you take a photo of your room and then you describe what you want it to look like and then we can populate that image with all of our products, right? And then that's immediately buyable on the site. How can we continue to personalize so that when you show up, your style preferences just keep getting tighter and tighter and tighter? AI helps us pretty significantly with those leaps, which are things that we've been working towards for some time that now get accelerated.

And so I think it's actually -- as you think about sort of how the shopping experience can change, it will evolve quite rapidly, but a lot of that can happen on our platform. And to the extent that there's shopping outside on other platforms, we are happy to partner with the LLMs and work with them on that and then ultimately be the retailer of record.

Sorry, just one quick follow-up, and thank you for the response. As part of the UCP deal, does Wayfair share first-party data with Google and other partners?

Yes. We have not talked about data sharing, but generally, the way the UCP works is we sort of overall help develop what that should look like. And then ultimately, because the transaction is happening on our site, we're capturing that -- the purchase is actually happening through us. So we're capturing that customer in that data.

Could you talk about just your advertising philosophy? You guys cut marketing spending last year. Was that because of the tariff and kind of cyclical dynamics? Are you guys doing something structurally marketing-wise? And how do you think that's going to evolve in the next 2 or 3 years?

Yes, great question. We sort of started actually ramping up dollars in the back half of '24 and early '25. And that was to do a number of things. One was to sort of test in a bunch of new channels all at once, but a bunch of channels that we were actually slower on and farther behind, frankly, than we would have liked, but that we thought had promised an opportunity in our category.

And then we were also retesting sort of where the limits and thresholds were in some of our existing channels like PLAs, like Pinterest, et cetera. And so you did see an inflated ad dollars in back half of '24 and early '25, Q1 of '25. We use all of those inputs to help us rebalance the media mix modeling and improve -- not change our thresholds, but sort of improve what we truly understood is incremental from each of the various channels. We have a payback period that we expect for each channel. Generally speaking, those payback periods held for quite a long period of time, but we will sort of rebalance across the media mix as we get new data.

We also then, in '25, did holdout tests. So what you're referring to, the ad spend went quite a bit lower in Q3, we did a large -- we said at the time we're doing a large holdout test in Q3, a PLA holdout test that can have quite a big impact on the total dollars spent in that quarter. And so that was a little bit artificially low in Q3 of last year, and we did call that out at the time.

But as you think about, in general, we've obviously improved the ACNR quite a bit. And that has really been as we were able to get back into a period, once we got sort of the site experience back to where we wanted to be, we were able to get in a period where the testing would matter, and we were able to improve the overall media mix as a result of that testing.

So maybe talk a little bit about your store strategy. It is an omni category. And you've got some specialty retail brand stores. Now you're opening up various sizes of the larger Wayfair store. One is coming to Westchester County, where I live next year, next spring, which I'm very excited about. So maybe talk about how you're thinking about how -- like the differentiation between the Wayfair versus the specialty retail brands and how scaled -- and how could -- how big could this opportunity be?

Yes, great question. So our specialty retail brands are Joss & Main, AllModern and Birch Lane and then our luxury brand is Perigold. We actually started opening up stores with the specialty retail brands because those were much smaller format. They're about 8,000 to 10,000 square feet per store. So they were a little bit easier to get open, and they allowed us a chance to learn in a just sort of lower risk environment. And we have a handful of -- we have 2 Joss stores, 3 AllModern stores and 4 Birch Lane stores across the country.

And then we have 2 Perigold stores that we opened this year. And then we have 2 Wayfair stores currently opened, the Chicago store, which is the first Wayfair store opened in 2 years ago, actually this month, and then Atlanta opened about a month ago. Those are both large format 150,000 square foot boxes. And then the Perigold stores are sort of 20,000 to 30,000 square foot boxes. One of those is in Houston and one in West Palm Beach.

So sort of stepping back, overall, we believe that the category -- a large portion of the category will remain offline. I can't tell you exactly if that's 50% of the category stays offline or if it asymptotes at 60% offline, who knows. But somewhere within there, there will be a large chunk that stays offline.

And most of the things that are required to be a good offline retailer in this category, many of those things we had already built. So in this category, as we talked about in terms of the rise of agentic shopping, you do need a logistics network. and we've already built that out. You need a broad supplier base. Obviously, we have that. You need a large brand. We have the brand. We have 100 million customer file, right? So many things that we've invested in to build the e-commerce channel over the last 25 years are also applicable to the offline channel. And then you obviously need to learn how to operate stores, which we're in the middle of learning. But we do believe it's an omnichannel category, and it's really important to show up in both places.

As we look at the stores, we expect the stores to hold to certain payback thresholds. And we are looking at not just the sales within the store, but we're also looking at sales that we can attribute to the store and sort of broader halo stores. Sales that we can attribute to the stores are sales that we know are from a quote that was made in the store. If you shop in the store and the Wayfair stores, you are encouraged to pull up the app to sort of build a quote or to look at sort of broader selection online. So we can actually geolocate a lot of customers to having been in the store, and then we can see what their purchase behavior is 5, 30 days after being in the store.

And then we then see, as we've tested the Chicago market, we see this enduring sort of ongoing halo effect in Chicago from the presence of the store, which has sort of a broad signage on the 2 major highways. There's obviously some local marketing associated with the store, and that helps lift the area. We will now be able to compare that to Atlanta. So now we've got another store open, we'll be able to sort of test that out in Atlanta.

Atlanta has opened very well. It's opened much stronger than actually the initial Chicago store did as we should hope because we spent 2 years learning at this point. And you should see us sort of ramp up the pace a bit. Columbus will open this summer, Denver in the fall, Westchester in the spring of '27. We have 2 other leases on the Wayfair stores already signed for '27 that we announced. We just announced Cincinnati last week and then Fort Lauderdale, we announced a few weeks before that.

Generally, what we're trying to do in each of these new locations is sort of learn something incremental and new. So the size of the store may change a little bit. The one in Columbus is a 70,000 square foot store. 70,000 to 150,000 is a pretty big range. I think we'll find that the ideal store is probably somewhere in the middle there, but that gives us sort of the bookends of where we might want to be.

The types of shopping centers are a bit different. So some are sort of more grocery-based shopping centers, some are a little bit sort of more furniture corridors like the Columbus stores in a great shopping mall, the Polaris Mall in Columbus, but it's also on a nice furniture corridor. There's a number of other furniture stores right in that area. Given how furniture is shopped because of the desire for breadth selection, it's -- you generally do see furniture stores clustered, so we'll be testing that out there. So the rollout allows us to test these things and sort of incrementally learn. We're quite excited about what we're seeing, and I think you should expect this to sort of continue to go at pace.

Is there any part of the strategy on the Wayfair store? Should we marry it up against some of the CastleGate facilities that you have?

It is helpful to have a store within a day drive at the CastleGate facility. We have the country very well covered from a fulfillment center network. And when we think about where we put in new stores, we certainly want to -- you're probably not going to -- I always use Maine as an example because that's where I'm from. So I know the job. You're not going to put a store in rural Maine, but for many reasons, you want to do that, but that's not near any sort of CastleGate facility. But most of the country in the large urban centers are near CastleGate facility. So it doesn't really rule anything out.

The Chicago store serviced by Romeoville. The Atlanta store, we have an FC right outside of Atlanta. So -- but in terms of sort of are there chunks of the country that wouldn't be accessed because of that, not really because of the way that the network is set up.

Additional audience questions? Time for one. Big question that we are -- the energy prices are up. You do -- part of the complexity of this category is delivery and you ship a lot of heavy stuff around the United States. So can you talk about any potential risks around fuel prices?

Yes. So product generally ships to the customer domestically, 1 of 2 ways, either it goes on the -- on an existing small parcel network, largely through the FedEx network or it goes through our folks in terms of our home delivery operation that depends on the size of the product, obviously. It is very common in small parcel contracts to have fuel surcharges. To the extent that a fuel surcharge gets kicked in, we then pass that through to the customer in terms of the sort of ultimate retail price. So that does protect our margins.

And then in our own network, obviously, sort of with local players that we're working with, it's also very common to have fuel surcharges, but we can do things to try to minimize that. For example, with FedEx, we can move the inventory as far forward as possible that's efficient. So we'll zone-skip so that you're running less on the network if you need to as you try to balance there. In general, given our scale, we're probably better positioned than others to sort of manage that. But we do sort of move that through in terms of price and the margins hold up as a result.

Great. Thank you so much.

Thank you. Appreciate everyone being here.

Hello, everyone. Thank you for joining us, and welcome to the Wayfair First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference call over to Ryan Barney, Investor Relations. Ryan, please go ahead.

Good morning, and thank you for joining us. Today, we will review our first quarter 2026 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&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 second quarter of 2026.

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-K for 2025, our 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 contribution profit, contribution margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures. This call is being recorded, and a webcast will be able for replay on our IR website.

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

Thanks, Ryan, and good morning, everyone. We're pleased to discuss our first quarter results with you. Wayfair has been off to a solid start to the year despite a volatile macroeconomic backdrop. Our net revenue grew by 7% in the first quarter, driven by order growth of 3% and AOV expansion of 4%. The home furnishings category has had a choppy start to the year with weather disruptions in the front part of the quarter, leading right into a broader pullback in consumer spending, driven by elevated energy and fuel prices.

Sometimes we get asked why weather would impact an online business. And the answer is pretty simple. Weather disrupts our customers' lives and when you have no power or your children are home from school, you're simply not shopping for home goods. By our estimates, the home furnishings category was down in the low single-digit range for the first quarter, suggesting that we outperformed the market by a high single-digit spread. However, our share spread success has held strong. We're thrilled with the customer engagement we saw during Way Day this past weekend, and we had a terrific opening to our Atlanta store earlier in the month.

Our strong revenue performance in Q1 translated to noteworthy profitability. Our 5.2% adjusted EBITDA margin in the first quarter is the best Q1 result we've delivered in 5 years, and it approaches what we reported in the first quarter of 2021. Years of work to optimize our capital structure puts us in a place to take advantage of the market dislocation to repurchase more of our convertible bonds in Q1. This functions essentially as a stock repurchase. This effort reduced potential dilution by more than 4 million shares.

Our plan remains consistent, increasingly outperformed the category to drive top line growth, follow that growth through in a manner that maximizes EBITDA dollars and grows them faster than revenue and deploy our excess cash to manage both our upcoming maturities and dilution. We're sticking closely to this plan even as the macro environment remains turbulent. We have heard many questions from investors regarding the impact of higher energy and fuel costs.

Our platform puts us in a strategically valuable position here. While we face higher cost for fulfillment, those are reflected in the end retail price via the take rate. Suppliers ultimately decide the level of cost burden, they're willing to bear as they determine the wholesale price they want to charge for each item. Ultimately, we see that suppliers are focused on remaining competitive, especially in such a demand-constrained period. And so prices remain generally stable. This is a critical feature of our model. At every price threshold, we can ensure that we're offering the best value for shoppers due to the vast selection on our platform and the intense competition among suppliers to win each order.

We're continuing to closely watch the broader economic implications and how consumers are managing their wallets as they face higher prices at the gas pump. We understand concerns that a high-ticket long consideration discretionary category, like home furnishings, would be impacted in a more meaningful economic pullback. However, it's helpful to contextualize the category's current state. It has seen steady contraction starting in 2022. The category tracked down in the double digits for most of 2022, 2023 and 2024 and saw some modest improvement to low to mid-single-digit contraction in 2025. By our estimates, in Q1 of 2026, the category is now down between 25% to 30% versus the peak in 2021 and clearly below the 3% long-term CAGR from the 2019 pre-pandemic baseline.

This data holds whether you use Census Bureau, credit card panel or any other available data source. This is a cyclical category, which is clearly in a down cycle in a category that has historically always returned to trend over time.

While we believe we're due for a mean reversion, the timing remains hard to predict. We take confidence in knowing that whichever direction the macro turns, Wayfair will be a key share winner because our scale gives us the ability to build a customer experience that cannot be matched. And to be clear, our plan to accelerate growth is not dependent on the mean reversion. We're very excited by how our share gain is widening and will continue to widen in this tough environment. The years of investment we've made to continually improve our core recipe, develop a global logistics network and replatform our technology architecture benefit every customer we serve. This work extends beyond our Wayfair.com business to benefit our professional offering, our retail stores, our luxury business, Perigold as well as what I'd like to focus on today, our international markets.

We made great progress since we last updated you, so I'd like to spend a bit of time highlighting the exciting work we're doing internationally. If you zoom out and look at the total addressable market across the U.S., Canada, the U.K. and Ireland, we're talking about a category that approaches nearly $0.5 trillion, over $100 billion of which comes outside the U.S. While our U.S. business naturally commands a lot of attention given its scale, Canada and the U.K. represent large, highly attractive markets with similar demographics and a similar online penetration rate. We've taken a deliberate long-term oriented approach of building a global infrastructure that can be leveraged to support our efforts internationally and we think we're set to reap the benefits.

In both countries, despite macro headwinds, we're seeing clear structural share gains. Particularly in a tough market, there's an opportunity for the strongest platforms to pull ahead. We're seeing this in both the U.K. and Canada, driven by a combination of: one, focused execution against the basics of our customer offering; two, the leverage gained through our global technology infrastructure; and three, our ability to deliver relevant local nuance in our marketing flywheel to maximize impact and loyalty.

Let me start with the core recipe, offering the best possible selection, sharp pricing and fast reliable delivery. This is the fundamental consumer value proposition that wins in the home category anywhere. In Canada, which is our most mature international market, we achieved our highest non-COVID market share last year with growth nicely outperforming the market.

Historically, Canadian consumers faced a subpar retail experience compared to the U.S., defined by smaller assortments, higher pricing and the friction of cross-border shipping. Since launching our Canadian business 10 years ago, we've been focused on dismantling those barriers and delivering a best-in-market offering. We offer nearly all of the 40 million products we show to U.S. customers to our customers in Canada. This means we have one of, if not the most extensive catalog in the country because we integrate across our entire North American supply chain. Our supply chain enables forward positioning locally in Canadian CastleGate warehouses while also fulfilling cross-border orders seamlessly utilizing our U.S. CastleGate sites.

Our global footprint and advances in supply chain optimization has allowed us to shave nearly 2 days off of our delivery speeds over the past year. This operational agility also enables us to pivot quickly to meet the needs of the local shopper. In response to rising interest in domestic goods, we made it easier than ever for customers to find Canadian-made products and products that ship from Canada through curated events, site navigation filters and targeted marketing. These local-first initiatives are resonating deeply driving a 15% increase in customer engagement among this product segment.

In the U.K., the story is very much the same. Despite intense consumer headwinds and pressure in the broader market, we've seen consistent share gains. We've grown our U.K. catalog to over 6 million products. Having the right item at the right price is only part of the recipe, getting it to the customer quickly and safely is where we truly differentiate. Similar to our U.S. business, we see our post order service as a key differentiator in this complex category. 60% of our large parcel orders are now delivered within 2 days. We've added room of twist delivery as well as both assembly on delivery and assembled post delivery to ensure a seamless experience from the moment of purchase all the way to enjoying it at home. We make it easy for a customer to buy a heavy bulky item and have it assembled in their living room, which builds the type of loyalty that gets a shopper to come back time and time again.

And similar to the advantage in Canada, we offer substantially all of the 6 million items to customers in Irelan and other underserved markets.

This brings me to the second pillar of our international momentum, our scale advantage and technology. We have a technology organization of more than 2,000 talented engineers, data scientists and product managers. Our technology development is done centrally, which means we don't need to build from zero for each market, a durable competitive advantage that allows us to raise the bar on the customer experience every day.

Now where is this more evident than in our rapid deployment of generative and agentic AI? We're not just experimenting with AI, we're actively using it to widen our competitive moat. In Canada, localization is critical, particularly for our French-speaking customers in Quebec. Historically, translating and merchandising a catalog of millions of items with the necessary nuance and interior design context was a monumental highly manual task. Today, we're leveraging advanced AI capabilities to execute in-depth merchandising and product detail page translations for our French catalog at incredible speed and accuracy. We're also using AI to speed up the time it takes to launch new products on our site.

In the U.K., we're deploying agentic AI to autonomously enrich our catalog data. We built this capability for our U.S. business and are now rolling it out across our platforms. We are operating agents that automatically enrich and correct product attribute details across tens of thousands of products. This means that when a customer searches for a very specific aesthetic or finish, the results they see are highly accurate, visually inspiring and complete. This kind of technological leverage allows us to use resources more efficiently, while simultaneously delivering a richer and more intuitive shopping experience.

And finally, let me touch on the third pillar driving our success abroad, our marketing power and our intense focus on customer loyalty. As we have scaled our brand awareness to household name status in both Canada and the U.K., we're evolving our marketing mix to mirror our U.S. strategy, moving beyond traditional channels to aggressively lean into platforms like TikTok, Connected TV and streaming audio. Central to this approach is speaking to the consumer in a voice they recognize through local influencer and celebrity collaborations.

In Canada, we scaled our Creator program from 0 to more than 1,000 creators in the past year, generating tens of millions of views. That manifests in visuals of homes that feel familiar with a style and aesthetic that is highly relevant to local market trends. We can speak to and resonate directly with the consumer looking for inspiration for her home in the suburbs of London or the heart of Toronto.

Acquiring a customer is only the first step. Our goal is to earn their repeat loyalty. In the home category, a customer may only make a purchase a few times a year. Our aim is to ensure that every time they think about their home, they think of Wayfair. And that's why we're so excited about the international rollout of Wayfair Rewards. We spoke at length about the program last quarter and continue to see terrific response from our customers. We launched this program in Canada last month, and we just launched in the U.K. a couple of weeks ago. We're seeing Reward shoppers come back more frequently and at a lower acquisition cost, all of which contribute to a meaningful expansion in customer lifetime value.

When you step back and look at the whole picture across Canada and the U.K., you see a business that is widening its gap to the market through a combination of our value proposition with local customers and our structural advantages versus local competitors. We're leveraging the considerable investments we've made in our proprietary global logistics, our expansive technology stack and our data-driven marketing engine and are bringing their full weight to bear on these international markets. We have a clear playbook. We have the right team in place, and we're incredibly excited about the compounding growth and profitability that lies ahead.

And I'm excited to say that we're now entering a new phase where we have ramping programs that allow us to focus on profitable growth, focus on accelerating our rate of taking market share despite the tough macro, an opportunity to even further increase it when we get to a good macro, but always in a manner that optimizes for the growth of EBITDA dollars. Ultimately, delivering terrific value to our customers and helping our suppliers to grow their business enables us to continually expand our market share in a manner that maximizes our profit. This is the outcome we have been and are expressly focused on delivering.

This year, you will hear us talk about the levers to do this. They include things that we've discussed, like stores, verified and rewards, but we'll also increasingly include new topics like improvements on the consumer technology front. AI tools for suppliers, enhancements in our consumer financing options and new convenient delivery offerings. These all drive up customer satisfaction and loyalty to our platforms and resulted in market share gains and more growth in EBITDA.

Thank you, and now let me turn it over to Kate for a review of our financials.

Thanks, Niraj, and good morning, everyone. Let's dive into our results for the first quarter before talking through guidance for Q2. Revenue for the first quarter grew by 7.4% year-over-year, with the U.S. up by 7.5% and our International segment up by 6%. We delivered another impressive quarter of outperformance against a challenging macro backdrop by approving day in and day out that our core recipe of fast delivery, broad availability and sharp pricing combined with the growth of newer initiatives like Wayfair Loyalty and Verified stands on its own against our peers.

Let me continue to walk down the P&L. 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 first quarter was 30.1% of net revenue. I tapped at length in February about how the componentry of gross margin will evolve over 2026.

As we scale up programs like rewards and other investments in the customer experience, we increasingly see that maximizing profit takes our reported margins slightly lower, but leads to higher profit dollars. You can see that very clearly in the top line results. We're making gross margin investments, which drive our share spread wider. And net result year was another quarter of very healthy order growth at 3% versus the first quarter last year.

Within that, we saw new order growth of nearly 7% in the quarter, our best result since 2021 and saw our active customer growth finally flipped to positive year-over-year after multiple quarters of positive sequential growth.

Customer service and merchant fees were 3.8% of net revenue, while advertising was 11.2%. The net of these delivered a contribution margin of 15% in the first quarter, up by 70 basis points against the year ago period.

Selling, operations, technology, general and administrative expenses came in at $356 million for Q1, the lowest it has been since the second quarter of 2019. We're hearing many questions around efficiency, especially in light of all the ways AI is augmenting productivity across our corporate staff. I find it's helpful to remind investors where we are and how much we've already accomplished. From our peak in 2022, we've taken SOTG&A down by nearly 40% on an annualized basis, which translates to more than $800 million in run rate reduction and even more when you factor in stock-based compensation and capitalized labor. This efficiency has been coded into our DNA for years. And as we drive more productivity in our workforce, we expect to further lever our fixed costs as revenue grows by billions of dollars.

In total, we generated $151 million of adjusted EBITDA in the quarter for a 5.2% margin on net revenue, up by 130 basis points year-over-year. We ended the quarter with $1.1 billion of cash and equivalents and $1.5 billion of total liquidity when including our undrawn revolver. Cash for operations was an outflow of $52 million and capital expenditures totaled $54 million for the quarter. Free cash flow was a negative $106 million in Q1 and an improvement by $33 million from Q1 of 2025, which is simply a function of our typical negative working capital cycle after a successful Q4.

On the capital structure front, we made further progress in both leverage reduction and dilution management. Our gross leverage ending Q1 was 3.8x ,down a full 3 turns from where we stood just a year ago. We issued a partial redemption for $250 million of principal on our 2027 convertible notes and repurchased roughly $56 million of principal on our 2028 convertible bonds as well. The over $300 million of principal reduction is the equivalent of more than 4 million potential shares of dilution which we essentially repurchased. We wanted to continue to take further advantage of the equity dislocation, so we bought back another $43 million of principal of the 2028 in April through a 10b5-1 repurchase plan.

Our convertible exposure is quickly dwindling away. Today, we have just over $700 million of principal remaining on the 2027 and 2028 convertible bonds, nearly half of what the original size of those issuances were as well as the $39 million stub on our 2026 bonds. You've seen us be strategic about the ways we've managed these obligations. This is one more area where we are firmly in control of our own destiny and taking the right steps to maximize free cash flow per share.

Now let's turn our attention to guidance for the second quarter. Beginning with the top line, we would guide you to mid-single digits year-over-year growth for Q2. We often hear a lot of questions from investors on how we formulate our guidance. So let me give a brief explanation. When we think about top line performance for the full quarter, we look at how the category has performed so far and how our share spread has trended. From there, we build in any specific changes to the promotional calendar or other items that would impact the comparable to get to a final figure. So in this case, we're looking at a category that has been volatile in April so far, trending down in the mid-single-digit range.

Our share spread has been holding nicely in the high single-digit range. Promotional intensity over the remainder of the quarter is expected to look very similar to the year-ago period. So the combination of those factors get us to lease where we expect mid-single digits year-over-year growth from a weakening macro even as our share spread widens.

Turning to gross margins. We would guide you to a range of 29.5% to 30.5% of net revenue. As I mentioned a moment ago, with the ramp of Wayfair Rewards and broader consumer price elasticity, we see new opportunities to make investments out of gross margin, which should lead to benefits on adjusted EBITDA dollars and margin as we scale order volume faster.

Consistent with prior quarters, our expectation for customer service and merchant fees is just below 4%. We expect advertising in a 10.5% to 11.5% range, reaching a contribution margin of roughly 15% once more.

SOTG&A is expected to continue to hold in the $360 million to $370 million range. Working your way down the P&L, this guidance suggests a second quarter adjusted EBITDA margin in the 6% to 7% of net revenue range.

Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $70 million to $90 million. Depreciation and amortization should be approximately $63 million to $69 million. Net interest expense of approximately $38 million, weighted average shares outstanding of approximately $132 million and CapEx in a $55 million to $65 million range.

As we wrap up, I want to zero in on the 2 core themes we hope you've taken away from the call this morning. Our success on share capture and our ability to drive durable and expanding profitability. You'll see us widen both these over the course of 2026 as we focus on raising the bar on the customer experience and earning a greater share of our shopper spending. We're not going to wait for the macro environment to normalize, we can drive growth on the basis of our outperformance, and you'll see us deliver on that over the rest of 2026 and beyond. Our model is now honed to drive substantial incremental flow-through from that growth, giving us the platform to meaningfully expand owner's earnings and free cash flow per share in the quarters and years ahead. Thank you.

And with that, Niraj, Steve and I will take your questions.

[Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan.

So the first question is, I want to try to diagnose what's going on in the environment. Obviously, it got volatile in the back half of March, April continues to look that way. But at the same time, you had stimulus that helped the customer and help drive, I think, overall retail spending. Do you think that actually helped in your category and your results in the first quarter? And then as you think about the second quarter, last year, you extended Way Day, I think an extra day, but you didn't do it this year. So that seems to provide signal some confidence in your outlook. So just trying to unpack what's going on, do you think stimulus helped such that maybe you're misreading what the trend business might be.

Thanks, Chris, for your question. So yes, so here's my view. Let me start with the macro environment and then I'll do some micro comments on our business. I think the overall macro environment, it's -- I would think of home as being a category that's still out of favor. I would think of it as kind of bumping along the bottom. I think in terms of how it's comping, you think of maybe that category comping like low single digits or something right now. You probably saw the Wall Street Journal article...

Negative.

Negative low single digits. You priced out the Wall Street Journal article the other day we said, hey, prices, there's been some inflation. Anything has had some inflation is basically seen consumer spending drop and they cite furniture as an example of that. So I don't think the category is going off a cliff, but I don't think the category is actually great.

What I do think is happening though -- and on your question about stimulus like tax rebates, there, I think those clearly have been healthy, but I also think like good spending is not fantastic. And so -- sorry, let me take a sip of water. And so I don't know, with the gas prices, oil prices, the headlines, I'm not sure that tax refunds have driven a lot of spending in the category, which I think is part of the Wall Street Journal sort of article that I referenced. So what do I think has happened? I think we're doing particularly well, right? So I think we -- our share spread to the market, I think it's basically a double-digit share spread. And why? I think it has a lot to do with the programs we're driving, things like stores, verified rewards, we have a new delivery program, launching what we're doing with the app, what we're doing with our B2B sales force. And I think most of those are compounding programs, and almost all of them are relatively early in the impact they can have.

On the Way Day extension, I think that's just an other example of us optimizing our promotional calendar in a category that's out of favor promotional events are a great way to get the category to be top of mind. And what we found is that you could have a longer event or you could have more events in the quarter. And we basically have optimized how the we try different things and we've basically optimize it from what gets us the maximum benefit. So I wouldn't overly read into the Way Day event being 3 days versus 5 days. So I think we basically set ourselves up through our own actions to actually accelerate the rate of taking share for us to grow EBITDA faster than we grow revenue. And I think we're set up pretty well to aggressively take share in what is continuing to be a down market for the category.

Makes sense. And as a follow-up question, I looked at your most recent investor presentation, at least one before today. The bridge to the 10%-plus adjusted EBITDA was taken out of the presentation, I know you're very focused on driving EBITDA dollars and contribution margin. But just was wondering, is there a signal there that we're supposed to read into it in terms of how you now think about the long-term profitability of the company?

No, we're absolutely on track to get to 10%-plus EBITDA over time. So I'm not sure exactly what you're referring to. But the way we're going to grow the business, EBITDA is going to grow faster than revenue. And the way that's going to happen, a lot of that is through very profitably growing the size of the business because we have a lot of fixed costs in the business. That's how EBITDA percentage grows. And the share spread is a great indicator of how we're going to do that, and that's going to continue to expand. But let me turn it over to Kate.

Yes. Chris, I think you're referring to the IR presentation that we updated a year in February. And we just took out the bridge slide that was a few years old at this point, but we still left the 10% goal on the profitability. And in fact, Niraj and I have both said, I think several times, we actually believe it can go north of 10% adjusted EBITDA margin. We're quite confident in the path there. And if anything, you've seen us continue to build on that last year, this year in the guide for this coming quarter, right? So that's nicely picking up. And as Niraj spoke to, it's a result of the combination of share capture, and that really nice solid flow through.

Our next question comes from the line of Peter Keith with Piper Sandler.

Maybe sticking on the longer-term topic. Niraj, in your shareholder but last quarter, you talked about a 20% plus organic growth rate that you guys are targeting berg stock is not reflecting that type of growth looking forward. So perhaps you could provide some high-level background and some of the bridge dynamics in order to get to that growth level.

Yes. Thanks, Peter. And the team here in the room is pointing out that I sound like I just got back from a 9-day business trip, which includes spending a weekend in High Point, North Carolina, which turns out to be true. But they just handed me some throat lozenges, which are hopefully helping now.

So to answer your question about the 20% plus organic growth rate, yes, the reason I pointed that out in the shareholder letter is that I understand folks want to model a quarter, talk about the current quarter, model the next quarter after that, et cetera. I prefer to think about how this business is going to durably grow over the meaningful long term, midterm, et cetera. And a 20% growth basically is where we think that this business can get to in the not-too future, through our own actions.

And so what are some of those actions? And I've kind of recapped a bunch of those programs before, but let me just talk through maybe a little more than I have in the recent past. So we talked a lot in the last year about Rewards, about Wayfair Verified and about what we're doing with brick-and-mortar stores. And if you think about those 3, they are meant to be meaningful moats relative to other competitors, and they are meant to be compounding advantages. And what do I mean by that? Well, on average, a customer is spending $600 a year with us right now. And that's out of a $3,000 or $4,000 spend, and that's in a year where they're not moving. And can we get more share of wallet? Then can we get more new customers? Can we grow that base of customers who in 600 starts saying $700 or $800 a year with what we think we can with the loyalty program is meant to bend that curve. Something like stores where the majority of customers are new to file, that's a great way to get new customers.

And by the way, our Atlanta store just opened a few weeks ago, the grand opening was a couple of weeks ago. It's opened stronger than Chicago opened. It's a great proof point. It's hard to draw a line with 1 point. We now have 2. You can draw a line. We'll assume we'll have 3 this summer with Columbus, Ohio, up 4 in November with Denver. We have more than 3 opening next year. We're pretty excited about what we're seeing there. These are profitable ways to grow the customer base and profitable ways to grow the dollars per customer per year.

Well, those are 3 we're going to be talked a lot about. But then if you think about the consumer tech investments we're making now we're post replatforming, what we're doing with the native apps. If you in about the brand marketing, and hopefully, you've seen some of our new adds. I think our new ads are some of the best ads we've run in the last decade. I think our ads have gotten a little stale. And now I think they're a lot fresher and they're meant to really help people understand what we offer and frankly, draw in a lot of new customers. That's part of why you also see them running in places like NBA games and NFL games and the NCAA Final 4. This is all inside an ad budget that's actually, on a percentage basis come down pretty nicely and on a dollar basis, frankly, gotten a lot leaner. I think that's meaningful.

In our B2B business, we've made a lot of change to how we run the sales force there. We think that's got a big runway ahead of it. We have emerging categories like home improvement, where we sell things like cabinetry and large appliances, things we're not known for, which we're seeing some nice growth in and we're seeing in the super early days on that. So how do we get to 20% growth over time? It's not one of these things. It's the aggregate of these things. And I think we're in the early days of proving that we can do that. We started last year at 0% year-over-year. We ended last year at 7% year-over-year. That was a year where the category probably comped down mid-single digits or something like that. And so we did that against a headwind that basically remained. This year, the headwind is probably a little less, but there's still a headwind. I don't know what we're headwind is right now, but let's call it low single-digit negative. But we're going to see that our rate of growth is going to accelerate as we go through time.

Okay. That's helpful. It does sound like the throat lozenge is working, but we'll pivot the next question to Kate...

This is a cherry one. I would have picked lemon if I had a lot of choices, to be honest.

So Kate, just to parse out the guidance for mid-single-digit revenue growth in Q2, it does sound like the industry has stepped down and gotten a little bit worse in April, as you said, negative mid-single. But the Q2 guide is similar to the Q1 guide. So kind of walk us through the logic on getting to that mid-single-digit number when you -- the industry is weakening, do you think your share gains are accelerating? And I do believe that compared to get a little bit tougher as the quarter progresses.

Yes. I mean I actually think you just hit on it in the way you frame the question, and it aligns with Niraj's answer that you just gave, which is we do believe the share gains are accelerating. And so we're quite confident in that guide even with ongoing compression in the category. And I think it speaks to all of these pieces that we're working on really building and combining together. So rewards, verified physical retail, improvements in the site experience, implements and marketing. And that gives us that conviction around that widening share spread.

Our next question comes from the line of Oli Wintermantel from Evercore.

So Niraj, maybe you can help us walk through that EBITDA bridge over time a little bit because at your last Analyst Day, we heard that gross margin should be a help to get to that 10% EBITDA margin. And now it looks like gross margins for a period of time is going the other way. So maybe you could talk a little about that. And then on the gross margin itself, maybe frame it how you think transportation cost, gas prices are a headwind there? And how you think contribution margins are going to develop over the year?

Yes. Thanks for the question. So let me say a few thoughts, and I'm going to turn it over to Kate. So a few thoughts I want to share. So we gave that bridge in the summer of 2023. And so we're kind of, call it, roughly 3 years later and a few meaningful things have changed since then. Just to rattle off a couple, like one is we launched our loyalty program.

Our loyalty program is a great program to grow revenue faster and grow EBITDA faster. It does lower the gross margin percentage, for example, but it does lower the ad cost percentage. We started launching brick-and-mortar stores. Brick-and-mortar stores actually where the costs get accounted for brick-and-mores stores go in different lines. So a lot of the store staff goes into Saka, for example. So I would say, at some point, we need to update the bridge for you all with the updates we have now. But the long-term numbers we can get to haven't changed.

The order of operations, I would say, of what we get to when could have changed. And so I think it's important not to worry about the intermediate lines, but actually to focus on the top line and the bottom line because those are really what matter. All the changes we've made are meant to basically facilitate the top line getting better and the bottom line getting better, which I think would be the 2 numbers everyone would care about the most. But basically, in the long term, nothing has changed.

And on gross margin, what do I mean by that? Like how can we get gross margin up with rewards perhaps being a drag on it, and we want to get more members in rewards. So maybe that will be more of a drag. Well, the answer is that as you scale the business, there's a lot of benefit to gross margin percentage as individual items get a lot more volume, the economics on individual items get better. And then the fixed cost of logistics is another item that gets a lot of leverage because a lot of logistics is variable, but there's actually -- we operate 20 million square feet of logistics space across, I think, roughly 70 buildings -- and there's a fixed cost nature to how that works. So there's a lot of puts and takes, but the trajectory of where we're going hasn't changed at all. But let me turn it over to Kate.

Yes. I'll add a little bit more color there, and then I'm happy to answer your second question about energy prices. So I think on the sort of componentry to get from where we are today to the 10% as Niraj mentioned, things in the business evolve and that can move around a bit, but the conviction around getting to the north of 10% obviously is still there. On the gross margin piece, in particular, on that slide, we talked about 3 things that were going to drive gross margin. The supplier adds, so the retail media piece, leverage in the business and from CastleGate and then the merch margin mix. And all of those things still exist. So I think it's really important to understand that none of those pieces are actually operating differently than we expected. We're seeing really nice gains in CastleGate.

I think if you've been at High Point, you would hear that from folks. We're seeing really nice gains in the Retail Media business. But as we constantly evaluate where are the right places to invest in the customer and the customer experience, where do we see things on sort of the optimal curve there, that may make sense for us to invest in that customer experience like in the form of rewards and actually then see the result of expanding gross profit dollars. So we actually -- you saw that guide down, we're talking about over $1 billion of gross profit dollars in the second quarter. That's where you see that expansion.

So things may move around, but the levers are all still there, and I think that's really important to understand. We also, in that bridge showed a little bit of leverage that we might get on SOTG&A. But throughout this year, we -- or last year, we continue to show significant improvement in SOTG&A. In fact, we're back to 2019 levels on SOTG&A with $3 billion more in revenue on the top line. So you're seeing efficiency pickups every stage of the game here. And then the other piece that I just want to point out is on that bridge, we sort of show the path to 10%, but we said we believe that we can get to well north of 10%. And so 10% is obviously a stop on the way, but we think we can continue to exceed that.

On your question around energy prices weighing on GM, I think you mean in the form of transportation. Obviously, the way that our model works is we have the wholesale cost. We add from our suppliers. We add on top of that the cost to deliver, incidents and damage and then our take rate. And so effectively, we can maintain that gross margin even with fluctuations in the energy prices.

Our next question comes from the line of David Bellinger with Mizuho Securities.

I just want to follow up on an earlier one, where you're talking about the higher energy prices, some of the macro issues. Can you talk about the cadence of sales growth through Q1? Are you seeing any of this actually show up in your business day-to-day to date? And is there also any evidence that the category may be shifting even further online during these times of higher gas prices and maybe just store visits are starting to dwindle a bit more. Is there any evidence of that digital shift starting to take shape even further?

David, thanks for your question. The energy prices, I would say, I don't think energy prices have had a direct -- I don't think it's affected like sales moving online or anything like that. I would say that, obviously, in a world where customers have noticed prices going up, it doesn't help optically that they see the gas prices having jumped up 20% year-over-year. or all the headlines are basically about how inflation stubborn or there's new spikes to it. And so I think why is the category still comping negative low single digits after being down for 3 years in a row and why is it down fourth year in a row. I think that's mainly that people are not moving categories out of favor. But none of these headlines help matters. But I think the category is just bumping along. I don't think these are having particular effects.

But I don't know, Kate, do you have any...

Yes. I mean I think we've long talked about the impact of consumer sentiment on the category. And so certainly, that creates incremental challenge for us. But -- we go back to what can we can control right now, and we think we can continue to control the pace of our share gain. And so we're focused on expanding those share gains even while the category may be compressed.

Got it. And then I just like to follow up on the consumer-facing genic AI. I know this is a very early stage. You're doing a lot with Google Gemini and their UCP. Any additional data points you can share around the traffic that's being driven to your digital properties? Or just any data points around how referrals are looking and what this could mean over the next 6 to 12 months and adding to this share capture?

So let me give you the answer. There's kind of 2 sides to it. So 1 is the same way as the media landscape evolved. We were an early partner with Meta, an early partner with Google, an early partner with Pinterest helped develop [ ad news ] with all of them, still do that and all the alphas and betas with those guys. And so we want to be everywhere. We want to be there early, and we want to help shape the direction. That's the way we think about agentic commerce. So early partner with Perplexity, early partner with OpenAI, early partner with Google and what they're doing with Gemini, so on and so forth. Whether that be on shopping, the shopping protocols like UCP, whether that be with new advertising formats, the different ones of them are trying. And a number of them have publicly cited is, we're effectively partnering with them all, and we're early in partnering with them all.

At the same time, as I say that, the traffic levels we're talking about today are de minimis. They're very small. A lot of people talk about the growth rate of that traffic with a high percentage, but that is a little bit misleading because you have to put a high percentage on a very low number. So where could that be over time, it could be meaningfully higher. But I tend to think that, frankly, a lot of what's going to happen in agentic commerce will really impact 3 categories of goods. One is going to be replenishment-type items where agents can just execute replenishment for you, whether that's paper towels or dish soap or whatever. You know what you want, it knows what you want cheapest way to get it by whatever you want it. Second will be like commodity items. You want a few more iPhone cables, they give me some high-quality one inexpensively and can get it for.

And the third will be technical items. You want a 55-inch TV. "Hey, what's the best premium 55-inch TV out there right now? What's the best budget 55-inch TV out there?" And it can figure out the right 1 for you. And they all look the same. You probably don't care what logo is on it. You care about getting the best value, best quality, one, et cetera.

Categories like fashion, beauty, home, I think there's a lot that a consumer learns through the process of shopping. There's a lot of motion there and consumers actually don't want to own the same items as each other. So to be honest, I think the role that these platforms will play will be different than I think the way a lot of it's talked about today, which hits those 3 use cases, but we're going to be there early. We're going to help shape the direction and that's the same role we kind of played with tech platforms historically.

I think we shared a bit on previous calls and some of our other remarks and even on the call today about how we're using AI to actually improve the customer experience. So there's -- what you were asking about, which is sort of off-site shopping, but there's also how do we -- we are 1P from the perspective of the data that we have into the consumer and how do we leverage that to actually make a much better experience? So we talked about AI stylists at Shopko. We talked about on the call today how we use AI to improve the merchandising of products. On the 2 calls ago, we had Fiona Tan, our CTO on the call talking about how we're using some of the personalization trends on site.

And so what we are really excited about is we have this rich data set. We have engineers that have been using various forms of machine learning for years, how do they use AI to really accelerate how the consumer discovers and engages with the site.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

My first question is 2 parts on the financial model. So first, the gross margin, I guess, pull back that is that entirely due to the loyalty program investments? Are there any other puts and takes to it? And then should we be less focused on an incremental margin more focused on an EBITDA dollar growth for the near term? And then I'll have a follow-up on agentic.

I'll just say one thing and turn it over to Kate. But what I would say, I actually think if you net out the loyalty program, gross margin actually would be neutral to up, not down. But let me turn it over to Kate.

Yes. I mean I think the way we've talked about the gross margin investment is there are a few pieces to that. Certainly, the loyalty program weighs on gross margin, although it gives you improvements elsewhere, right? And we've talked nicely about the incrementality that we get in the customers from the loyalty program. We've also mentioned there are other ways that we think about investing in the customer experience, whether that be in the form of price on certain segments of the catalog or category in the form of delivery speed. So I would think about sort of multiple things that we look at on that gross margin line and we say, "Hey, these investments sense because they're going to drive greater gross profit dollars over time." And so therefore, it is the right thing to make those investments.

You also asked about EBITDA incrementals and dollar growth rate. I think you've heard us say a few times that EBITDA dollars and margin, right? So EBITDA margin will continue to grow quite nicely and that EBITDA dollars should accelerate at a pace that's faster than top line growth. still seeing really nice EBITDA dollar growth. The one thing I want to point out is as you may be looking at in the '25 incremental relative to '24, you did have some sort of astounding incremental that year where we were comping over some unusual periods. And so as we spoke about at that time, those were a little bit unusual given the comps. But I think what you're seeing now is really steady profitability improvement.

Got it. Okay. And there is a follow-up on this agenetic idea. Is there a scenario in which some of the vendors, whether it's even importers, wholesalers have a way to get to the customer without using platform. I'm sure that's always exists, but do you think agentic is an enabler. And then it could decrease the value of a marketplace or your platform. And I'm wondering if that is tied into some of the loyalty you're working on now, and then the share capture that you're focused on or if those are just 2 separate thoughts.

The main reason to drive the loyalty is basically 2 things. One, obviously, you want to grow the dollars per customer per year. And the second is you want to do that and basically not be paying the advertising costs of having to reach that customer repeatedly and you'd rather give the value to the customer, which effectively, if you think about the benefits of rewards, that's what effectively rewards does, it gives value directly to the customer and incent them to just come direct to us, right? So that's the trade there.

In terms of suppliers wanting to go direct to customers, there's basically a few big problems with that notion. And they're obviously welcome to do that. But the problem they find is that it's expensive to reach the customers. They have a relatively narrow catalog in context of how customers want to shop the category overall was they're making a purchase decision. But the biggest issues have to do with customer service and logistics to actually deliver these items economically in a manner that avoids damage and basically successful, it's quite difficult to do that. And so suppliers -- this is why suppliers effectively in this industry don't go direct. In fashion, for example, you see them go direct. And the reason is that an article of clothing, you can actually ship very easily and you can take a return very easily because you just think about putting an article clothing in a polybag, he logistics, the service on it and the return product is actually fairly trivial on a relative basis. And so that's a big hurdle for these folks.

So I don't think anything around agenetic would change how the supply chain would operate.

Our next question comes from the line of Colin Sebastian with Baird.

Yes, really good to see the ongoing share gains here, and that's not with a shortage of competition, obviously. And I guess within that context, I know there's been some chatter about some of the more value-oriented marketplace is trying to move upmarket. So I wonder if you're seeing that? And I guess related to that, given what Niraj, you've sort of articulated on agentic commerce if being more focused in the middle and higher end of the consumer market, how is agenetic benefiting you in terms of those integrations with agents that may be more price-oriented than a traditional means that people in your focus -- focused on what the market might be shopping, if that makes sense.

Yes. Let me take a shot, but I'm not 100% sure I understood your question, but let me answer what I think your point. So I think you're saying at the commodity end of the market, at the opening price point and where you could shop on a Walmart, on an Amazon, on Wayfair and you can get that inexpensive commodity item, that $29 bar sell from anybody. How does agenetic change that because it's a price-driven commodity purchase. And I would say that, that's a great example of the closest our category gets when I mentioned agentic, I said there's replenishment, there's commodity. There's technical as a 3 class of goods, I think, are most likely to be impacted by agentic.

I think what you're saying is like there's a portion of the category that's commodity. And that's true. What I would point out is that commodity end is not where we really do much volume. And that commodity end is, in fact, where -- you can go to Target, you go to Walmart, you go to Amazon, you go to us, you got a to, you go to TikTok, you go wherever, but it kind of -- there's really no margin in that volume. And that volume is not where the differentiation occurs. And that's why we, as a category specialists do particularly well is that we actually become very strong as you come up off of that as you shop all the way through the middle and then if you think of our specialty retail brands up through the upper middle.

And then as you think about Perigold and luxury, all the way up through the top. And so I think that's part of the point that I would make about agentic doesn't impact us in the same way that I think it impacts some others because the tranche of our market that would be impacted is not really -- that is not the tranche that we are particularly strong in. But is that what you were asking about?

Yes. Just in terms of the benefits that you see from integrating with agentic commerce if the agents sort of facilitate more of that price orientation. And then also if you're seeing some of the more value into marketplaces move upmarket.

Yes. So -- okay. So 2 thoughts on that. I think it's hard for folks to move upmarket or downmarket. If that's not what they're known for, not what they specialize and if that's not where their supplier base is, and that's not the type of goods that they know how to merchandise and sell. So I don't know that agentic enables that movement in the same way you're thinking.

Yes. Maybe you're going to that agentic could enable more price discovery. We've long operated in a world of price discovery. And I think that's where parts of our catalogs that are more differentiated, the way that our delivery and service experience, we've spoken on this call quite a bit about actually the complexity of the category differentiate our ability to service the customer in that way.

And I guess one last comment on that as well. because I've rattled off a bunch of reasons why our share spread and our growth rate can keep climbing. And when I answered Peter's question about how we get to 20% plus, it's one of the things I rattled off. But I talked about what Verified. We just zoom in on Wafer Verified for a moment. Wafer Verified is where we actually do an editorial review kind of like the old -- for those who are old enough to remember, consumer report style kind of review of an item that gets it like what the item really is to set expectations so that customers can make good choices are very happy. We do that on a selection of goods. Those goods are increasingly exclusive to Wayfair.

And so that's the other thing to think about as we scale exclusive items give us differentiation because to your point about price competition, when you have an item that's exclusive and you have the merchandising and the information to support why it's a great item. So I might be able to find something that looks like it but you have no certainties around quality or knowledge of what the item will be. And I think everyone on this call is probably have an experience where you order something and what you get is not what you thought you were getting. And I think that's a concern for customers. It's yet another way that we can build a milk around what we provide.

Our last question comes from the line of Brian Nagel with Oppenheimer.

So I've got two. The first question, and again, at the risk of being a little repetitive here. Just with -- I guess it's more for Kate. With regard to what we're seeing in gross margin, the question I want to ask is, if I'm hearing you correctly, the impact here is largely a function of the loyalty program. But then obviously, as you discussed essentially, there positive offsets elsewhere. So I want to ask, I mean, how big is royalty now? And presumably, as loyalty continues to grow, is that going to -- does that suggest there's going to be an increasingly large impact upon the gross margin rate? Or are there some type of offsets there? And then I have a follow-up question.

Yes. So yes, certainly a component of the gross margin is the loyalty program. We said on the last call that we ended 2025 at a little over 1 million members, and we obviously intend to continue to grow the program in '26. That's contemplated, of course, in the guide that we gave for the second quarter and the way that we've talked about gross margin throughout the year.

I would focus you back to sort of how do we think about EBITDA dollars and EBITDA margin growth and the accelerating EBITDA dollars throughout '26. And what we said there is that even as we make investments in some places, there will be offsets throughout the P&L, such that EBITDA dollar growth accelerates faster than revenue growth. And you've seen that this quarter. You will continue to see that. And I think that, that's an important piece to keep in mind. So that's income in the form of certainly ACR, but also in the form of how we think about leverage on the SOTG&A line and the efficiency there.

Okay. That's helpful. And then my follow-up question, a different topic, but you continue to make very nice progress with regard to your balance sheet. So I guess as you is you're sort of saying improving the balance sheet. I mean how do you think about this from a -- how to manage dilution, your leverage ratios and then any type of capital return to shareholders?

Yes. Thanks for the question. Obviously, in Q1, we continue to make nice progress on there. We essentially bought back roughly $300 million of face value of the '27 to '28 million. That's roughly the equivalent of managing 4 million shares of dilution, right? So you're seeing us make progress on this potential dilution that we had overhang of the '27 and '28 as we continue to buy that back. And I think that speaks to how we're trying to manage ultimately to this free cash flow per share continuing to grow. And part of that piece is obviously on growing the numerator, but part of that is on how do we continue to take that denominator and make that as efficient as possible. And you're seeing that in the way that we're managing the '27 to '28.

You've also seen us manage that in the way that we've managed net withholding on the sort of employee share pieces. And so nice progress there. As we look going forward, what we said is we want to remain opportunistic about how we continue to grow -- or how we continue to manage these -- how we continue to manage these pieces on the '27 and '28, how we continue to do that in a way that sort of manages further dilution. And then eventually, you get to a place where you're sort of talking about outright repurchasing of shares. And I think that's been a goal of ours and a place that we're excited to keep making progress to get to that point.

We have now reached the end of the Q&A session. I will now turn the call back to the Wayfair team for closing remarks.

I'll just leave you with -- first, thank you all for your interest in Wayfair. I'll just leave you with 2 thoughts. You can decide which one is more important. One is we're definitely very focused on how we can profitably grow the business, and that's really about accelerating the rate at which we grow the revenue which will include spreading the share growth over the market in an increasing way. You'll see that manifest in the growth in EBITDA dollars and margins. And the second thought I'll leave you with is that it turns out throats just work really well.

So thank you all for your interest in Wayfair. Talk to you in next call.

Thanks very much.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, everybody. At the risk of alienating all of the other attendees at this event, this is the session that I've been most personally excited for. So I -- please don't tell anybody, all right. We'll keep that between us. We are super excited and fortunate to have the team from Wayfair with us, including Niraj Shah, the Founder and Chief Executive -- Co-Founder and Chief Executive Officer; Kate Gulliver, the Chief Financial Officer, who we also consider to be a superhero; and Ryan Barney, who runs the Investor Relations. We're so excited because Niraj, his story is incredible. And if you have not had the chance or opportunity to do a little digging into it, there are so many ways to better understand Wayfair. I would highly recommend how I built this with Guy Raz because it goes into the history of how Niraj and his college roommate, Steve Conine, founded this business.

They were at the forefront of understanding that commerce was changing and that the consumer was going to find new ways to procure products. And it is so exciting to have him here today to help us understand what could be the next succession in how commerce and consumption are changing. So I hope that was not over the top and somewhat appropriate.

Michael, thanks for having us here. We're excited to be here. And I thought with that of preamble, I thought maybe we'll go 45 minutes I won't even have to say anything.

As you can tell, I'm a little long-winded and it happens when I get excited. So with all that being said, like I had mentioned, you were operated with a lot of foresight as e-commerce was in its infancy stage. We're at the forefront of a lot of change. So I'm going to leave it very open-ended and ask, how do you see all this technological innovation, not only changing how the consumer shops and looks for goods, but how Wayfair is trying to capitalize it on it to be at the forefront of these changes.

Sure. So I'd say there's 2 -- there are 2 large changes that are underway. One has been underway for, I'd say, roughly 10 years. And that is only accelerating. And what that is, is that customers' willingness to engage in e-commerce has moved, say, about 10 years ago, moved from a stage of sort of early adoption to becoming kind of a mainstream activity they're very comfortable with. And as that happened, sort of their expectations around selection, around delivery, service were heightened. And what you find is that to operate in e-commerce well, you actually need to be a scale player in 3 things.

One is your brand, your marketing, your customer reach needs to be significant. We spend over $1 billion on advertising. We have a household brand. We have millions and millions of customers that are in our loyalty program or you download our app and come direct. So you need scale for that. Second is logistics in order to deliver what the expectation customers have and at the price they have, so speed of delivery, convenience of delivery and low cost of delivery, you need scale. And there's no way to do logistics without scale. And so you find the scale players, whether it be Walmart or Amazon on grocery or Home Depot or Lowe's on building materials or us on home goods, they've built an expansive delivery operation around their type of goods.

And when you talk about large bulky home goods into the home for a consumer, we're the only one who's invested in that type of network. We have over 20 million square feet and 75 buildings, logistics operations on 3 continents. And so you need scale for that. And then the third you need scale for is the technology. And the technology, I'm going to get to the second big change in a minute, which is technology, which is I think what you're probably actually more focused on right now. But -- and so we have a team of 2,500 data scientists, software engineers, product managers to build technology even in a world of AI, which I'll get to in a second, at the level that consumers expect to experience or your supplier partners expect to have access to or that you want internally to run your operation, is not necessarily easy.

And there's a finite number of folks who really know how to play at that level. And so we have the scale in those 3 things. Our competitors, Walmart, Target, Home Depot, Lowe's, Costco, Amazon have that scale. But the big -- the first big change is that anyone who's smaller than that, you can either be an independent store with incredibly good service and a relatively small radius and provide that as a shopkeeper, and that works or you're a scale player. That shopkeeper is not really big in e-commerce. The scale players are. But everywhere in the middle is getting squeezed out. So that's the first big change. And that's continuing to compound. The second big change is obviously technology doesn't stay static. So if you think about the changes, so [indiscernible] the other way to take it is that I'm old, right? So I've been that way.

You still look very good, which is hard to believe.

Well, I graduated from college 30 years ago. We started Wayfair in 2002. So Wayfair is 24 years old this year. And I had a few stages. We didn't launch Wayfair as a brand until 2011. The first decade, Steve and I just grew it out of cash flow. We were profitable the whole time, and we just reinvested all the profits back in the business. When we raised capital to launch Wayfair in 2011, obviously, went public subsequent to 2014. So there's been like a journey. But through that journey, we've always been very technology oriented. Our background was as engineers. And so if you think about cloud and mobile and all the technology changes that happened over the last 20, 30 years, those have all been quite transformative, and they all took a number of years to play out.

And you can look back and say, "Oh, wow, this is what happened there, and there are those who won and then those who really didn't quite understand it and ended up losing over time." And obviously, the technology change that's upon us now is AI. And AI, and I think rightfully so, people talk about us being larger than those other technology changes, certainly disruptive and dynamic. And the notable thing about it is it's moving significantly faster than each of those moved. And those didn't move slow, but they moved to the cadence people got accustomed to. Things got tremendously better on like a 2-year cycle. And with AI, things are getting tremendously better on like a 6-month cycle. And the 6-month cycle versus 2-year cycle is very hard for people to internalize.

And it doesn't fit with how companies budget. It doesn't fit with how business leaders think about technology. It doesn't fit with how even technologists tend to adopt technologies. But what you find with AI is it's the same thing where if you have a technology-minded organization with the requisite skills at that kind of highest level, you can actually be an aggressive user of that technology in a transformative way, whether that be your internal cost structure and speed of operation, whether that be what you do, in our case, with our supplier partners on our platform or whether that be what we do for customers, you can be quite transformative.

And so we view this as the next -- just a huge opportunity for us. And it came at the perfect time for us in the sense that we got lucky in that we spent 3 years doing a lot of replatforming work on our systems, which was unfortunate at the time because we couldn't use our technology resource to advance the business. We had to prioritize replatforming. Well, all of a sudden, we're through that. And so you saw that at the beginning of last year, our growth rate, which is kind of like roughly 0 year-over-year, taking share because the market was declining, but still not much share. And you saw it accelerate over the course of last year from 0% to 7%, while the market continued to contract.

And the way we did that was we were back to being on the offense, being able to use technology to grow and drive the business. And that growth rate, which accelerated, we think at the end of this year, we can be nicely -- share spread can expand into the double digits. And again, that's off our own actions. But a lot of that's due to how we use technology to advance our business. And AI is just -- it's a tremendously strong lever. And I think the challenge for folks is when you have a disruptive technology, it's hard to get your head around it all at once. So folks say, okay, well, who's going to go away, who's going to benefit? And I think that's what is a struggle for folks.

And I think this notion that LLMs and AI agents can do everything is not the case, but I think they can do a lot. And so the companies that can optimize themselves in that world, the same way in the days of search and social media with what we did with Meta, what we did with Google, we do with Pinterest advantaged us, I think we can do the same thing. And the same way that their efforts like Google Shopping, which tried to have transactions finished there, ultimately found that consumers want to go lower funnel. But basically what OpenAI the other day said as well that that's probably the bulk of what people want to do. Google already knows this lesson from years of balancing both sides of it.

I think it's going to be the case, particularly in categories like fashion and home where items are not UPC code commodity goods, where it's just a fulfillment engine. And I think we're well positioned to really be the scale player who then pulls away with this category through the set of what we're doing, whether that be the way we're using these technologies and then our own programs, whether it be our loyalty program rewards or verified or we're doing brick-and-mortar stores, et cetera. So I think it's a really good time and the technology set is, we think, pretty exciting. But I think there's a lot of confusion around it, too.

100%. Well, uncertainty is the worst part of anything, and you just provided a lot of clarity on that. So thank you, and that was very well said. Can you give a few tangible examples of how you've deployed technology in the last 6 to 12 months that has enabled some of those market share gains that have been very visible in your financial performance?

Sure. So I think -- so those gains show up through a myriad of efforts. And I think some of them are easier to grasp from the outside. So in other words, if I talk about our loyalty program, Wayfair Rewards, and we talk about -- we talked about this on the last earnings call, the number of people who have enrolled in it and the fact that they then spend a multiple of what they would spend before they were in it because of the benefits and how -- while it compresses gross margin, it expands EBITDA because we're getting more revenue with less ad cost, but at a lower gross margin.

Well, the net of that is higher profit margin, EBITDA margin, right? And we talk about the growth in members, that's like relatively easy for folks to kind of grasp. But then if I talk about like one of the dozens of things we don't do with AI, we have this 20 million-plus item catalog. And we know there's error in this catalog. And dimensional error is like one thing that comes up. And whether that be dimensional error that causes the shipping estimates to be wrong or whether that's dimensional error where the customer that the sofa is an inch or 2 inches off and it ends up being an issue for the space they want to put it in. That's -- you grapple with that because when you have that many items in the catalog, suppliers are putting in that information, some of that they're putting in manually, some that they may have wrong and even in their own system.

It's not always easy to find the error. And we've been able to replace a lot of labor trying to help minimize error with automation around using AI to identify and correct that error. We've been able to do that with filling in missing attributes and information. Well, that's a little harder for you to grasp how that drives share gain. Well, the way it does that is customers are happier, you see their repeat rate go up. You also see that reduce our cost on incidences. So if there's a return, that's an incident or if it's a mistake we made, obviously, that's more expensive than just a return because we're paying for everything, and we're trying to make sure the customer ends up happier.

So what happens when you save that money is you could put that into something that grows the business, right? -- or profit, right? And you're seeing that our revenue has been going up, profit is going up much faster. And that's basically what you're going to continue to see. So there's like dozens of things that are causing us to accelerate the rate of share. And again, some are easy because we can talk about what we're doing on YouTube or what we're doing on with influencers, which is a lot more than we're doing the year before, again, easy to grasp. But then a lot of the places and things we're doing that get into like our delivery logistics optimizations are harder to grasp, but they do drive that customer behavior.

You bring such a valuable and interesting perspective at the risk of being wrong. I feel like you're a technologist at heart, but a business person in practice.

Well, the technologists won't have me, but I like to think...

I think everybody will have you. Make no mistake about it. So there's 2 questions in this regard. Number one is how do you deploy this technology in a way that the organization can absorb it and capitalize on it. And two, how do you think about the existential threat where this is creating a lot of productivity, but at the same time, that could lead to a disruption in your end market, which is the consumer who might find their job being displaced as a result of the technology. I know those are 2 big questions, but you're such an effective.

Well, so I was reading how...

I think I -- I didn't mean to plummet you.

No, no, I was thinking Howard Marks is like follow-up memo to his original AI memo, which he just published whatever recently. And he talked about like step 1 on an AI was using a chatbot. And you almost use it like the same way you use search, but obviously, it's better than search, right? And he talked about like step 2 is basically where you start giving it like research assignments. You realize you can do more than just what you would do with search and you start framing things that way, asking it to do some reasoning for you. But then you start to realize, well, actually you can do that quite well. And so like stage 3 or whatever you call it, step 3. But the third thing, and it's basically, that's the age we're now at is where you have agents, autonomous agents, you figure out how to orchestrate them around accomplishing goals you have.

And I think the real opportunity with AI is actually today and how you take that third step and put it into practice, whether that be in your software development organization, how you really change how you're building software and what you can -- what speed and what you can do or whether that be business teams where basically workflow automation has existed forever, but workflow automation was before it had to be very discrete specific steps. Take the cells from this column, put them on this other sheet, run this calculation, then insert that here. It had to be very literal. You couldn't have a reasoning step, which is like does that based on the picture and what you know of that product, does that width seem inaccurate. That's a reasoning step. You couldn't put that in a workflow automation before.

Well, now you can put in reasoning steps, right? And so if you think about the workflows you can automate went from a small amount to a very significant amount of what people do because the small amount stuff was basically automated, spreadsheets and other things sort of helped you automate those. But where you had to have reasoning steps, you had no solution other than to put people around the reasoning steps. So you built up a very large setup to do that. Now you basically can create workflow automation with the reasoning steps basically being AI. That's like the first step of basically what you could do with taking what AI agents could do into the business process side.

And I think where that goes is where instead of thinking about it as a portion of what someone is doing, there's going to be certain roles where it can do the entirety of that role. And so like an example, which is maybe not exactly what you're thinking is like if you just think about driverless cars in the beginning, you say, okay, well, maybe the driverless vehicle could go from here to here and very, very narrow band, but it couldn't like pull into my driveway and it couldn't do -- but if you think about like what a Waymo now can do, it's not quite at the 100%, but it's pretty close to it, right? It needs to have mapped the route. So if you're going up a private winding road that it hasn't mapped, it can't do that, right? So it's not 100%, but it's getting close to it.

Well, you start thinking about that. So I do think the landscape of what jobs are and where people can add value will change. I don't think it needs to be scary in the sense that there's been technology, which has destroyed jobs and then new jobs have been created many times in the past. But I think there's always a period of disruption. And that period, I think, is coming very quickly.

Got you. And I want to ask one more on the Agentic Commerce side. But before I do, I want to bring Kate into this and look at this from the financial lens. How, as the Chief Financial Officer, are you thinking to capitalize on this technology, but at the same time, meet some of your hurdle requirements, profitability goals? Because it does seem like this is an exciting but also very uncertain period where you're going to have to manage it carefully.

Yes. I mean I think what you heard Niraj describe in a few of those answers were ways that we are leveraging AI to enhance and improve the consumer experience. And that can actually help boost the top line, right? You asked a separate question around sort of like overall consumer disruption. Putting that aside for a minute because we've been operating in a very disruptive category for many years, and we've been focused on share gain. This is a category where the potential to help a consumer identify what she wants faster, simpler with better product data, et cetera, really improves the customer experience pretty dramatically.

And so what we get excited about is, one, there's a lot that we can do, we think, that actually grow conversion, grow loyalty, improve sort of that customer coming back to us and shopping again and expanding their share of wallet. So that's sort of the top line benefit. And then you heard Niraj speak about some of the efficiency gains that you can get. And so we're certainly quite focused on how do we think about these efficiency gains if you have portions of someone's job that is automated, where do we think about where that efficiency gain goes. We could put that back into ongoing enhancements that we're making. We could give that to the consumer in some form of price or delivery benefit.

And so I think that's actually pretty exciting when you think about it. Now it's very early days on that. But internally, part of our focus is let's make sure we're doing the right things now to make sure that our employees are experimenting, that they're very comfortable with this technology and that we're starting to see some of those efficiency gains and then think about how might we want to invest that and what is the right way to think about that investment. So it's both the top line piece and then the sort of employee efficiency piece.

Very well said. Your share price has been unfairly penalized because of this idea that Agentic Commerce is going to take over and disrupt platform, third-party marketplaces, assuming the idea that we as consumers are just going to go to our preferred large language model and say, send me a gray couch that is 70 feet in length and have it delivered to my doorstep. Why is that wrong?

Well, I think any time there's a rapid change, it's hard to get your head around. So I think the notion that you just don't know what's going to happen definitely is the first thought folks have is going to create fewer uncertainty and doubt. I think the reality is, as I was describing earlier, there's like the bigger players who are basically the ones who can deliver against the customer experience today. They're going to be the big beneficiaries in the slices of the market where they are the best solution.

Effectively, what is happening is just that AI is only going to facilitate those -- whoever is the best at something becoming bigger, faster. And that's not just -- that's both internally what they do with the technology and what they specifically do for the customer, the technology, but it's also, frankly, where customers are going to get steered to, where they're going to go to. I think the reality is these -- the LLMs they're very helpful for customers to kind of get the landscape of something they don't understand, but it can only take it so far. If it's something the customer can be very articulate, like I use Dove soap bars, I use whatever Mrs. Meyer's hand soap, I use Seventh Generation dishwasher tabs, et cetera, and I want to replenish that stuff, it could execute those orders for me. And that is a very straightforward exercise.

If it's something where there's a discovery inspiration, emotion, aesthetic, whether you're talking about home or you're talking about fashion, you're talking about beauty, I don't think the agent is going to help you by going from the beginning to the end and just saying, okay, you want something that is -- you want some more lipstick unless you want to reorder the same exact one, right? Just like it won't solve the great sofa example that you gave a minute ago. But what it will do is it will -- and this is where we can optimize for this, but it will say Wayfair is a great solution for you, whatever. But there's a lot of choices you get to make around the item. You're going to want to understand other items.

We have information about what you purchased. We know what styles you like. We know what you have in your house. We can create inspirational imagery with AI that's very specific to you. We can also present you with a lot of options around delivery, assembly, taking away packaging, things that you would then -- you wouldn't always want necessarily the same services, but depending on the purchase, depending on that particular use case you may want, you can have all these items delivered together 2 weeks from Friday, if you want. There's things that we offer that don't get abstracted away into like this generalized e-commerce sort of use case.

So I do think if you're a commodity goods provider, it could be potentially quite different. But honestly, we play in a category that's very bespoke and unique where customers -- basically, home, fashion and automobiles are the only 3 product categories that customers have so much sort of curiosity and fanaticism about that they'll spend money to basically buy magazine, basically consume media for the enjoyment of knowing what else is coming, what the trends are, what's available.

So if you kind of put them the shopping lens over that, like these categories, there's not that many of them, but these ones are noncommodity categories where customers are going to want to play a role in the decisioning. And it's nonobvious -- it's not a reasoning solution as if I'm looking for 42-inch TV and I want a budget one, there is a best one at any given time or I want to step up from there, there's a best one at any given time. If I want the premium one, there is a best one at any given time. That's not the case in our world. There's an emotive content to it that is very hard to capture through artificial intelligence.

Yes. No, I was just going to add to that, that I -- yes, I was actually going to say it's highly emotive purchase. And I think the other thing that you touched on a little bit with the delivery Niraj, but this is a complicated purchase for consumers. It's a high-ticket purchase for them. And it comes with some risk, right? Does it get delivered correctly? Will it fit in my room? Who is going to remove the product that's already there if there's a damage issue, which is the category that has damage, how does that get resolved? And so sort of trust in the retailer actually matters quite a bit as well, I think, in this category.

So all of the things that Niraj described around sort of taste and style and selection and sort of the consideration combined with the sort of logistical complexity, I think, are quite important here. That said, we are very focused on being wherever the consumer is. And so our view has been we should be in the mix, partnering with folks to make sure that as they're thinking through sort of how this evolves, that we're part of that conversation. We've publicly said that we're partnering with Google on Universal Commerce Protocol to sort of help shape how this discovery happens and how this part of the shopping experience does evolve. And I think that's really one of the benefits of our scale is that we actually are interesting to these folks to actually partner and sort of push the thinking forward here.

Very well said. Home, home furnishing and marriage may be the 3 categories where the risk of regret is very high, just ask my wife. With that being said, one of the sub topics within this is Wayfair has a lot of aspirations to -- for its sponsored ads business, for retail media. And there are fears that if there -- at least a portion of the business move to Agentic Commerce, that could disrupt the ability to monetize those eyeballs. How do you see that playing out? Are you as confident today about your aspirations on retail media than you were a couple of years ago?

We are. I think it goes back to that earlier point, which is just, again, where do transactions really get consummated on these agents. And I think that's really in the commodity purchase type arena, perhaps in the low ticket non-pure commodity. So commodities where the UPC code is the identical thing and you're just replenishing. I think that's where the highest risk is. The next highest risk would be, I want a 3-pack of iPhone cables, I want to spend less than $15. I want them to be gray or black. I want them 6 feet long. That's kind of like you haven't specified the exact item you want, but it's kind of like you might be willing to take the risk on that because you're sort of like how bad can it go, [indiscernible] highly rated, whenever. You may not care.

But as soon as you move up in ticket price and the item is more bespoke, you really want to pick the right item aesthetically, emotionally, I really don't think you're going to see a high percentage of transactions happen upstream. The same way you saw that same dynamic play out with all the kind of shopping interfaces that were built by the media companies over the years. So those are not categories that they were able to disintermediate there. And so I think that traffic does flow downstream to the retail sites. And I think the shopping experience we have, the retail media is embedded in that in a way that it's basically helping the customer discover items that they might have high interest in because that's where that ad unit is highly valuable to the person who's paying for it and to the customer.

If you have ad units that are not valuable to the customer, you end up running into a problem. You can't really scale your supplier advertising business. So you can only really scale it if you're putting pertinent interesting products in front of the customer that are relevant. And so that's why we think -- that's why we're seeing that continue to develop nicely. We don't really see risk to it.

Got you. Pivoting the conversation, Wayfair has done a remarkable job more recently and over the long term, taking market share. And that has been characterizing a lot of the performance that you've been achieving and reporting in the last several quarters. You haven't gotten much of a help from the housing market, from the home furnishings market. What do you think needs to happen in order for that to become more of a tailwind, understanding that market share gains are going to be a critical driver still for you moving forward?

So there's no question that home goods is a cyclical market, right? And there's no question that we're in like a down part of that cycle, if you look at the overall market. It's contracted for 4 years now. It's not contracting as fast as it did for the 3 prior years, but still contracting. It's probably near the bottom, but in terms of when does it really turn up, that's much harder to forecast because housing prices remain elevated, interest rates remain elevated. And ultimately, when people move, that's one of the catalysts to purchasing home goods. And whether -- if you look at the moves per year, that number isn't really rising.

We don't necessarily see it taking off anytime super soon. I think the reason we're fine with that is that our strategy for taking market share is not dependent on the category really gaining momentum. The same way we went from 0% year-over-year growth to 7% at the end of last year. The market contracted through last year. And so we've kind of accelerated against the market. How did we do that? Well, the answer is our own actions, whether it be how we use technology, what we did with logistics, what we did with our marketing reach, the improvements to the customer experience, the programs like rewards, verified stores, et cetera.

And there's a lot more to come on those things. And so you start this year, we're at that 7% or whatever, mid-single digits was our guide. And then where we think we'll be by the end of the year, we think that's going to climb into the double digits. And why will it do that? It's that same recipe that we're now back in control of because we got through the tech replatforming, we got through kind of the organizational shift. And now we're back to like driving these programs. We're back on the offense. And frankly, we now have a new tool in the toolkit that we didn't even anticipate at the beginning of last year, which is the rate at which AI is now something we can use in a whole variety of places in our business. So that only accelerates our ability to do that.

And so I think you're going to -- you see that play out. And I think basically, you say, okay, well, how can I get some confidence that, that will play out? I basically say, well, because it hasn't, right? So that's how we went from 0% to 7% last year. The market was no help. The market contracted. So you had to do that in the face of a contracting market. So what is it that we did? And you saw profits rise much faster than revenue growth last year. So we didn't do it by funding it. We did it while profits grew. So that's what you're going to see this year. You're going to see that we're going to -- our rate of share capture is going to grow. We'll be in the double digits by the end of the year. And profits, EBITDA dollars or whatever, they're going to grow much faster than the rate of revenue growth.

And do you take any pause in all the macroeconomic uncertainty, the rise in the price of oil, is your mindset, hey, consumers dealt with a lot of uncertainty for the last 4 years. This is really no different than what has happened for a while.

Well, I mean, I think it's really no different, but yes, I would prefer that the price of oil will not be $100.

Without a doubt.

Without a doubt. Well said.

As you look through the different drivers that seem to be in the relatively early phases of having an impact between loyalty and some of the things you're doing on the advertising side, how are those going to play out? What is going to be the most meaningful? Can you give us some insight into what you're seeing from a customer behavior perspective that gives you a lot of confidence on the outlook for the rest of this year?

Yes. We're seeing -- so these key programs we have, whether it be verified, whether it be rewards, whether it be the investments into our native apps, whether it be stores, these are all what we're doing with our advertising marketing programs, it's all basically really trying to do 2 things. One, expand our reach of how we attract new customers. So like in our stores, the majority of customers we get through stores are new to us or some of the marketing programs, we've moved money towards places where we're getting a higher reach with new customers. So either get new customers. But then really, what it's about is basically whether they be new or whether they be repeat customers, how do we get them more loyal. And that's the bigger piece of the flywheel. And that's where if they download the app, we know we bend the curve. If they join rewards, we know we bend the curve. If they shop both online and offline, we know we bend the curve.

So all these things accelerate the customer coming back more times per year. So our average customer is spending $600 with us out of an annual spend of $3,000 or $4,000. The easiest way to take market share is to get that customer who already knows us, likes us, happy with us. Why are we only getting $600? Why can't we get $1,500 to $2,000? Why can't we get half their spend? Well, there's no like logical reason why that's like prohibitively -- we have to change the laws of physics to get half their spend, right? No, it's just the customer needs to be aware of the breadth of categories. They need to be top of mind thinking of us when they get to that purchase. It needs to be convenient and easy. They need to feel like they're going to get the best benefits.

So the things we're doing with logistics, the things we do with our app, the things we're doing -- these things all kind of do that. Rewards just gives them another financial motivation. They get 5% -- they pay $2,900 a year, but then they get a kind of endless amount of 5% back on anything they buy. So at $600, they've broken even. But then if they're going to spend x amount more in the category, well, if I go to Wayfair, I get this extra 5% back. So if I think Wayfair has a selection, they have the delivery experience, they have the competitive prices, they have a great experience helping me find the things I want, why wouldn't I just go there? I also get this extra benefit, right? And so that's kind of how all the stuff kind of weaves together.

And so if we can keep accessing new customers at a faster rate and then whether they're new or repeat, if we can keep doing things that cause them to incrementally become more loyal, that compounds. And so the category, it can shrink, but the truth is it's still quite large, right? And that the spend is very fragmented. If you look at a customer share of wallet, they're generally not concentrating where they're spending their money. And so it's very -- it's quite fragmented. So the share is coming out of a wide variety of places. And if you look at what's happened over the last year, we're one of the only few folks who really gained share in the category. And we think now with the setup we have post the tech replatforming, post the organizational kind of changes we made between '22 and '24, this is now a compounding cycle, and that's what you saw through last year. That's what you'll see through this year.

Kate, you're going to add something?

Actually, you ended up hitting on it on the loyalty piece. I was just going to say, I think we talked about loyalty a bit on the last call because it's actually one of the sort of cleanest ways for folks to start to see some of this in action. And what I think is interesting about it is it's a place where we're giving a little bit of investment to the customer, right, in the terms of that 5% back and some of the shipping and access benefits they get, but it ends up being highly accretive to EBITDA because we're not going and remarketing to that customer. They're coming in directly. So I think it's a good example of the way that we think about as Niraj keeps highlighting revenue growth, but EBITDA growth accelerating faster than the revenue growth.

Loyalty enables you to do that because we get that incremental purchase. We actually said in the investor presentation, the average customer is with us 2x, you're seeing actually 3x from the loyalty customer. So if you think about that really being an incremental play, you're seeing that incrementality and we're getting that without retargeting to them. So then you're able to see that flow through quite nicely to EBITDA. And I think it's an important example of how we look at some of these programs and how we think about the benefit that they're driving on the bottom line and on the top line.

And is it fair to say that you have pretty good visibility into the consumer behavior. So you know as the funnel or life cycle unfolds, where those are -- where those consumers are who have just signed up and what their behavior is going to look like over the next period of time to give you the confidence...

I mean we're obviously only a year into the program, right? So I'd caveat it by 1.5 years into the program at this point. I'd caveat by -- it's early days, but we can start to see for those initial cohort of customers how they've behaved over the course of their first year of membership, how they start to behave in their second year. And we think we have a lot more that we can do in terms of how we keep engaging that loyalty customer. And so I would say, yes, we have a clear perspective. Will that evolve over time? Certainly. And then I'd add, we're talking about loyalty because, as I said, it's a fairly clean example of it. But Niraj mentioned a number of other things that we've done, enhancing the app experience, obviously, physical retail stores and verified to continue to improve that sort of customer incrementality.

Yes. I want to pivot a bit to stores because this seems like it's a very exciting opportunity to capture a segment of the market that may not have been focused on Wayfair in the past in the Chicago location. We've talked about 50% of those customers who are shopping in that store are new to file, suggesting that you're getting a bigger share of the TAM. How quickly do you expect this to play out? And is it right to think that over time, Wayfair is going to have a physical presence in many major markets, and it will be another way to interact with, engage and attract new customers?

Yes. So the Wayfair stores are quite large, right? So the one in Wilmette, north of Chicago is 150,000 square feet. And because they're quite large, there's, call it, 2 years of lead time to open them, plus or minus. So they're not something that you can open in 6 months or 9 months. For our specialty retail brands, we have smaller format stores, you can open those quite quickly. But the large ones, the permitting, the construction, just -- you can only open them at a certain rate. So when we opened Chicago, we were very excited with its performance, and that led us to greenlighting some more stores relatively quickly. Well, Chicago has not been opened yet 2 years. It opened in May of '24. So our second store is only opening at the end of this month in Atlanta.

And we're all invited. We're all invited.

Everyone is invited. Yes. I mean stores are open to the public. We'd like you to come as often as you want. And we have 3 opening this year. We have one in Atlanta at the end of this month, one in Columbus, Ohio in June, end of June and one in Denver in November. And so if you think about that 2-year timing, we greenlit them because we saw Chicago open very strong. But now over 1.5 years in, we've been able to see how Chicago has developed, and we're even more excited. So we're already working on what we're going to open not just in '27, but in '28. And we're pretty excited about what the potential is. We've seen the math, whether it be that more than 50% are new to file or the rate of growth in that market, its compounding annual growth is significantly higher than peer markets in the rest of the U.S.

We've seen what the economics are of the store itself. Reminder just there is, by the way, you have to spend money for the store, but the delivery, logistics operation, the supply chain, the inventory in it, the brand awareness, the customer reach, these are things we already have. So our economics for opening stores are different than a retailer who maybe started in one region, they're going to expand to another region where they got to open up that distribution center. They got to get inventory into it, then they got to start opening stores to amortize that. They need to market in that region where no one knows them.

That's a normal cadence for someone who builds a nationwide retailer. They do it market by market. Well, the reality is we already -- because we have whatever, $12-plus billion national business with all those capabilities, what we don't have are the stores. But we actually have all the other component parts that are usually pretty costly pieces of the store expansion plan, right? So that's part of why it works well, too. But yes, we're pretty excited about the potential.

And how fast could you go? You're opening 3 stores this year. Is that a good cadence? And what does that do to -- and maybe this is Kate's area, what does that do to the economic model of the business over time?

Yes. So I guess sort of 2 questions within there. Right now, our focus has been we have one store, one large format store, leaving aside the smaller formats, which can expand quickly. Let's get a few more open. They're all going to help us learn and understand. We've announced those 3. We've also announced relevant to folks in this room probably who may be from the area, one in Westchester and Ridge Hill opening in Q1 of '27. So we're getting a broader base. And then over time, we can decide what is the appropriate pace to accelerate that off. So I think still today, we're in the, hey, that first store is looking really great. Let's get a few more open, learn about that and then we can determine the appropriate pace.

In terms of the economics, we haven't shared a lot around the economics of the store yet. I would tell you that we look at it a few ways. So we think about the 4-wall economics of that store and the performance of transactions related to the store as well as the transactions sort of surrounding the store. Some of that is interesting because the way that we think about our customers is, we want her to feel that this is another channel, and we want her to feel that she can go into the store, get a quote, interact with a customer, with a salesperson, learn more about the product and then go home and purchase it afterwards if she wants to, right?

And we incentivize our salespeople to think about it broadly that way. And so we're looking at sort of all the different types of purchases relative to the store and then the store economics itself. And we are encouraged by what we see on all of those fronts. And as Niraj said, when you think about other folks going into a market, they have investments in the logistics infrastructure, in the marketing infrastructure and then the investment in building out the store itself. Really, what we have is the investment in building out the store itself. So as we think about the cash-on-cash returns of those stores, it's really just the physical investment in the store.

Got you.

The one other point I want to make there, sorry, is that because I got a question on it this morning, so just to make sure folks understand, the inventory in the store additionally is not something that we are funding that is suppliers, it's part of the CastleGate network in a way. They see it as sort of another point where they will forward position their inventory. And so when you think about the cash intensity to open a store, the vast majority of the inventory comes from the suppliers.

Yes. And just to highlight that, not only the suppliers fund the inventory in all our channels of how we sell goods. So stores are no different. And in fact, when we highlight something, we curate it. So whether that be joining verified or whether that be in a brick-and-mortar store, actually, the demand from suppliers wanting to be in it is inflationary.

Very high.

So actually, our ability to then still be the curators, our merchant teams picking which items, there's no lack of supplier demand. So it's actually -- they just view it as, hey, I want to drive my sales up. And if you put it in, I know exactly what that's going to be. And so it's actually -- it's a nice adjunct build of the -- already the setup we have.

Where I want to come to a conclusion in our conversation is that Wayfair historically has been incredibly disciplined and thoughtful in how it manages the levers around the profitability of the business. This year, the expectation is set that the gross margin could dip a little bit below 30%. So help -- and that was just coming out of the fourth quarter results. Help us create a little bit of context for that? What's driving it? How should we think about as external observers, how that's going to unfold over the longer term?

Yes. Let me just give kind of a quick thought on that, but then to turn it over to Kate to fully answer the question for you. What I would just say is like so if you think about -- we talked about rewards for a second ago. Well, rewards, if you basically give someone 5% back off the retail price, you basically -- you're taking gross margin down by 5% of the 30%, right? So 1.5% for those purchases, net of what the $29 fee they've given covers, right? So part of that gets covered by the $29. But as you can imagine, they're going to purchase more than $600 per year if they're in the program. And they do.

So that takes down the margin. But as we mentioned, the actual profitability goes up. And why? Well, we get a lot more direct traffic from it. So that's like the advertising cost for that customer cohort is lower. So that's like the net math there. I can go down through different examples of basically where there's trade-offs between margin and SOT G&A or between margin and advertising and so on and so forth. And so the set of programs we have will move these interim lines. And that's why I think the important thing to talk about is how revenue can accelerate between now and where we are at the end of the year, where the share spread can grow into the double digits pretty nicely. And the EBITDA growth will outpace that revenue growth by a significant margin because ultimately, like those are the 2 things you really want to see.

And because our different programs have interplay, do we want to manage a given line suboptimally to worry about that line? Or do we want to manage them in the optimal mix at that program level to get that outcome we want, which is that the revenue growth is optimized while the EBITDA growth to be faster than that is also optimized. And those are really the objective functions. So that's what we're doing. I think what we found is like you don't want to surprise folks, you want to communicate that. I think in communicating that, what was lost is that the gross margin line, people got focused on it in isolation and the concept that we're talking about EBITDA growth outpacing the revenue growth by a fair amount, and that's part of the sentence that seemed to have gotten like truncated somehow. So I think -- because I think if people kind of pull that full thought together, they're like, okay, well, that's what I want to see. And I think somehow -- maybe we didn't communicate it well enough, but it got truncated there.

Please, anything to add?

I know we're at time or over time.

We can do this all day.

We'll just hang out here already. I think you highlighted it, Niraj highlighted it nicely, which is the philosophy for how we operate the business has not changed over the last few years. And that's we want to accelerate both revenue and EBITDA growth, but we believe that EBITDA can grow faster than the top line. We have 3 primary cost levers between revenue and EBITDA that we talk a lot about. There's the gross margin line, there's the ACNR line, the ad cost line, and then there's the SOT G&A, which is the overhead OpEx line. And we think about the interplay across those lines to ultimately achieve that same goal that we've always talked about or talked about for the last few years, which is do we want to make a trade-off that is going to accelerate revenue growth, but ultimately, on an EBITDA dollars basis is actually better, improving.

And so that gross margin piece was, hey, we actually see here that we can make some investments here in price and the customer experience that will ultimately pay off with top line acceleration that yields better EBITDA dollars growth. And there are other things that we can do to sort of navigate and manage that to have that ultimate outcome. And I think we've proven our ability on all 3 of those levers actually over the last 2 years, our ability to navigate those quite well.

This is so fun. So awesome. Thank you so much. Please join me in thanking the team from Wayfair for a great conversation.

Thanks, everybody.

Thank you.

Hello, everyone. Thank you for joining us, and welcome to the Wayfair Q4 2025 Earnings Release and Conference Call. [Operator Instructions] I will now hand the call over to Ryan Barney, Investor Relations. Please go ahead.

Good morning, and thank you for joining us. Today, we will review our fourth quarter 2025 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&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 first quarter of 2026. 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-K for 2025 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 contribution profit, contribution margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results.

Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded, and a webcast will be available for replay on our IR website. I would like to now turn the call over to Niraj.

Thanks, Ryan, and good morning, everyone. We're pleased to talk with you this morning to discuss our fourth quarter results. Q4 capped off a tremendous year for Wayfair, with revenue growing 7.8% year-over-year, excluding the impact of Germany. This growth was evenly split between order growth and AOV expansion, both of which grew more than 3%. We had our third consecutive quarter of new customer growth on top of healthy growth in repeat orders. all in the face of a category that contracted in the low single digits for the final quarter of the year.

2025 was a year where we returned to growth and accelerated throughout the year through a number of organic business strategies that can compound for years to come. Numerically, this was characterized by two important themes: our share-taking and top line growth overwhelming the drag of the macro and the substantial flow-through of that growth to the bottom line.

We expect our top line growth and flow through to adjusted EBITDA to be the bedrock of our story for years to come. The opportunity in front of us is considerable. We're playing in a category that is nearly $0.5 trillion in the U.S., Canada and the U.K. The space is highly fragmented, filled with either large retailers that don't focus on HomeGoods or pure-play competitors that cannot match our scale and the benefits we bring to both our customers and our suppliers.

Our company was built around the idea that we could leverage technology to build a large business in an underserved retail category by being innovative in how we serve customers and by continually making our customer experience better.

Through our history, this simple though hard to execute strategy worked. And as a result, we saw it lead to rapid organic growth and an ever larger business through the wonders of compounding. Earlier today, we published our annual shareholder letter, where Steve and I explore the three core levers of our growth in 2026 and beyond.

One, improving our core recipe of selection, price, availability and speed of delivery. Two, inventing and scaling new business initiatives, which can meaningfully contribute. And three, leveraging technology to improve how we operate, how our suppliers build their business on our platform and help customers engage with us.

We're focusing on activating the true power of our technology organization and the AI-driven enhancements we plan to bring to the shopping experience customers have at Wayfair.

We talked about that at length on our third quarter call with our CTO Fiona Tan. So I'd encourage anyone that didn't have the chance to go back and listen to that.

Technology underpins everything we do and is the key enabler as we scale some of our newest growth drivers. I'd like to spend time talking about two of these today. Our physical retail portfolio and our loyalty program, Wayfair Rewards.

2026 will mark a major milestone in our evolution with the launch of our next set of Wayfair stores. You've heard us talk at length about the major points of success we've had in our store just outside of Chicago for nearly 2 years now. More than half of the customers have come through the store have been entirely new to file and we've seen continued post-store visit lift on sales in the surrounding area. That journey will continue with the launch of our next store in Atlanta early this year, followed by our stores in Columbus and Denver. These will carry over many of the core design themes that have resonated so well with customers in Chicago. Atlanta and Denver will be in the 150,000 square foot range, while Columbus will be a smaller format, roughly 70,000 square feet. Each store will showcase the true breadth of our catalog in a variety of special ways, and you'll find some of the favorites from Chicago like the [ Dream Center and Shower Wall ], appearing in our Atlanta store as well.

This is a hallmark example of our ability to drive cost-effective execution at scale. We already have years of investment across the most significant areas a retailer needs to be successful. Our brand, our fulfillment and delivery capabilities our supplier relationships and our curated offerings. The incremental cost here is simply the cost of the stores themselves. These stores are all located in relatively close proximity to one of our fulfillment centers. So when customers purchase large parcel items, those products can show up on their doorstep in a matter of days rather than weeks. And of course, there's a vast selection of cash and carry items in the stores themselves.

Many investors have asked about the working capital needs to fill the stores, and that is another area where our unique platform model shines. The products in the stores are largely owned by our suppliers, exactly like items stored in CastleGate. In many ways, the store functions as a new form of consumer marketing with the product offering and inventory provided by our suppliers have been very keen to put their items on our shelves.

From the beginning, one of our objectives with physical retail has been growing share of wallet among our shoppers across all categories and also notably when it comes to frequency items. Today, customers are, on average, spending roughly $600 per year on Wayfair across two shopping occasions. Out of the roughly $3,000 they spend on their homes in total each year.

Part of the story is one of awareness. Walking through a physical store gives every shopper a broad view of the breadth of our categories and the depth of our assortment. Often inspiring purchases, they didn't know they could get through Wayfair. We're seeing this work in real time. In the Chicago [ DMA ], we've seen a nearly 30% spread in the performance of our frequency categories, items such as bedding, decor, kitchen and tabletop as a few examples, compared to similar [ DMAs ].

In tandem with our physical retail efforts, one of our other big initiatives is to drive share of wallet expansion via our loyalty program. And soon, shoppers will actually be able to sign up as they're checking out from any of our stores.

We've heard many investor questions about the loyalty program as we hit the 1-year mark. And so I want to spend a few minutes running through some of the highlights of what we've achieved and what's coming next.

We launched Wayfair Rewards in the fall of 2024 with the goal of deepening customer loyalty. The program offers terrific value for shoppers with free shipping, access to members only sales and events and 5% in rewards. Priced at $29 per year, our membership is intentionally designed to be effectively breakeven for that average customer spending $600 per year on Wayfair. The response we've seen from shoppers over the first year of the program has been terrific with over 1 million members today. As we expected, many of our existing customers see clear value in the program and early sign-ups were weighted towards recurring Wayfair shoppers.

As the program matured, we were really pleased to see a nice diversification in the mix of subscribers as we increasingly drew in nonactive customers. In fact, our recent cohorts have shown more than half of new paid members are nonactive customers. What's been most exciting are the spending patterns we're seeing among rewards members.

As we exited 2025, we're seeing members driving more than 15% of Wayfair U.S. revenue. The average reward shopper is purchasing on Wayfair across more than three shopping occasions over the first year of the program and spending multiples more than nonmembers.

We're seeing higher engagement across a wider mix of our categories. Compared to nonmembers, reward shoppers have a conversion rate on furniture and decor that's nearly 3x higher and a conversion rate on housewares, that's more than 3.5x higher, all of this comes alongside noteworthy benefits on the P&L. For several quarters, you've heard us talk about our focus on contribution margin is the best metric to measure our variable cost efficiency rather than just gross margin. Our improvements in contribution margin in conjunction with steady fixed costs lead to healthy growth in adjusted EBITDA, which is our core goal. Wayfair Rewards is a perfect example of this in action.

As you can surmise, the program bears incremental gross profit costs as we offer 5% rewards dollars and free shipping on smaller orders, resulting in a headwind to gross margin. However, the gross margin impact is more than offset by our ability to lever advertising spend as these shoppers return to buy from us at much higher rates and ultimately, drive share capture through increasing order volume.

The net impact is this. We improved contribution margin and lever against our fixed cost to drive appreciation in adjusted EBITDA dollars. While the moving pieces are slightly different, the outcome is similar for physical retail. Stores actually drive a higher gross margin but bear incremental OpEx costs from the associates. However, when combined with the uplift we see on revenue, the net impact is attractive growth in adjusted EBITDA.

2026 holds even more for us to unlock for Wayfair rewards. We're excited about new ways we can acquire members through highlighting the rich benefits that they receive. At the same time, we're going to deepen our engagement with our existing members to keep them coming back to Wayfair for even more of their home shopping. You'll see us broaden the aperture of Wayfair rewards beyond just the core Wayfair.com offering. We've only just begun marketing the program on our specialty retail brands. and we'll launch in Wayfair Canada and Wayfair U.K. in the months ahead.

And finally, later this year, we're going to debut a specialized rewards offering designed specifically for the luxury customer with Perigold. There's even more we're working on behind the scenes to drive value for rewards numbers. We're expecting to add even more members in 2026 than we did in 2025 as rewards provides one of the many pistons powering our engine of growth this year. You're going to hear that metaphor is a recurring theme across 2026. While the category may still have ways to go before it finds sustained organic growth, we're firmly in the driver's seat as we propel Wayfair forward. We're set up to take share at a pace we haven't seen in many years and drive top line expansion regardless of the macro, while continuing to deliver even more flow through to the bottom line. We couldn't be more excited for what lies ahead.

And with that, let me turn it over to Kate to walk through our financials.

Thanks, Niraj, and good morning, everyone. Let's dive into our financial results for the fourth quarter before we move to guidance for Q1. Starting with the top line, net revenue grew by 6.9% year-over-year on a reported basis and 7.8% year-over-year, excluding the impact from our exit from Germany. This is our last quarter where there will be a meaningful distinction there.

We saw solid performance in both of our geographies, with the U.S. business up over 7% year-over-year, while the international business grew nearly 4%. Let me continue to walk down the P&L. 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.

Adjusted gross margin for the fourth quarter came in at 30.3% of net revenue. For more than 2 years now, we've held gross margin steadily at the low end of our 30% to 31% range as we balance the structural benefits we're getting from programs like supplier advertising and CastleGate against areas where we see an incremental opportunity to invest in the customer experience.

While we'll get to formal guidance shortly, this will be the same play to you'll see in the first quarter. But as we look deeper into the year, we expect there will be opportunities for us to dip gross margins slightly below 30% as we look to capture share at a faster rate and generate more gross profit dollars and a slightly lower margin.

I want to be very clear here. The magnitude of this we measured in the tens of basis points, not hundreds. Some of this investment is driven by programs like Wayfair Rewards, as Niraj just discussed. Scaling the number of rewards members comes at the expense of gross margin, but drives improvement on advertising expense, allowing us to hold to our contribution margin target of 15% and most importantly, grow adjusted EBITDA dollars.

Ultimately, that is our core focus, and you should expect to see us grow the top line while delivering healthy year-over-year adjusted EBITDA and free cash flow growth in 2026.

Now looking specifically at Q4, the combination of 30.3% of gross margin with 3.7% of net revenue going to customer service and merchant fees and 11.4% of revenue going to advertising left us with a contribution margin of 15.3% for the quarter. This was 250 basis points better than we delivered in the fourth quarter of 2024 as we lapped a period of investment into newer advertising channels.

SOTG&A for the fourth quarter came in at $358 million, which, in combination with contribution margin expansion led to the significant profitability flow-through for the final quarter of the year.

In total, we generated $224 million of adjusted EBITDA in Q4 for a 6.7% margin. This was more than double the number of adjusted EBITDA dollars we delivered in Q4 of 2024. For the full year 2025, we grew adjusted EBITDA dollars by more than 60% and to $743 million and improved adjusted EBITDA margin by over 200 basis points, a remarkable achievement that is the culmination of many years of work in cost rationalization on top of a noteworthy year of share capture and top line momentum. As Niraj said earlier, this is just the beginning of much more to come.

We ended the quarter with $1.5 billion of cash on the balance sheet and $1.9 billion of total liquidity when including availability under our revolving credit facility. Cash from operations was $202 million, offset by capital expenditures of $57 million, leading free cash flow of $145 million for the fourth quarter. A more than 40% year-over-year improvement. We issued our third high-yield bond during the quarter, retire the remainder of our 2025 notes and repurchased just over $200 million of principal on our 2027 convertible notes.

As with our 2028 convertible note repurchases during the summer, these bonds essentially trade as an equity substitute given the trading price of the stock. So another way to look at this is that we offset more than 5 million shares of potential dilution through the two sets of convertible note repurchases in the back half of the year. Our net leverage is now under 2.5x, and down from approximately 4x exiting 2024 and over 6x at the end of 2023. We also saw our burn rate come down meaningfully in 2025. And from a peak of 11% in 2022 to just 4% this past year. I mentioned this last quarter, but it's worth repeating once more. We're operating with a dual mandate of reducing leverage while also managing dilution and we'll continue to balance these opportunistically in the future.

Let's now turn to guidance for the first quarter. Beginning with the top line, we will guide to mid-single-digit growth year-over-year for Q1. We're seeing another quarter of robust share capture translate into healthy growth even in the face of a category that is starting off the year comping negatively.

Turning to gross margins. As I mentioned a moment ago, we will guide you to the 30% to 31% range, likely at the low end as we find further value and take rate and customer experience investments in the form of order capture. You should expect customer service and merchant fees to be just below 4% of net revenue and advertising to be in the range of 11% to 12% of net revenue. The net of this should produce a contribution margin of roughly 15% for the first quarter for a healthy improvement year-over-year.

SOTG&A is expected to stay in the range of $360 million to $370 million, likely at the lower end of this range. As we've discussed, the power of our model is our ability to scale top line and contribution profit growth without needing to make further investment in head count. Our team is well equipped today to facilitate considerable growth in the years ahead, which puts us in a remarkable place to see noteworthy leverage as revenue growth compounds.

Flowing all of that down, we would expect adjusted EBITDA to be in the range of 4.5% to 5.5% of net revenue, again, demonstrating robust year-over-year improvement. While we don't guide on free cash flow, I do want to remind investors that the first quarter is a cash outflow period for us given the working capital dynamics of our business even when revenue shows strong year-over-year growth.

Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $70 million to $90 million. You should expect further rationalization here over 2026 and even accounting for the $20 million impact for the Performance Award, which is reflected in this quarter's figure.

Depreciation and amortization should be approximately $67 million to $73 million. net interest expense of approximately $37 million, weighted average shares outstanding of approximately $132 million and CapEx in a $55 million to $65 million range.

2026 is poised to be a tremendous year for Wayfair. We are leveraging our tech transformation loyalty ecosystem and logistics scale to consolidate share in a highly fragmented market. We're in full control of our destiny, and we are well set up to drive healthy top line growth independent of the macro, and we are turning that growth into more profit dollars than ever before.

Our team is energized by the opportunity ahead of us and eager to turn our ambitions into reality. We're excited to have you along on this journey with us. Thank you. And with that, Niraj, Steve and I will take your questions.

[Operator Instructions] Your first question comes from the line of Eric Sheridan with Goldman Sachs.

I wanted to ask sort of a multi-parter around AI, when you look at the current landscape, can you talk a little bit deeper about some of your initiatives, both internally that could be aimed at reducing friction in the business and/or driving operating efficiencies from AI? And how you're increasingly thinking about partnering with external parties to bring your brand and your marketplace into external environments like LLM agents as a potential pathway to market.

Yes. Thanks, Eric, for the question and for being on the call. Actually, so one thing I'll just reference that because I'm sure you and folks haven't had a chance yet to see it. But today, obviously, we released earnings and the refreshed investor deck, but we released our annual shareholder letter. And in the letter, from Steve and I, we actually talk a lot about how we look out to the future, the opportunity we see for the business, the economic opportunity, but specifically what drives it. And one of the three things that we talk about significantly in is how technology plays a big role, and there's a meaningfully not very lengthy, but a page or so about AI. And it basically tries to address exactly what you're asking.

So I'll give like kind of a summary answer right now, but I think you probably find that and others may find that of interest. And what we talk about there is basically exactly as you posit it. There's significant internal benefits, and the internal benefits have a lot to do with health. AI is really an unusual opportunity in that you can improve quality, improve speed and reduce cost all at the same time, whereas usually, the truth is when you have a technology that comes along that's transformative, usually, there's an opportunity for quality and/or speed but it comes at a cost, but the ROI is there. And here, what's tremendous about it is that you can actually do all three at the same time.

So on the internal operations, we obviously start with everyone using an enterprise LLM chat product, in our case, everyone had Gemini, connected or data stores to help them do their work more productively to get answers to questions. But where that fairly quickly led to is how Agentic workflows can allow you to automate meaningful pieces of work and do them, again, as I mentioned, faster at higher quality at a lower cost.

And the speed of the development of the technology has been tremendous to where we have -- we started -- let me take stuff like a year ago with some high-level areas a top-down effort like how can we really help our customer service agents do a great job for some of the more simple inquiries, how could you just automate the answers to those. And we're doing that, and we're getting like higher customer SAT scores on those and then our agents are benefiting from the -- where we have the coassist product for them on the more complicated ones. We did that in like a half dozen areas, how we maintain the product catalog information, how we find inaccuracies in the catalog, et cetera.

Where we then went to is now at the individual or at the group level, how do you take workflows and help automate work in there, getting rid of some of the work that's monotonous repetitive and do it in a way that's quick, faster, more accurate, freeing up people's time to work on things that are higher value. And if you think about the efficiency opportunities as you reshape how you allocate research in the future, there's upside there. So there's a whole section of activity there.

And then when you think about external parties, there's kind of two big groups of external parties that I'll just touch on really quickly. One is how we help our suppliers succeed on our platform. And that's about giving them tools and taking all the process work of things they need to do with us and eliminating a lot of the work that's time-consuming and has the same sort of dynamic as you would think about with internal activities and allow them to then do more to grow their business on our platform. And part of it also then is giving them analytics and insights that allow them to understand what's happening on the platform in a way that then allows them to know what to do. And so there's a set of activities there.

But then I think where you were going on the external parties has a lot to do with the kind of the genic services that are out there, the kind of the core AI leaders that are out there. And I think I would draw an analogy to how in the early days going back to whether it was Google or Meta, later Pinterest, how we've always been a partner working with those folks on both making sure that we show up very well there and that's an organic placements and how we give them product information, feed data that allows them to represent us in a way that helps them with the consumer experiences they want to create. But then also as they have paid advertising products and the like, how are we an early partner helping them develop those or in the case of a commerce transactions, which Google did with Express and shopping and interest of viable pens, how are we in early partner there, helping them with that.

Well, that analogy, if you go to today while using Gemini or ChatGPT are different than using these other products, I think there's an analogous series of activities where you start talking about how do we make sure we optimize how we show up there and represent ourselves well and make sure that the product information is all there, including very nuanced details, but then it goes to, they want to develop advertising units, will you partner with them on that in a way that allows us to, again, leverage all the data and the technology we have to make sure that we are a beneficiary as well.

And then, frankly, with customers engaging there, they foresee a world where on some set of transactions, consumers may want to execute the transaction on their Agentic surface. And that might be an agent executing a transaction if it's a commodity purchase or buying paper towels, it might just be replenishment or maybe the agent is deciding were how to solve that for. And so they want to develop commerce protocol. So we've been a partner and, I think, multiple of them have named us as one of their handful of partners that they're developing those with. So I think you're seeing us be very early there.

And then in our world, we think that what's going to happen because it's not a commodity good where you're not going to be just, "Hey, I need some more of this, it's more of that and whoever can get it to me by Friday at the lowest price is great". It's going to be something where there's a lot of exploration customers doing the category there's a whole view as to how that traffic gets handed off mid-funnel to places like Wayfair. And some of that, again, is organic traffic and some of that could be paid traffic and in the form of ad units. So this is kind of a relatively holistic view we have.

So I think you're going to see us continue to be referenced as an early partner in all of these places. I think it's very early in how this will all shape out. But I think we're at the same way being technology-driven Steve and I's background are both is engineer, has been a mainstay of how we've been able to grow the business. You're going to see that continue to be true here.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Please go ahead. I wanted to ask about margins longer term. And if I get a follow-up, I want to ask about holdout tests. On the margin, so you had a really good incremental margin. I think Q4 looks a big number, like north of 50%. Q1 looks pretty strong as well [indiscernible] 20%. Can you update us on how you see incremental margins evolving, especially if the top line recovery continues over the next few quarters? And then we've talked about things you've done or that AI can help do on SOTG&A on your cost base. So is it a level of revenue growth? Or is it a matter of time until you get to your long-term EBITDA margin targets?

Yes. So let me start with some thoughts and then I'll turn it over to Kate. I think the way to think about it, so just to take your question and kind of flip it around a little bit. What I would start with is -- so what you've seen is as we got through the tech replatforming and we got through a bunch of the things we need to do to get our organization back to being very lean, focused, efficient and executing very well. And that's all work we did already '22, '23, '24 the category in those years comping down negative double digits. We were kind of flattish through most of that period. We entered '25 sort of flattish in I call it, 0% revenue growth. By the end of the year, you see a sort of like in a mid- to high single-digit revenue growth, and it kind of ticked up each quarter.

And that's why the category continued to comp down. I think the overall TAM was probably down low single digits. If you index it to the categories we're stronger in, probably down mid- to high single digits but you see us pull away. Well, that's really due to us taking share because you saw profits grow even faster during the time period than revenue grew. And so we're taking share. We're taking share profitably. We'll how we're doing it through these core initiatives we had, like I talked about stores, for example, and rewards on the call earlier, well, there's over half a dozen of those.

So if you kind of look at what we foresee going forward is that these initiatives, a lot of these initiatives are set up to basically kind of continue to scale and compound these wins because a lot of these will get your new customers get new customers and drive loyalty from them. They'll a lot of these initiatives will help customers understand the breadth of the categories we're in, and they'll start buying more in categories that we under-index in.

So there's all these things in that share of customer share of wallet gross profits faster than gross revenue. So the way to think about what we're expecting to have happen is we're expecting to see the rate at which we outpace the market continue to expand and through our own initiatives, not through the market recovery. And then we're expecting to see profits grow even faster than that, through the combination of leveraging fixed costs and through the economics of these initiatives themselves to the combination of those two things.

And so that's like the business strategy and the activities that are happening that are driving what you're noticing, which are like the quantitative analysis of the results. And that's kind of what we foresee happening. So then you say, well, so then what would that create continue to create this outpacing where you see the profits grow faster than the revenue. So from your standpoint of incremental margins, you say the incremental margins look quite strong, right? Because margins are quite accretive. But let me turn it over to Kate for anything.

I actually [indiscernible] on the key point, right, which is that we expect to be able to continue to grow and accelerate EBITDA dollars faster than the top line. And so you are going to continue to see very nice flow through there. And just as point of fact on that midpoint of our guidance range in Q1 is over -- the EBITDA margin is over 100 bps higher than the Q1 2025 EBITDA margin, right? So I think that shows the strength of the flow-through in the model.

And as Niraj has pointed out, that's been driven by a number of measures internally. You see our stock or SOTG&A that operating expense down again this quarter. I think that's many quarters in I can't even count how many at this point because it's a few years in a row of that SOTG&A coming in. So that's providing really nice leverage there. And then that contribution margin around that 15% again. So you see this ongoing pattern of driving to that adjusted EBITDA growth, and that's really the North Star that we're driving towards.

And when you think about these initiatives internally, Niraj mentioned Wayfair rewards on the call and talk that the way that we look at them is how can we improve the customer experience with it, but make sure that even if the components of margin move around a bit, then we're again flowing that through at that adjusted EBITDA growth rate.

The second part of your question was that time line to 10%-plus adjusted EBITDA. So I do want to be clear, we talked about we believe we can actually get over to that 10% adjusted EBITDA. And we're pretty excited about the potential to do that. I think we've shown that even in a down market, we've been able to grow adjusted EBITDA margin significantly throughout the year. And as we look forward, certainly, top line momentum obviously helps you on that leverage and we think a number of our own self-health initiatives can continue to drive those share gains somebody respective of the macro.

Great. The holdout test that you're trying? And does that shape how you're spending advertising in '26 or not yet?

Yes, I think the way to think about the holdout test are that that's not a onetime active. That's like a ongoing set of activities. So the whole of tests don't start and stop. But what -- there's periods where we're running more of them than other periods.

But I think what we've been able to do is run get back into a cadence of running a relatively high amount of tests that have let us really hone how we do a lot of the marketing attribution and make sure that the anywhere we're spending advertising costs, we get to really good precision on where we're getting a return and therefore, spend our money wisely.

And you've seen some of that in the form of the ad cost leverage, where we're certainly scaling in a lot of new channels, but we've also been able to become more honed and a surgical and where we're spending money, and so we've been able to drive up our return in a way that's -- we've been pretty happy with. But let me...

Yes. I think you may be referring specifically to the Q3 testing of last year. That was a little bit bigger than maybe typical on any given quarter. So you just point, so there is a little bit of quarterly change in that. To your point on what we've learned, I think, for example, we've seen pockets of influencer spend and other elements there that we actually believe we can spend into and yield the kind of returns that we're expecting and requiring ourselves to get on those lines.

Your next question comes from the line of Steve Forbes with Guggenheim Securities, LLC.

Maybe just revisiting your comments on physical retail expansion as we look forward to this next class of stores. I wanted to -- I was hoping you maybe revisit [ Remate ] and talk about how those [ DMAs ] surrounding the store have performed sort of 2 years in here. Is the outperformance gap versus the company average still as strong as it originally was? And any way to sort of like frame up for us how you're thinking about how those [ DMAs ] surrounding those new storage should perform in 2026.

Yes. Steve, that's a great question. So the store will met opened up quite strongly when we first opened in May of '24. We could see the lift in that trade area in the State of Illinois very quickly. Now that it's been open over a year, it's been open over 1.5 years at this point. What we've been able to say is that we've seen that continue nicely. In fact, in the refreshed investor presentation, we put a slide in and put some updated numbers. And -- let me talk about how the -- one thing that's exciting about the store is that it's attracting new customers, and you're seeing that our business overall, you're seeing that we're have order growth in new customers and in repeat orders. So repeat orders, which are 80% of our orders growing new orders, 20% or growing.

So the store is one small piece of how we're doing that, but the stores help us attract new customers. But to your point, we also put the CAGR in there, and we see that the Illinois over national growth CAGR. You see that it's an over 10% CAGR since the opening.

And what's happening is that customers obviously could be boiled a Wayfair from experiencing our online offering, be very happy with that. Then having a store is only going to take those oil customers and have more use cases and methods to interact with us and grow with us. So it's going to enable us to get more share of wallet from them.

And then you may have new customers who are maybe have heard of Wayfair, but have never really engaged with us and maybe they're sort of online for the home category is not a comfortable thing for them to think about or maybe they were habitual in going other places well if some of the store, it may dent that curve. They experienced Wayfair in a different way. Well, that could lead to not just buying in the store, but that could then lead to them buying online as well. And so what you see is that interplay the store to the overall impact in the trade area is very nice, where the store itself is very economically productive and we're really changing the customers' behavior.

And so there's a big strategy, if you think about what we're trying to do is if the average customer was spending $600 with us a year out of, call it, $3,000 or $4,000 annual spend, how do we, high-level over time, get to, call it, $1,500, how do we get to half of their wallet? Or would it pick some number, but meaningfully higher.

And the answer is, well, One thing that you look at and you say that is, well, you really need them to buy across the breadth of categories that Wayfair offer because if they only buy in a small subset of categories, well, you're limiting how much they could really buy with you? And what does that mean? Well, you'd want them to buy small frequency items, candles and pillows from us, as well as we'd want them to do a renovation project with us where we could do the cabinet try, we could do the large appliances, we can do the flooring and tile, we can do the plumbing.

And so how do you do that? Well, they need to become aware that we're in all these categories. We need to give them an easy way to buy these categories. Some of these categories are easily purchased in person. Some of these categories require working with a designer may require financing. Some of these categories. We just may not have the awareness. How do you grow the awareness, someone running into that in the store is one of the highly economic ways to drive awareness. So what's happening is stores is one way to dent that.

Then you think about the Wayfair Rewards loyalty program. Well, if you spend $29, you're getting 5% back in rewards dollars, you're getting access to the members-only customer service line, you're getting access to the members only sales. Well, once you spend the $29, you've sunk the $29, you want to maximize your benefits. So yes, if you spend $600 your breakeven just from the 5%. But the truth is, if you spend the next $600 with us, in your mind, you just made $30. Well, that $600 is going to be incremental to you, just from our standpoint, to be [indiscernible] it could be incremental to us and it could just be diverting that spend.

Particularly when you start realizing what you're getting in the members only sales and some of the other benefits you rigs well, you probably hold have been spending that money with us even before, but now you're getting even more juice out of it, and so you should be now.

So there's a bunch of initiatives we have that sort of ladder up to this customer P&L. And this is why we really want to focus on like how do we accelerate our revenue growth, taking more and more share and do it while we grow profits even faster.

Because the lines in between to our mind, don't really matter in the same way in the sense that like the rewards program it lowers gross margin, but it grows -- or the profit margin. But it does that because the customers come direct and there's no -- the ad cost is different.

Or stores, for example, you may say, okay, the gross margin looks great, but it hurts [indiscernible]. Well, why is there stock Well, the way accounting works is you got to actually take the storage labor cost and put it into [ Saka ], which doesn't make any sense to me, but that's what you have to do. So these things don't make any sense, but it doesn't matter because if you can grow revenue at an accelerating rate and grow profits even faster, that's really the outcome you want. And that's the way to think about these initiatives.

That's helpful, Niraj. And then just a quick follow-up. Multichannel fulfillment. I don't think you mentioned in your prepared remarks. So just curious if you can comment on how the benefits of this offering are ramping or accruing to Wayfair and any sort of framework for 2026 on that offering in terms of the benefits of the P&L.

Yes. I think the key thing to think about is like we've built a logistics infrastructure. So one of the big opportunities we have is that the way the world is playing out is that it's increasingly hard to be a small player and offer the customers the benefits they expect from a retailer today. And why is that? Well, there's three big things that have a tremendous cost in our business.

So one is the cost of technology. We have over 2,500 folks and we're getting into a world so even technology is mattering more and more, not less and less. The second is, if you look at -- think about the marketing reach we have with spending over $1 billion in ad spend and having the brand be as strong as it is, it's very hard to do that if you have a very small budget. And the third is the logistics infrastructure with dozens and dozens and dozens of buildings and 20 million or so square feet of buildings and operations, you can now offer fast delivery and higher quality, lower damage and better customer services and experiences, et cetera.

And so if you're a small retailer, you can't do that. And if you're a big retailer, there's really only a handful who can do this, you really then optimize it for something. So we're the only ones who optimized it for home because we don't particularly worry about building materials or grocery or a bunch of categories. We're not in those. So we really are only in home. And so everything is optimized for home.

And so then you think about the logistics network because your question was about multichannel. And you say, "Well, how do you think about the logistics there?" Well, we say, "Okay, we've got these suppliers all over the world. And they want to put forth the best experience they can for the end customers", so they can get share. And how do they do that? Well, we have scale I don't have. So we can help them with ocean freight. We can help them we had fulfillment. We can help them with transportation delivery, things that they can't optimize we can.

Well, it really only makes sense for us to do that for items that we can then where customers can buy enough volume where we can then predict the demand, suppliers can put in that quantity. They can turn that inventory. And customers can then benefit from all of the benefits that accrue to them. And because it won't work sustainably for the supplier if they speculate in goods and goods come in there, they don't sell.

So the big benefit of multichannel is it allows suppliers to put in a broader breadth of products which then allow us to figure out which ones are really great winners on our platform. And then suppliers can lean and put a lot more of that product. We can then position into more and more facilities, faster and faster delivery, lower and lower shipping costs, less and less damage. And so think of multichannel as just one of the most recent additions into the logistics suite that enables suppliers to better take advantage of the Wayfair fulfillment operations in a way that allows them to grow their business on our platform because they're giving customers more benefits when all of this along the way, helps us.

And so one of the things I talked about in the shareholder letter is a forthcoming delivery offering for consumers called Wayfair Delivery Plus. And what we're really excited about that is that's going to offer customers a set of services in a very easy and convenient way that no one else offers, so it will tailored for HomeGoods. That takes away a lot of the hassle that's associated with HomeGoods from a customer standpoint and let's then just focus on all the benefits they have because they want that item, but maybe they wanted to assemble when it's delivered.

And maybe they want the old one take that away or maybe they want multiple items delivered on the same day because it's just going to be convenient for them or maybe they're doing a project or maybe they're setting up their summer home for the -- or they're helping their daughter move into our apartment. There's all these use cases.

And so what you're going to keep seeing us add our services that are software powered and operations powered services that sit on top of the infrastructure we built that allow the customers to benefit from what we've built that allows suppliers to more easily participate and economically win in it. Multichannel is one example. But frankly, wafer delivery plus, which I talked about the shareholders and others, we're going to keep seeing us do more and more. SP-6 Thank you.

Your next question comes from the line of Zachary Fadem with Wells Fargo. Please go ahead.

Can we walk through the cadence of Q4 in a little bit more detail? And any particular standouts in terms of Way Day versus holiday, et cetera? And then I know you aren't disclosing quarter-to-date anymore, but since you're guiding for a deceleration in Q1, is it fair to say that the Q4 strength continued into Q1 or not?

Yes. So as you know, we don't give color or guidance on monthly. But I think when we look at Q4, what we really saw overall was ongoing momentum of the initiatives that we started over a year plus ago. So those are things like Wayfair rewards and you spoke to on the call, Wayfair Verified that we've talked to in the past, one that we think is particularly exciting, changes to the customer experience, from the storefront updating and that really is due to the developer capacity that we have freed up from the tech replatforming. All of those things combined and really compound to deliver a pretty exciting Q4 in our minds.

As we look into Q1, obviously, we're guiding to mid-single digit. I think that shows a pretty healthy ongoing share gain in a category that we think is actually down low single digits. So when we look at Q4 and sort of into Q1, particularly with some of the complexities of the weather in the beginning of the quarter, we see our share gains really continuing to grow here. And that's what you're seeing in the guide. And I think that's exciting about our ongoing momentum.

And what I would say is I think they're really well. And I think the point is there's no momentum is actually the same way we started last year at 0. We ended the year mid- to high single digits. And we basically expect to see this momentum continue. So in other words, we're starting the year it's the turn of the year, but nothing has really changed. If you draw the line from the beginning of last year, we should keep taking it up to the right over the course of time because the initiatives we have are compounding benefit type initiatives, and there's a lot of gains we're seeing from them. And so the market is sort of not really providing the lift, but we don't really expect it to. And so a lot of -- one of the things I talked about in the shareholder letter is how over time, we can -- we think the organic growth rate can be 20% plus. And that's just off the back of how we can take share through the compounding nature of the benefits we have, and we think we can do that while profits grow faster than revenue.

And the reason is, as I was kind of addressing a couple of minutes ago is these initiatives drive quite profitable growth. But the growth they drive just compound because it's really about how customer behavior changes in terms of customers understanding the breadth of categories we're in, becoming more loyal, coming back more often. Us also getting in front of new customers, drawing them in and then them going through that same experience curve.

One thing, there's a whole series of efforts to get there. So I talked about rewards and stores on the call today. But we could talk about what we're doing in our Wayfair professional B2B program with the account managers, the recently released project shopping tool and the like. We could be talking about the Wayfair app and how that continues to take share and some of the planned product enhancements this year.

One of the things I will highlight is now that we're really -- the tech replatforming project was a very large project, a multiple-year project. But now that we're on the backside of that, the amount of technology resource we can put into product-led growth is substantial. And so we sort of have the best of both worlds right now because we both have a tremendous amount of tech resource coming back available to drive the business forward.

I mentioned the app is one thing, but there's a long list of things we're going after. And these things are pretty meaningful. If you just look at the app road map, you'd be pretty excited.

But also you have a new set of technologies available with what Gene allows. So you sort of an interesting time where you'd wish you had tech resources you could put against it. In our case, we think we have an amazing team, and we actually do have resources to put against it. And we're, in fact, if anything, at the best point in the cycle we could be because we're working off very new platforms that really allow for tremendous amounts of developer productivity and actually solve for one of the challenges in the Gen AI world, which is that the more clean and monitoring your systems are the faster it is to use some of the developer productivity tools that are out there as well.

Got it. That's helpful. And then following up on Wayfair Rewards, is there a way to quantify what the drag was on the gross margin line in 2025? And should we think about that rolling off in 2026? Or would you expect the impact to persist as you grow new members?

And then I suspect the net impact is positive when you offset that with advertising. But if you could walk through that in a little more detail, that would be great.

Yes. I mean, look, so if things go as we plan, actually, the drag should become an increasing drag on the gross margin line because the number of members and the amount of revenue of the total revenue that are coming from rewards members actually is growing at a very nice rate. And you'd be at that will be fantastic. That would be an amazing outcome. Because the profits that you're getting from those customers actually are higher.

So this is why I think like the gross margin line or the so these lines don't really tell you very much because if these initiatives are successful, what you should really see is that the revenue line continues to accelerate the profit line, the EBITDA line, what have you accelerated even faster. And that's the dynamic you get, whereas you'd see these lines in between move faster divergences. But let me turn it over to Kate.

Yes. Zach, I think Niraj hi it well, which is as we described on the call, we think it's an appropriate reward is an appropriate investment to make in the consumer obviously, that does impact the gross margin line. But on the other end, for example, those customers are coming direct, right? So you're not spending the money on the ad spend to get them to the site and therefore, it flows through quite efficiently to adjusted EBITDA margin and adjusted EBITDA dollars.

And that's ultimately the goal. And you actually -- when we talked about sort of some of the gross margin dynamics going forward, that contemplates something like Wayfair Rewards continuing to grow. We think it has enormous potential, and we're seeing really strong benefit from the consumers in this program. So certainly, our focus is on how we can continue to expand it. Again, knowing that you've got a trade-off on the gross margin line to the [ AC&R ] line, and that's ultimately flowing through to adjusted EBITDA growth.

Your next question comes from the line of John Blackledge with TD Cohen.

Great. Two questions. First, just any color on the potential for a rebound in the home category as we get through the year? And then second question on [ HTM ] Commerce. There have been questions around risk to advertising revenue streams for e-commerce marketplaces as we judge commerce stuff. Just curious how you guys are thinking about that.

Thanks, John. Yes, rebounding -- it's very hard to predict how going to play out. My general view is what we've been seeing, which is the -- for the housing market to recover, it's a little bit of a slow burn. And you're seeing like every quarter that goes by the percentage of mortgages that get refinanced at the current rates, keeps ticking up, but it's a relatively slow process. And that's basically not having a crystal ball. We basically underwrite something like that.

So our old plan is not really premised on how the market turns because I think that's a very hard thing to predict. And frankly, there's a very good chance. It's just a slow burn, and it kind of works itself out over a longer period of time. But it's really about -- it's a pretty dynamic market. There's really not very many folks that can offer customers the experience that they really want today. There's a lot of folks who are still operating off a model that's really not what customers are really looking for as you go forward. And so there's a lot of market share in what's still quite a big category that can move around.

And so if you go back to think about our particular initiatives and how do those impact the customer and allow for market share to move I think that's the way you could think about our strategy. And so you saw it last year allow us to kind of pull away from the market. And at an increasing rate, and we expect that to continue. And so our whole plan that we've discussed and the numbers we talk about are basically what we can make happen sort of without the housing market turning around.

And I think it will. It's a cyclical category. It's just a time horizon for when there's a next big kind of up cycle tied to housing is just very hard to predict. And so it's not something that we're putting into how we think about the market, time horizon and our initiatives. I don't know, Kate, any thoughts on that?

Yes. I think you hit it well, which is our focus is on our own measures and how those are gaining share. And you've seen that share spread actually expand throughout the course of '25, and we feel really good about the momentum going into '26. I think you had a second question around supplier adds and the impact of a genic shopping on supplier adds.

Yes. Kate, why don't I just comment on that. You can feel free I think it goes back to the type of goods. So in other words, if you want to think about these Agentic surfaces, I think the way you would say, hey, supplier adds could get impacted. It would mean that the traffic is not moving downstream to the apps or the sites operated by those commerce players, and the transactions are happening upstream on the Agenetic surface.

And so I think if you're -- if you're selling paper towels and dish soap and chips away cookies and that could be fulfilled by any number of folks, and you don't particularly care whose corrugated box shows up at your door who's a plastic back shop at your door, then yes, that traffic may never make it to the retailer the transaction may take place upstream. The traffic by not making it to the retailer, then there's no opportunity for the retailer to show the variety of products and the ad units, and that could be a big factor.

If customers are coming direct to the retailer or if customers are still making it to the retailer through these Agentic surfaces because there's more product understanding and exploration involved. Then the advertising, I think, still gets seen. And frankly, the less of a commodity is, therefore, the more browsing and the more curiosity the customer has about the offerings, the more ad units become relevant. And so we tend to think that our product road map on ads, which, in some ways, is similar to some others, but in some ways, it's quite different is a very good fit for what customers want to experience at home, and we think home is inherently more browsable and requires more sort of -- it has more of a customer curiosity and customer desire to understand what's out there than some other categories, I would like it more to fashion. And in that scenario, that presents you as the retailer offering a platform, an opportunity to let other suppliers get their products seen, and that's effectively what these ad units do.

And if you think about something like video, will certain products lend themselves to video telling a much better story than others, right? And so I think home is a great one. Fashion would be a great one. Well, is like ships like cookies, like they value the video, it could be very high, but you can say, well, that could easily get replaced too.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Nice quarter. Congrats. So the question I want to ask, I think it's probably longer term in nature, but today's results and the results way they've shown this nice market share. Wafer is definitely consistently now capturing market share. So as you look at all your data, is there anything we can call out in that market share? Are you -- do you see new customer cohorts coming to Wayfair? Are you taking more share in different income cohorts? Anything is this market share dynamic has persisted? Is there something -- is there anything new that can kind of speak to like the broadening reach of the Wayfair brand?

Well, I think a few thoughts there. So one, we're definitely seeing that -- and that whole [ K-shape ] economy thing is real. So when you do talk about higher income cohorts, you have the highest income cohort place that we offered our parable platform, the luxury platform. And that's growing at a very fast rate. You see -- you really don't see any economic strain there, especially retail brands would be the second highest level after Perigold all of them are on in [ Burland ], Johnson, Main, you see nice growth there. And then we go to Wayfair, you see nice growth there. But then if you cut it by income cohort, you definitely see more strain as you go down the income segments. And -- our data is not any different than the market data you're going to see broadly, but you do see it, and that's the case. But then what happens as you go down the cohorts.

The truth is, they're still customers buying products because let goes on and they may need something, and so then the question becomes, are you providing value? Do you make it easy for them to figure out which item provides them with the best price value? Are you in a position to offer items that are a better value than maybe a competitor this goes back to how our logistics operate, in fact, that we have so many suppliers on our platform. And so the ones who can really optimize something can offer the better value. So we do think we're benefiting through that. But I don't know, Kate?

Yes, I would just add that, Brian, that I don't -- there's not one particular cohort that's outperforming. I mean can you just point customer segmentation certainly higher income, higher net worth customers have over the last year or so done better.

But our cohorts performed pretty consistently. And I think what's unique about the platform, frankly, versus maybe other retailers in the space is we cover the full spectrum. So we cover opening price point all the way up to luxury. We cover decorative accessories to furniture, right? So we have the full breadth and we're seeing share gains really across the full catalog.

And so when we look at the share gains is not coming from any one retailer, it's not coming from any one profile type. I do think it's the compounding effect of all of these different initiatives. And I think that makes them more durable over time. And that's what's really exciting when you get into 2026.

That's very helpful. And then my quick follow-up. So again, a nice job here in the ongoing delevering of the balance sheet. But Kate, have you indicated just for some kind of parameter like a target debt ratio kind of what you're working towards?

Yes. What we've said, Ryan, is we really have a dual mandate that we're operating against right now, which is managing that ongoing net leverage down and continuing to also manage dilution.

And I think you've seen us take some really nice steps in that direction. It's really been an evolution of our capital structure over the last few years where we moved from a position where we said, "Hey, what we want to try to do here is create optionality for us". And we'll do that by improving the P&L to open up improving free cash flow to open up new sort of vectors for us. And you saw us improve the P&L considerably.

Free cash flow went up from this year from $83 million in '24 to $329 million in 2025. And that's allowed us to then move into a position where we can be more proactive from a capital structure perspective. And you've seen us do that.

So in Q4 alone, saw us bring that leverage down. You saw us, in effect, to sort of buy back some shares with the work that we did against the 27 notes. And the 28 combined, that's about 5 million of shares that we were able to manage there. And you also have seen us throughout '25 manage our dilution effectively, our burn rate has come down considerably to around 4%.

And so I think you're seeing all of the pieces in place to manage that net leverage and to manage that dilution, and that's the ongoing goal.

This concludes today's question-and-answer session. I will now turn the call back to the Wayfair team for closing remarks.

I just want to say thanks to everybody for your interest in Wayfair. And just put in one more plug to encourage you to read the shareholder letter we posted today, and we look forward to chatting with you next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Welcome to day 1 of the Global Consumer and Retail Conference. I am Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. And it is our pleasure to welcome Wayfair here, Niraj Shah, CEO, Co-Founder, Co-Chairman; and Kate Gulliver, CFO and CAO.

I'm going to read a quick disclosure, make a quick intro, ask the first question and sit down. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Wayfair has been one of the most successful stocks in consumer in the last 12 months. The premise of market share taking and a coiled up P&L has paid off, and we are seeing that leverage start to come through more meaningfully and I think the premise of investing in the brand, having a scalable model are all coming to fruition.

So my first question, 2025 has been a better year than '24 for the broader home furnishing industry. Looking back at how the year has played out, can you talk about what are some of the biggest surprises versus what you expected? And what could '26 look like?

Simeon, thanks for having us here. And everyone in the room, thank you for joining and your interest in Wayfair.

What I'd say about the category is the category had 3 years of relatively significant declines, double-digit type declines for 3 years in a row. So the fact that this year is no longer declining at that rate, say it's flattish year-over-year. I wouldn't say that, that's really a great market, but I'd say it's sort of bottomed out. And why could that be the case? Well, one is the housing market has been anemic since '22. So that's sort of now that's hurt the demand in the space, but it's kind of bottomed out.

I think consumers, as the years kind of post-COVID continue to move along. We're a category where people are always buying new things to freshen up their house and they'll have needs. Maybe their child is now at an age where they need a desk or whatnot. So things continue to evolve and change. I will say, a category cyclical and the upturn and sort of the tailwinds, that's still ahead of us.

So we're not really seeing the tailwinds. But what we are seeing is that it's a category where it's quite a large category. So our TAM between the 4 countries we're in U.S., Canada, U.K., Ireland is $500 billion. So it's a pretty big category, and it's very fragmented. It's unusually fragmented. And that's just a historical legacy. And what we're seeing is that a lot of the retailers that kind of are smaller and up through the middle they're increasingly distressed going out of business, recoiling and that share comes up for grabs.

And there's only a small number of folks who are making the investments like we are in logistics and technology and the brand where you're actually putting forth the consumer proposition where you can take share. So really, the story of Wayfair this year is less about the category having tailwinds and it's more about what we've been doing and what's driving it. But I think the category is a cyclical category. The tailwinds are yet to come.

As you mentioned or as I mentioned, Wayfair has experienced one of the most significant inflections in demand across, call it, discretionary space. Your guidance for the fourth quarter suggests continued improvement. What's your view of that growth into holiday season?

And there's this premise that you're going to always grow. We've had it -- I think you've had it that you should grow above the industry. And now you're getting to that mid-single-digit threshold. Is that the right frame of reference that we can compound going forward?

Yes. Let me just make one comment and I'll turn it over to Kate to answer your specific question.

So the Wayfair -- if you look at the last few years, the Wayfair history is sort of COVID had an initial bump that was like sort of hard to handle. And as we kind of came out of that bump as the sort of discretionary spend moved to travel, entertainment, leisure, then the ocean freight inflation hit and then housing became more anemic. We basically said, hey, look, we need to get the company back to its roots in terms of being efficient. We've gotten it overbuilt. And we had a big technology replatforming project underway.

And so a lot of what we did from '22 through '24 was honing the cost structure, getting the execution back to the place that historically had been and finishing the tech replatforming. So we entered this year back on the front of our feet. And those investments and that effort of what we had done, not only did the cost structure have come down, but just the execution and the operational sort of integrity of the business is back and the technology was now modernized to the point where we could actually move back towards a lot more feature function, a lot more half of our white-collar workforce, so 2,700 or so people roughly out of the 5,500 people are technologists, so software engineers, product managers, data scientists. And this has been a bit competitive advantage of ours historically. We're back to -- on our front feet on that.

So our story is a little more about what we've been doing. But in terms of your question, and that's kind of where you're seeing the momentum building. But in terms of guidance, let me turn it over to Kate.

Yes. I think you sort of asked 2 questions like where do we see sort of longer-term growth? And then how do we think about '25 specifically? Obviously, for the quarter, we guided mid-single digits. And I think that really contemplates a few pieces in that guidance. So as we looked at sort of obviously the momentum of the last few quarters, and us really taking share to what you said earlier, we had not really seen a market recovery, we've seen a sort of flat line and then our share gains.

And then if we look at it sort of on a year-over-year compared to the fourth quarter of last year, there are 2 pieces that influence that a bit. One, the fourth quarter last year was actually relatively strong compared to the prior quarters. And two, you all may recall that we stepped up advertising significantly in the fourth quarter last year. So we're comping and now we've brought that marketing spend level back down. And that's because as we look at sort of where efficiency lines were and as we thought about the appropriate mix of the marketing, that was where we were testing a number of things.

And so we think it's appropriate to have brought it back down. That's helped drive that contribution margin at that sort of 15% level. But obviously, if you have some inefficient spend in the quarter, that may have inflated the quarter last year. So it's important to know that we're comping over that right now.

I do think our long-term growth, we've long talked about that getting back to double digits. Now that, of course, is comprised of many things, right? It's the work that we think we've done this year that is on the changes that we've made around Wayfair verified and loyalty and the site experience, huge improvements in the site experience, as Niraj has spoken about, that over time should build on each other, but also some sense of a market recovery, of course, as well.

The home furnishing market, it depends if you add white goods or not something like mid-single-digit growth. You mentioned that there's always people refreshing things at given times. Is there any detection of like replacement cycle beginning? How do you decode that even if it's happening?

Yes. So I don't think that, that is the type of thing where there's a light switch in terms of the effect you'll see. So I do think you said, okay, so the category had like 3 years where it's declining, say, roughly 10% a year, and now we have a category that's more or less bumping along the bottom, call it, flattish.

It's still a big category. So you have, call it, round about $500 billion or $450 billion or whatever of spend. Well, what is that? A lot of that is just the ongoing needs customers have. Some of that is going to be project spend. It's going to be comprised of all of this. But what's missing from that is a lot of project spend and a lot of moving related spend that would normally occur if we had $1 million more unit sales on existing home sales.

So I think the -- what you're calling the replacement cycle has to be moving along, right, for that spend level to be where it is. But again, it's not like a significant tailwind where you're saying it's taking off, right?

Yes. It's not like we look at a certain category and say, oh, that category is a replacement. You don't see anything noticeable like that.

No. And again, categories like replacement of any given item we sell is a big bell curve distribution, right? It's not really like you will replace it at a specific point in time.

Yes. Tariffs, pricing, elasticity, a couple of things, all in one. First, I remember when we had government data, and we'll get it again, there was a noticeable step-up in home furnishing demand, late spring, and it was a little bit more forceful than other categories. It could have been related to pricing and consumers buying ahead. Not sure that's playing out. Again, you probably look at credit card panels.

So what's happening with, I guess, industry demand. Second, as pricing comes through, and again, you're not controlling it, you're just the marketplace in theory at this point. But have we seen the worst or the peak of inflation? And what's happening with like-for-likes? And how much longer can we see that curve persist?

Yes. So in terms of what we saw so far this year, we didn't see any significant pull forward of demand. What we saw a couple of pockets of time, but the pull forward was in very specific categories and just measured in days. It wasn't really it didn't amount to very much at all. So a very de minimis effect of that. So I think tariffs in general have not driven consumer behavior to drive a lot of purchasing earlier. It's just -- it sort of is what it is.

I think consumers also didn't necessarily know what to do with that okay, tariff, what does that mean? I don't know. And in terms of the reality of what's happened, a lot of the tariff-related costing has gotten absorbed either by our suppliers because they built in a higher ocean freight price, so they use up some of that or they're willing to take lower margins on their existing line and they're just focusing on new product development to drive new products in at a higher price point or the countries on the other side where maybe they've provided export incentives to help some of these companies or the ultimate producers who have been able to eat some of this.

So what we've seen come through in terms of the increases that have come to us, which then have gone to the consumer. It's been relatively muted relative to the kind of spreadsheet math you would do saying what it should be. And what I think again, it is, is that the suppliers are pretty savvy. They know that it's a demand -- lack lesser demand in the market, right? I said the category is anemic. Like if you just kind of take that to heart and you're a supplier of these goods, you know that if you raise your prices, faster than your competitors raise their prices. You already don't have a demand level you like, you're going to lose demand pretty fast to your competitors.

And the reality is you need some level of demand for everything to work for you to get the costing you're getting from the factories you buy from or from the factories you operate, and so I would say there's a lot of weariness to be aggressive on passing through costing. So as much as they can eat, they're eating. And again, I think it will really where you're going to see costing slowly trickle in over time is as new products get introduced in the market, new products always start with higher margins.

And then as the styles get more competitive with others, the margin rate suppliers get on these items reduces. And that's a normal cycle. I think where generally suppliers are going to look to recoup margin is going to be on this new product development cycle, and that doesn't happen overnight. And so even if they want to be more aggressive, introduced twice as many products in the next years, they would normally they think about things like in the next year, they don't think about doing that in a month or 2 or whatnot.

So I think it's playing out, and I just don't think there's going to be a big pricing shock that will have any sort of dramatic impact. I think the big things that are really driving the behavior of the category at a macro level is going to be the issues associated with housing, the overall health of the economy, consumers wage situation, consumer sentiment, these types of things.

And then again, the big prize for us is, while we, of course, room for the category to be healthy and have tailwinds, the big price for us is really about how we take market share. And really, the gains we've been putting up and accelerating. We're on the back of just taking more and more market share. And we think we can -- if you look at where can we be in 6 and 12 and 18, 24 months, we think we can really drive the growth rate through that vehicle.

I want to get to AI in a second and thinking about market share. But I guess, fascinated, given the supplier base, and there's been a lot of volatility in where they have to source and how agile moving from China, but now we're getting tariffs in Vietnam and India.

Can you talk about like, I guess, what -- how they're faring? And then are they prepared like for a repeal as the supply chain shifted a lot such that there actually could be benefits in the supply chain, even if there's a repeal, like what's the next several months could look like?

Yes. I mean what I would say is like -- so of course, suppliers are going to be cognizant of costs, but also where can they get the quality they need. The costs are not just the tariff-related costs. There's different production costs, different transportation costs tied to raw materials, all this. So they're going to figure out what makes sense.

The way we look at it is, I think the thing that's important to appreciate is that we have over 20,000 suppliers on our platform. And so predating this year or the year before or 3 years ago or 5 years ago, we have suppliers who make goods. In China, we have suppliers make goods in Southeast Asia. Suppliers make goods in India. In Turkey, but then places also like Brazil, in Europe, Eastern Europe, we have a lot of production that's domestic in the United States. We have production that's near the U.S. and Mexico and Canada.

So we already had this large set of suppliers with all different types of production capacity. So what happens with tariffs is that it may help one group and disadvantage another group. And then each of those groups will then figure out what they're going to do to try to become more competitive. But we're already on the kind of standpoint of we're already working with both of those groups.

So unlike a traditional retailer or maybe we put a sourcing office somewhere in particular, and we focus on a particular region. And if that region got advantage, it helped us and it got disadvantaged, it hurt us. The reality is we're already working with all of these groups. And we are facilitating these groups competing with each other on our platform to gain the interest to the end customer.

And so this type of volatility, which you don't really root for, the truth is our model is best set up for it versus 1 where you place discrete bets on which region is going to be better or worse?

The other thing I would add on the suppliers that we've spoken about it before, is that these are -- in many cases, these suppliers have been managing some version of tariffs since 2018. So these suppliers have learned to be relatively nimble. This is a category that has had tariffs for years. And I think that has helped with their sort of flexibility. We obviously then combine that with our flexibility in terms of being able to work with suppliers from all over the world.

We can bring product in from all over the world. We can source it domestically, et cetera. But I think you have a supplier base that has gotten more agile over time after tariff, COVID, et cetera, a lot of disruptions that have forced them to be more nimble in how they operate.

What is your vision with AI, a digitally native company, kind of a visionary company? What's the use case of it? Are you excited by it? And is there a top line applications, middle of the P&L implications?

So first of all, super excited about it. One statement, and then I'll answer your direct question. I'll just say when we talked about how -- what are our competitive advantages, how do we win? One big source of advantage is the supplier network I just described a second ago, right? We have this large base of suppliers. It gives us a lot of flexibility, access to great selection, it creates great price value for the customer.

A second one is around the logistics network we built like over 20 million square feet of logistics space. These are large fulfillment centers. We have a ocean forwarding operation. We have our own final mile delivery for large and bulky things where we have 50-plus delivery centers, we operate our own delivery operations.

But as long as one brand would be the fourth. And then the fifth, I would say, is the fact that we've been a technology-focused company. And so I mentioned the 2,700 people a minute ago, well, A lot of where we've got an advantage online is that technology has not been an afterthought, but rather been something that's kind of a native to my background, the background of Steve Conine and the other Co-Founder, Wayfair, the other Co-Chairman, it is as technologists, not as merchants or retailers.

Now in our company, we have folks across this whole spectrum of skills, but technology is very much at the core of how we think about things. So what's exciting about the advent of Gen AI is that even though we've been aggressively investing in machine learning for over a decade, the breakthroughs with Gen AI over the last couple of years have facilitated a whole new set of use cases that weren't plausible before.

So when we talk about a catalog of 20 million items, how do you make sure the descriptive quality, all the descriptors are there. How do you find dimensional inaccuracies. Are you talking about millions of customer service inquiries, how do you facilitate better, higher-quality answers quicker at a lower cost. If you talk about the marketing creative, we spent over $1 billion a year on marketing, how do we go from having a finite number of creatives made by people to thousands and tens of thousands, hundreds of thousands and have them get better and better at a faster rate. So there's all these things that we've already been doing. So everything I just named or things that we've already been doing.

Then you start looking forward and you say, well, what else can we do? Well, if you start looking from a cost focus in the operation, there's a lot of business process and a lot of work involved with running the company at the scale we have with over 12,000 employees that you actually say, well, we can do it very differently at a lower cost, higher quality way. And so we're going to be very ambitious with that. So there's a whole set of initiatives we have underway there.

Then if you take the other side and you say, okay, well, there's the cost opportunity. Now what about the revenue opportunity from the customer standpoint or from a supplier standpoint, what could you do to facilitate suppliers being more engaged and doing more on the platform or what can do with the customer giving the customer an experience that's better, easier, more convenient, more engaging, more productive. That's where I think the actual bigger opportunity.

So the cost is actually a pretty big opportunity, and that's still going to be playing out. But then the ability to change the experience for a given customer to be seeing imagery that's really generated specifically around everything we know about them versus the product having standard imagery or how you can actually help a customer navigate the large catalog and get an experience that's very tailored to them in a way that helps them discover new items and visualize them in a way that they couldn't before. Or I mean, there's a long list of use cases of what we're doing with suppliers and customers.

And I would say most of that is in like what I'd call pilot stage. We have a few of those pilots out where customers are interacting with them. And those are showing actually pretty engaging results with small amounts of traffic. And so I think what you're going to see is over the next stretch of time, the companies that actually have good mastery of the technology are going to be able to pull away from those who do not in the same way that that's been happening for decades.

And then folks say, well, okay. And then what about the way discovery works on these LLMs, so whether it's Gemini or ChatGPT or whichever LLM. We think that's just another big opportunity because if you think about the way we've always historically been a great collaborator with Google and Meta and Pinterest and a number of the platforms where Discovery was occurring.

The reality is they need content and information, there's ways to optimize yourself on those platforms. And then the truth is there's a degree to which those platforms then need to pass off that traffic to really make the customer experience work well. And we've always been a leader in that.

So we feel very good about the setup we have in today's Gen AI world. And we believe that will just be another kind of, if you say, well, in that fourth or fifth bucket of differentiation I talked about technology. Well, does the opportunity differentiate technology next year look higher or lower now that Gen AI exists than you would have known 2 years ago, I would say higher.

The one piece on the cost side, which you said is still relevant. The business has gotten a lot more efficient. Does it help [ Ben or Stymie ] the cost curve already into '26? And then you mentioned something this mastery of the technology where you can extend your competitive event. Can you -- is there an example that you can bring to light like how that specifically can help Wayfair or home furnishing?

Yes. Do you want to talk about the cost side?

Yes. I mean, what we said on the last call was that guide on the SOT -- or on the SOTG&A and sort of [ 360, 370 ] was a pretty good place for us to operate from even as the top line has been growing, obviously. And that, I think, is really driven by a few things.

So one, when we took out significant costs over the last years. We had said at the time that we were leaving in teams and head count investment in areas where we were growing. And thus, we believe that even though we were getting leaner and leaner and leaner, we'd be able to grow without adding back headcount. On top of that, you're now seeing an opportunity with AI to continue to grow maybe beyond sort of where it initially would have been on that line and be able to continue to get more efficient.

And you see that, I think, in areas, obviously, we've -- I think we're all well versed on the tech space where you see that. But on the commercial side, the example that I frequently talk to is the legal team. So the legal team is a very small team within the company. We have as you hopefully have seen, we are opening up more physical retail stores. So there's been an increase in lease volume.

We have one person that helps the leases across the entire network. And even though we have increased -- so she does industrial, retail, et cetera, even though we've increased the lease volume that we're doing and the number that we're having to review, because of different AI tools that, that team is able to leverage, we're able to keep that head count where it is and not add to that.

And so I think it's a good example. The work is actually -- the volume of work has increased there, but the efficiency of the individuals have gotten quite a bit better. And so I do think on the commercial operations side, we're going to -- in addition to the tech side, we'll continue to see nice opportunity there.

And the second part of your question, in terms of -- I guess one example I would just give, there's actually quite a few that are underway, but, one example is -- everyone is familiar with how you can use these models to generate imagery.

And one of the challenges inherent with these models is that if you generate imagery, you have a set of products, what you get is not always exactly the product specifically that you asked for. So it might add an extra leg to the sofa or something that, in general, wouldn't matter if it's sort of like an inspirational image. But if you're talking about like rendering products that someone's going to buy, it could matter for sure, right, because the customer may focus on certain aspects of it and then it needs to be accurate.

So we -- going back probably about 9 months, got a model working well, which is a tuned version of an existing model that was out there, but very specifically modified to be able to take a -- someone can specify a set of items for a catalog, and it could create further realistic imagery of these items that were accurate.

And then what we've been able to do over time is then figure out how to get that working at scale where instead of create -- instead of it being a relatively expensive compute process to create these images. We were able to get the compute time down dramatically with quality very high. We are now able to do it rendering it if you just take a photograph of your room, we can now take the space and we can spatially render it in the room.

And so we're now taking that. And we have a few things running on our site like [ muse ] and some other things, which allow you to put in prompts and get imagery that's inspirational we're now taking this model and we were using it for ad creatives like creating marketing creative units kind of high-volume, high-quality way.

We're now about to roll it out in some consumer-facing use cases where it's really about them now being able to see this in their shopping journey where it's actually helping them with the actual products. And so what we've seen is the conversion when you do this is actually quite high because someone can actually see exactly what they're going to get. We don't have to worry about any of the issues around returns and dissatisfaction and so on and so forth.

And so that's just like an example, but it's like the number of internal use cases we have for this is actually quite high. And we believe that we're pretty far ahead in terms of getting this to work.

And what does agentic mean to Wayfair? We're starting to focus on risks for other digital companies in terms of advertising income. For you, there could be some implications there, and there's also implications maybe for advertising spend potentially with an agent. So how do you think about both of those dimensions?

My high-level view is just that, okay, so if you have places out there where folks get upper funnel traffic, they're then going to want to monetize that a few ways. So one way, of course, is if they can have the transaction monetized there, they get some sort of take rate on that. Or if it's more economical and productive for the customer to pass off that traffic, they can effectively get some sort of advertising fee cost per click or whatever it is, right?

And if you think about what like Google and Pinterest others have done over the years, they've ended up with a blend of the 2. And the more transactional the category is, the more it's basically a take rate and the more kind of complex less transaction in the category is the more it's basically click-through kind of charge.

So my guess is what you're going to see upper funnel happen is things along those lines, where it's going to be very hard, I think, for -- someone is not going to say, okay, I want a gray sofa, just have it arrive next week. That's going to be -- that's not going to -- for most customers, that's going to be an insufficient shopping experience. And what you're going to even find is that the ability for something up funnel to actually help you get to the confidence to make a purchase of a specific item without the additional content that doesn't get presented necessarily in that interface very well is going to be limited.

So I think you're going to get a mix, and it might be different than the mix that exists today, but we're going to optimize for both sets of that mix. Then what's going to happen as you come through that funnel traffic on our site, we're increasingly building tools that basically caused you to come to us directly. So if you think about what's happened to our business over time is that we went from being purely transactional.

And when we launched Wayfair.com, one of the thesis was that we can build a brand where we can create loyal users who then come directly to us. Then over time, what we've done with the product catalog and with the various things we've done to improve the experience is we've gotten the kind of repeat rate to continue to climb.

Well, then what's happened more recently is with the mobile app. So now if someone is loyal to us, we get them to download the app. If they download the app, the odds of them coming directly to us goes up even more dramatically. Well, then we launched last year, the rewards program. The rewards program basically says, well, for a nominal fee, it's $29, you get 5% back on everything you purchase, and you get early access to sales. You have a series of benefits. So some are monetary, some are non-monetary.

And the $29 is basically, if you think about it, you spend $600 a year, it's being paid for. If you spend more than $600, you're making money on that. And then, of course, it's the nonmonetary benefits. So we also give you early access to sales members only support line, these things that customers value in different ways. So we've seen really good uptake on this program. Well, if they set up for that program and then if they don't have the app, we say, you should download the app, the odds that they download the app actually jump up dramatically because you'd say, well, hey, I already paid $29, might as well get the app.

So now if they get the app and they're in the program and now the experiences we can put through the phone because the phone has a camera in it, the phone has a microphone in it. And so you think about what you can do with AI, agentic AI and you now have a state where the customers logged in much more often than they're logged in on the [ debt ].

So what happens is like the lower funnel use cases of where we're keeping the direct interaction where we can make the experience better and better, and we do it where the traffic is like native traffic to us where we're not paying for the traffic to come in. That's getting dramatically better. So the way we think about it, it's an and, like there's no one strategy. It's like a multifold strategy because there will always be traffic that's economic for us to pay to get that traffic from folks who are starting up for funnel. But then ultimately, for someone who's engaged with us and excited, we want to create a direct relationship, right? And so if you think about the different programs we have and how they fit together, you can kind of see the picture.

And how about retail media? I forget, I'm not trying to have you tell us, but where you sit as a percentage of revenue? We roughly know where that is, but how does this all get worked out because if you have agents directing traffic, maybe you don't capture that revenue?

So the last time we talked about retail media was, I think, in December -- or the November call of last year, so 2024, and it was under 2% still. So to keep it in context, compared to other players, it is a much smaller piece for us.

The other thing that we've been saying is we've -- rather than pocket that, right? We've been largely reinvesting in the customer experience with that. So we've been improving price, delivery speed, et cetera. We think that's been the right trade-off. We talk about sort of optimizing this multi-quarter contribution margin dollars, EBITDA dollars, that has been the right investment there.

We have in the past spoken about that growing to, say, 3% to 4%. Again, that is a much smaller piece for us because of the nature of the goods. These are unbranded goods. The experience is a little bit different. This is not a grocery category, right, where it's a significant chunk of the piece. So I do think it's important just to put that in context a little bit.

And what I was -- so if you're selling things that are more transactional, say, like a 3 pack of iPhone cables, that both is a transaction that could take place upper funnel, not even on your own site because someone may not care as much about that. Just under $10 having arrived by Friday, highly rated, and it might be good enough, right?

Second, if it comes to your site, effectively, you're typically using advertising and making it a reverse auction because you'll show items in more or less whatever order and so the suppliers are bidding on that. So that's where the sites where you find have a much higher percentage of retail media. It's where it's more of a commodity. Because in that sense, you really can effectively use almost all the slots or virtually all the slots on the page.

In a category where there's a lot more nuance and kind of customer curiosity engagement around it. What happens is that traffic either originates with us or gets to us earlier in the funnel. And then the customer is still not sold on just buying that item. They want -- there's a lot of product discovery that still happens. So the opportunity for us to continue to deploy retail media the way we are, which allows suppliers to have their items be seen by customers when there's a propensity that this customer might be interested in it, that's still very much there.

Because customers -- they want to really make sure that they understand their options before they make a purchase because we're not really -- very little of our business are commodity items like we don't really sell a lot of commodity items. And so customers put more care into the thought process of the purchases that they make with us.

So I think we're -- the category we're in is set up well. And I think the approach we're taking is still set up well. So I think the retail media growth we can have continues to be there. And a lot of the growth is not necessarily like the existing types of media units getting more value and volume, which is certainly a piece of it, but it's also us adding additional types of ad units, which we're working on. We have a good product road map there. And those types of ad units, we believe, when we think about how we think things are likely to evolve are still very much there.

You're gradually opening stores. How is retail? How is it in Chicago land, where it's probably your most representative foot forward. It's probably in the comp base by now. And now I'm intrigued by Perigold and what it's doing to the market. And is there any AI piece where people want to actually come in and physically touch and feel market effect?

Yes. So for Wayfair, we have 1 store open. It's in a Wilmette of Chicago. It's 150,000 square feet, and it opened in May of '24. We announced 3 stores will open next year. Early in the year, there's 1 in Atlanta, midyear, there's 1 in Columbus, Ohio. And late in the year, there's 1 in Denver, Colorado. So we're pretty excited about what's happening with the Wayfair store in Chicago, and we're excited to start replicating that success and driving that forward.

For Perigold, we opened the first 2 stores this year. So 1 in Houston in Highland Village -- Highland Park -- Highland Village, I think it is and 1 in West Palm Beach, Florida, just about 2 months ago, the 1 in West Palm Beach, and they're off to a great start.

And so we now have stores open for all 5 of our brands. We think we're proving out the -- what the right size store, what the model is. The Perigold stores are not 150,000 feet, but they're large. There are 20,000 in Houston, 30,000 square feet in West Palm Beach and the early numbers and reception is great. So we're going to continue to prove it out and then scale -- continue to scale it up.

I think there's a very big opportunity where customers -- it's a category where customers don't necessarily feel fully fulfill just interacting online. So depending on the use case, online might be preferable in-store might be preferable, [ IDA ] is the ability to go back and forth in whatever way they see fit. And then if you think about what we've built, where we have a household brand, we have a big customer file. We have a great product assortment, we have good availability of inventory. We have a delivery and fulfillment network.

Stores are effectively the front end of all of that, but we don't need to build all these other pieces you would need to build if you were going to build a brick-and-mortar retailer. We already have all those pieces. So we're in quite a good position to actually kind of round out the customer experience by adding physical stores.

Close out on the incremental margins. There was a profound inflection a couple of years ago with how you restructure costs. And we were of the mindset that mid- to high teens EBITDA -- incremental EBITDA margin is the right way to think about the business until you blew past that this year.

So thinking about investments that you need to make or scalability of the business going forward, does that framework still apply?

Yes. I think that is overall a good way to look at it. And so I want to talk through a few pieces. So one, we've tried to articulate the contribution margin concept because that is very much how we think about it, which is the gross margin less the CS&M, less the marketing spend, right, the ad cost as a percent of net revenue. that, you've seen a really big step-up this year on that contribution margin.

Now some of those year-over-year compares are unique. So I want to make sure that folks are not orienting around some of the year-over-year compares for next year because we did step up marketing spend in '24. So we stepped up marketing spend Q3 and Q4 in '24 and actually been in Q1 of '25 and then that pulled back, right? So I think it's important to be clear that we're sort of comping a unique period there. Then the other piece, but we do think that can sort of stay at the 15-ish level.

The other piece is obviously to the point that you made, Simeon, around the cost structure on the team, on the SOTG&A. And again, we have been comping some of those improvements. As I said, we think that can hold in. So if you're growing. So if you keep that sort of flat and you have your contribution margin at 15% and your top line is continuing to grow, then you're obviously growing your EBITDA dollars faster than that rate. And so you're seeing a really nice flow-through to EBITDA, and that is what you saw the last few quarters, and we think that, that construct remains.

And does that support feed into, I think, what's the last time you published the long-term margins of getting to...

North of 10%...

Low double-digit EBITDA margin.

Yes, that would continue to drive that towards the north of 10%.

Sneak in one last 1 on advertising spend because there were moments in the last 12 to 18 months where it looked like there was some deleverage picking up. And it's hard for us to say which period did we get to pay back.

Now it's slowing down, leveraging again and it looks like you're getting the payback. Is there an unlock? Or this is just the back and forth, ebb and flow of managing this business?

I mean I think it's important to not look at advertising costs solely in isolation. And so this is why we talk about contribution margin a lot. As you have gross margin, you have ad cost, and there's different things you might do in other words, like rewards when you joined the rewards program...

That's a great example.

You get 5% back. Well, if you think about what we just did is we hurt our gross margin. Because what we know is that you're actually going to buy more than the $600 since breakeven. We actually see a significant step up. So we actually hurt gross margin percentage.

But you come back to reps. So they add cost efficiency is dramatically higher. I mentioned you download the app, you come directly, right? And so if you look at it from a profit standpoint, it's an incredibly profitable deal. So you'd be happy to do this all day long. But you'd say, oh, well, your course margin isn't going up. But your ad cost is going down. But that's really good. And then at the same time, there's things like a TikTok as an advertising channel is 1 that we arguably were late to, but as we figured out a set of things there, it's growing nicely.

That's a good place to spend advertising we're keeping on a very tight payback constraint, but we're happy to scale that. So you say, that's causing your advertising to go up, up, but when I look at it over a multi-quarter basis, it's a highly profitable thing to do. So each of these things add up to different puts and takes. And so I think the way you need to think about it is, again, to really look at the contribution margin and to say, hey, I want to know what your revenue growth rate is. I want to know what your contribution margin is, and I want to know what your EBITDA dollars are growing at.

Because if you're doing those things, should I really care about the trades you're making in each one of these many use cases that then you add together and give the P&L because I kind of want you to make each individual trade as smart as you can, right? And that's what we're focused on.

On that note, congratulations on a great '25. Good luck holiday season and into '26. Thanks for being here.

Thank you for having us. Thank you.

Thank you, Simeon.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Third Quarter 2025 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the call over to Ryan Barney, Head of Investor Relations. Ryan, please go ahead.

Good morning, and thank you for joining us. Today, we will review our third quarter 2025 results. With me are Niraj Shah, Co-Founder, Chief Executive Officer and Co-Chairman; Steven Conine, Co-Founder and Co-Chairman; Kate Gulliver, Chief Financial Officer and Chief Administrative Officer; and Fiona Tan, Chief Technology Officer. We will all be available for Q&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 fourth quarter of 2025. 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-K for 2024, 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. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation, which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded, and a webcast will be available for replay on our IR website.

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

Thanks, Ryan, and good morning, everyone. We're pleased to be here today to discuss our third quarter results with you. Q3 was a great success. Share gain further accelerated with revenue growing 9% year-over-year excluding Germany. This came in tandem with more than 70% year-over-year growth in adjusted EBITDA. Our 6.7% adjusted EBITDA margin marks the highest level achieved in Wayfair's history outside of the pandemic period. As we've promised, substantial profitability flow-through is powered by a strong contribution margin and fixed cost discipline as our business has returned to growth.

As we shared in Q2, we see the groundwork we've laid over multiple years directly driving share capture and profitability despite a category that remains stubbornly sluggish. Existing home sales continue to bounce along the same multi-decade lows we've seen since late 2022. Decreasing short-term interest rates certainly loosened financial conditions, but mortgages are a longer-duration product and will require more relief in long-term rates before we start to see a broader unlock in mobility. In that context, it's important to note that our plan to grow is driven by Wayfair-specific factors and is not reliant upon a recovery in the housing market.

In spite of the depressed housing environment, we've been encouraged to see that the category has moved past its multiyear trend of double-digit declines. Based on the data we have, the category started down low single digits, has been inching closer and closer to flat over the course of 2025, though it remains structurally underspent against the pre-pandemic baseline. This directional improvement is all the more encouraging given the uncertainty our industry has faced around the evolving tariff landscape this year. These changes have only served to reinforce the relative strength of our model, consistently delivering the best value and experience to our customers while simultaneously enabling our suppliers to win share and grow their businesses.

That strength should be very clear in the KPIs themselves. Revenue growth was driven by order momentum. We saw orders grow by over 5% year-over-year in the quarter, including new orders growing mid-single digits for 2 quarters in a row. Active customers saw sequential growth for the first time since 2023. AOV was up roughly 2% in Q3 driven almost entirely by mix shift as our higher-end brands and B2B outperformed the growth of the Wayfair business. Competition remains intense amongst our suppliers and provides a structural incentive to keep prices as low as possible to win share on our platform.

To measure our momentum, we anchor on quarter-over-quarter trends as a barometer of success. Q3 this year was the best sequential growth we've seen in the third quarter since 2019, following strong trends from the second quarter. I'm sure many of you are wondering how much of this is intrinsic growth improvement versus something more transitory like pull forward due to tariffs. The only instances of pull forward we've identified came from a very short-lived increase in large appliances demand back in the early spring and a similarly short-lived increase in vanities late in the third quarter. Neither of these moves the aggregate in a meaningful fashion. We see our outperformance as structural share capture driven by our strong day-to-day execution against the core recipe, the early success of the new programs we've been able to launch and from the broad gains we have brought to bear from our technology team.

Since the start of the year, we've highlighted the strong returns we're seeing from initiatives like Wayfair Rewards, Wayfair Verified and our growing fleet of retail stores. These successes all reflect the deeper engineering resources we've been able to dedicate now that our multiyear replatforming is largely complete. At the turn of the decade, we made the decision to modernize our technology stack, including migration from data centers to the cloud. The simplest way to think about this is that by replatforming our code base, we can now be much more agile and, as a result, meaningfully ramp up the pace of innovation and what we can offer our customers and suppliers.

We completed the bulk of our replatforming earlier this year and the timing couldn't have been better as we are in the early innings of a new phase in how customers shop online. While AI has certainly become the buzzword of late, we've been on the forefront of machine learning for a long time, leveraging algorithms to drive everything from pricing decisions to marketing investments. Today, there is new ground being broken with the proliferation and sophistication of generative AI, and Wayfair is a leader in the application of AI in retail.

To that end, I'm excited to have Fiona Tan, our Chief Technology Officer, here today to spend some time diving deeper into the ways we're bringing Generative AI to bear across all of Wayfair. Let me now turn it over to her.

Thank you, Niraj, and good morning, everyone. I'm thrilled to join you today to share how our technology teams are shaping the next chapter of Wayfair's growth, powered by a long leadership in AI and machine learning and now by pragmatic advances in generative and agentic AI. Wayfair has always been a technology-focused, customer-obsessed company. Our promise to customers is to make it easy for them to create a home that's just right for them, and the rapid evolution of AI represents a considerable opportunity to deliver on that promise in new ways.

Our long history of applying machine learning, from the predictive models that power our core pricing and marketing engines to the algorithms that help us classify and organize our vast complex product catalog, means we're not starting from zero but instead scaling from a position of strength, backed by operational discipline to measure impact rigorously.

Our investments in AI are pragmatic and results-oriented centered on three key strategic outcomes. First and most importantly, we are reinventing the customer journey. We are moving beyond simple personalization to create truly intuitive and inspiring shopping experiences that guide customers from the initial idea to the perfect product for their home.

Second, we power this best-in-class experience by supercharging our operations and our teams. We are embedding AI into our core processes to make them faster and more efficient and have provided generative AI tools to every employee. This allows us to deliver for our customers with a level of excellence that is difficult to replicate.

And third, we are powering our platform and ecosystem. We are building tools that make Wayfair the best possible partner for our suppliers and are ensuring our catalog is seamlessly integrated into the next generation of AI-driven commerce.

Let me walk you through each of these. Starting with the customer, we are using generative AI to make the shopping journey more intuitive and personal than ever before. We think about this as an AI-powered growth flywheel to inspire, engage, learn and personalize. It all starts with inspiration. And we're using generative AI in multiple ways to help customers discover products they love. We developed Muse, our proprietary AI-powered inspiration and discovery engine, to create shoppable photorealistic room scenes to capture the attention of low intent customers and spark discovery. Muse offers a visual browsing experience entirely powered by generative AI.

We then incorporate learnings from Muse into our new Discover tab in our app, offering an endless loop-based shopping experience that turns installation directly into action, delivering a measurable lift in conversion as well as visit duration for customers that engage with the tab. In parallel, we're using generative AI to understand what inspires our customers beyond just their searches and clicks. Our new interest-based carousels are driving incremental revenue uplift by matching product to every customer's lifestyle and aesthetic with contextual signals like location and weather coming soon to enhance personalization.

Once the customer is inspired, we engage them with a suite of AI-powered tools that builds confidence and removes friction from their journey. We've evolved our on-site search to be more intuitive using a sophisticated LLM to move beyond traditional keyword matching. This allows us to interpret what our customer is looking for with far greater nuance, connecting to the right products with greater position. For shoppers who have picture but not the words, our visual search allows them to simply upload or snap a photo and instantly find similar products from our catalog, turning real-world inspiration into a shoppable reality.

When customers have specific questions, our AI-powered assistant provides instant reliable answers by drawing directly from product specifications and reviews. These interactions feed our ability to learn, and ultimately to personalize. This is where we combine AI scale with our unique home expertise. We had our own interior designers annotate nuanced style pairings then used LLM to scale this understanding across our entire catalog. The results are compelling. Customers who see these designer quality personalized recommendations are 1/3 more likely to save, add to cart or order products, reflecting a much higher confidence in our selections.

And we are just getting started. We are now preparing to test a new generative AI feature called, Complete the Look. What's unique here is our proprietary ability to generate a complete styled room scene where the products visualized are directly inspired by real shoppable items in our catalog. This allows customers to move from individual product ideas to a complete shoppable design plan more intuitively than ever before.

None of this is possible without world-class execution. This brings me to our second pillar, supercharging our operations and our teams. A core part of our operational excellence is the quality of our product catalog itself. We are using generative AI at scale to improve the accuracy, consistency and completeness of our product information. This makes our catalog more reliable for customers and simplifies the management process for our suppliers. This catalog enrichment is already delivering an impactful lift in add to cart rates. At the same time, we are using AI to automatically detect and process difficult items, which keeps the customer experience clean and is projected to reduce the cost of this review process by 3 quarters.

With a more reliable catalog as our foundation, we deliver superior customer service. We recognize that the unique nature of our category, which involves high consideration and complex orders, requires a sophisticated approach to service. For immediate 24/7 resolutions on common inquiries, we use fully autonomous conversational AI agents. For the more nuanced situations that benefit from human expertise, we've equipped our associates with a powerful real-time AI copilot, which combines several advanced capabilities. It uses our patent-pending intent-based routing to connect customers to the right expert on the first try and it uses advanced reasoning models to recommend better, more proactive solutions when a standard replacement won't be enough.

This holistic system is designed to lift first contact resolution and post contact satisfaction, all while reducing our cost to serve and driving down waste. This focus on a reliable experience also extends to trust and safety. Our multimodal AI now uses computer vision to detect fraudulent imagery in real time, better protecting both our customers and our suppliers.

Thus, AI is evolving our operations, it's also up-leveling how we work. We are committed to ensuring that every Wayfarian can benefit from this AI transformation. Our engineers are integrating leading coding assistants to accelerate development cycles, while business teams, marketing and merchandising use generative tools to automate repetitive tasks and focus on more strategic work. We have provided a generative AI license to every single employee and we are fostering a culture of hands-on innovation that goes beyond just structured training.

We're encouraging our entire team to find new ways to create value with these tools through programs like our Gen AI Innovation Challenge where any employee, not just technical ones, can submit ideas that solve real business problems. In fact, many of these have already been implemented across the organization today. By using leader boards and other engagement models, we are making AI experimentation part of our everyday culture. This mindset where our teams are learning with the same urgency and curiosity we expect of the technology itself is fueling innovation that translates directly into better supplier tools and richer customer experiences.

Finally, our third pillar is about powering our platform and ecosystem. We win when our partners win, and that means using AI to both improve their operations and to drive more qualified customers to their products. For our suppliers, we've developed an AI agent that automates service ticket classification and resolves a portion of inquiries without manual intervention, a truly agentic implementation that we expect to drive measurable savings over time. Simultaneously, we are using generative AI to put those suppliers' products in front of more customers. We've utilized LLMs to rapidly scale and optimize our SEO titles, leading to greater Wayfair presence in Google search and a higher volume of free traffic.

We've also used gen AI to create superior titles and ad copy for our Google Product Listing Ads, driving strong, consistent results and a powerful synergy between our organic and paid marketing performance. This leadership in search is now the foundation for our work in generative engine optimization to ensure our products are not just discoverable but are selected and recommended by these new AI platforms.

Looking ahead, we are actively shaping the future of agentic commerce with a clear dual-pronged strategy. First, we view this as a new additive channel for growth, so we will be where our customers are. This begins with ensuring a vast and specialized catalog is deeply integrated and accurately represented on leading AI and search platforms including Google, OpenAI and Perplexity. This provides the foundational third-party truth on our selection, pricing and delivery promises. But we are moving beyond just discovery to enable seamless transactions. Our plan is to make our catalog fully transactable on leading AI platforms, allowing customers to shop with confidence and ease wherever their journey begins.

Simultaneously, we are building deep competitive moats to ensure our own site and apps remain a premier shopping destination. These moats are built on our unique advantages, a powerful inspiration and personalization road map fueled by our proprietary data, our foundational strength in selection and fast delivery and unique programs like Wayfair Verified that build customer trust and confidence. That belief in our unique advantages underscores how we're thinking about differentiation in the AI era. In a world of AI-driven commerce, retailers with a large, well-detailed catalog of products, verified supply chains, transparent fulfillment and deep technology capabilities are advantaged.

We believe that customer attention will flow to the most trustworthy API, not the loudest ad. The disciplined investments we've made in our core data and technology architecture position us to deploy these technologies safely and at scale. This turns our deep technical heritage into a sustained competitive advantage, and it gives us confidence that we're not only keeping pace with the AI revolution. We're helping lead it.

Thank you. And now I'll hand it over to Kate to review our financials.

Thanks, Fiona, and good morning, everyone. Let's dive into our financial results for the third quarter before we move to guidance.

Starting with the top line. Revenue grew by 8% year-over-year on a reported basis and 9% year-over-year excluding the impact of our exit from Germany. We saw healthy growth across both our segments with the U.S. business up 9% year-over-year and international up by 5%.

Let me continue to walk down the P&L. 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 third quarter came in at 30.1% of net revenue while customer service and merchant fees were 3.7% and advertising was 10.6% of net revenue. As I discussed back in August, our focus is on improving contribution margin, that is gross margin less customer service and merchant fees and advertising, and balancing the trade-offs between these three line items. The structural gross margin improvements we are achieving through initiatives like supplier advertising and logistics provides us with a wider envelope of dollars to reinvest back into the customer experience. We're doing this while driving savings in other lines of the P&L such as advertising.

We think about where the ROI of each dollar of spend is maximized on a multi-quarter basis as we map out the mix of investments in the customer experience and advertising that generate the most EBITDA dollars. The net of this was a contribution margin of 15.8%, up 150 basis points year-over-year and our best result since 2021. The bulk of this was driven by the considerable leverage we saw in advertising this quarter. We're continuing to see the dividends of investments made in prior quarters paying off as well as the compounded effects of efforts to improve the mix of free versus paid traffic.

Last quarter, I mentioned the success we've had in driving adoption of our mobile app, and we saw that ramp even further in Q3. In fact, the revenue from our mobile app grew by double digits year-over-year and total installs grew by nearly 40%. Some of this reduction in ad spend is onetime in nature. We ran several holdout tests in the third quarter, which drove the outperformance versus guidance. These tests are important as they help us refine our perspective on incrementality spend and play a valuable role in refining the machine learning algorithms that drive our advertising operations.

Selling operations, technology, general and administrative expenses totaled $360 million for the quarter. In total, we generated $208 million of adjusted EBITDA in Q3 for a 6.7% margin. This is a remarkable achievement, up by more than 70% year-over-year.

We ended the quarter with $1.2 billion in cash, cash equivalents and short-term investments and $1.7 billion in total liquidity when including our undrawn revolver. Cash from operations was $155 million, offset by $62 million of capital expenditure. Free cash flow was $93 million, an improvement of more than $100 million compared to the third quarter of last year. The improvement in our profitability picture has demonstrably changed our capital structure profile. A year ago, our net leverage is more than 4x trailing 12-month adjusted EBITDA. Today, that sits at 2.8x, well over a full turn reduction.

Having managed our 2025 and 2026 convertible maturities, we've begun to turn our attention to our 2027 and 2028 bonds, which have strike prices of $63 and $45, respectively. In August, we used roughly $200 million of cash to repurchase about $101 million of principal on our 2028 notes. Given the trading price of the stock, these bonds essentially trade as an equity substitute. So said differently, the $200 million of cash was effectively an offset to roughly 2.2 million shares of potential dilution and future interest expense through 2028, all while reducing the gross debt balance outstanding.

We are operating with a dual mandate: reducing leverage while also managing dilution, and you'll see us continue to balance these goals opportunistically in the future.

Let's now turn to guidance for the fourth quarter. Our quarter-to-date performance is skewed by the timing of our Fall Way Day, which ran in early October last year and is running right now for 2025. Controlling for that timing, we're seeing strong performance over the first month of the quarter and we're excited about the holiday season ahead. Going forward, we're planning to move away from giving quarter-to-date results given how often it is contorted by comparability issues and will instead just anchor on the full quarter guide.

For the fourth quarter, we would expect net revenue to be up in the mid-single digits year-over-year, which includes the roughly 100 basis point drag from the impact of closing Germany. Turning to gross margins. We will continue to anchor you to the 30% to 31% range, likely coming in at the low end of the range once more as a function of both our reinvestment as well as the typical seasonality we see in the holiday quarter. Customer service and merchant fees should be just below 4% and advertising should be in an 11% to 12% range of net revenue.

As I mentioned a moment ago, the outperformance we saw in Q3 was driven in part by the holdout test, which were onetime in nature. While we're certainly making strong progress on driving structural improvement in ad cost as a percentage of net revenue, we would expect Q4 to come in modestly higher than Q3 in the absence of these tests on top of our typically higher spend in the final months of the year.

The net of all these moving pieces should get us to a place where we drive a contribution margin that is in line with where we were in the second quarter of this year and a considerable improvement on a year-over-year basis. SOTG&A is expected to stay in the $360 million to $370 million range, likely at the top end of the range given seasonality in the holiday quarter and some spend here tied to revenue like cloud computing costs. This continues to be the appropriate run rate to think about as we look to 2026.

Following this all down, we anticipate adjusted EBITDA margins in the 5.5% to 6.5% range for the full quarter.

Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $80 million to $100 million. This includes approximately $20 million of impact from the CEO performance award approved by our Board in September. You should expect this to become a recurring part of stock-based compensation in the quarters ahead. The accounting treatment begins expensing the fair value of the grant today, but I want to be clear that there are no shares being issued right now nor will any be issued until the share price targets are met.

Depreciation and amortization should be approximately $71 million to $77 million; net interest expense approximately $30 million; weighted average shares outstanding approximately $130 million; and CapEx at a $55 million to $65 million range.

I want to now wrap up by taking a moment to turn the clock back to where we began 2025. In the shareholder letter, New Urgency, published in February, they talked about our three core goals for the year: one, focus on tight execution to drive profitable growth through taking market share and what is likely a continued challenging market; two, continue improving the financial position and strength of the business; and lastly, invest in building the five long-term moats of the business.

We're very proud of how much we've been able to achieve across each of these. As we turn our sights to 2026, we plan to invest judiciously to grow the business at a rapid pace while growing adjusted EBITDA faster than revenue. None of this would be possible without the work of an exceptional team. So I want to end today with an enormous thank you to everyone that worked so hard to make all of this possible across the entire Wayfair team. And with that, we hope everyone takes a moment to check out the exciting Way Day deals.

Thank you. And now your Niraj, Steve, Fiona and I will take your questions.

[Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan.

This is Jolie Wasserman on for Chris. Our first question is more how you're thinking about the way the consumer is going to show up this holiday since you did move Way Day back a few weeks and away from some of these more major promos out there across retail like Prime Day. Does this mean you're anticipating spending is going to be more spread out this year? Or are you seeing more of an urgency to get out ahead of the potential 232 tariffs?

Jolie, this is Niraj. Thanks for your question. Well, I mean, there's kind of a few different things wrapped in there. What I would say on the tariffs, we really have not seen any consumer behavior based on the tariffs. So as we mentioned earlier on the call, the minor, minor pull forwards we saw were -- lasted days in duration and were very small. So we don't really think there's any tariff-induced behavior. We actually think the holiday shopping is probably going to be similar to past years.

And so what we did with Way Day is we actually went back to the timing that we actually had not last year but the 2 prior years. So it's the same timing of '22 and '23, which is late in October. And last year, in '24, we did it earlier in October. And what we kind of came to the conclusion for is that we think that the period that we've always done it in, late October, is probably more optimal, and so that we just went back to that. So I would just -- you should just view it is, yes, we're running kind of a very similar seasonal cadence to what we traditionally do.

That makes sense. And our second question is just more broadly how you're thinking about 2026 abilities to lap accelerated share gains, whether price increases are expected to become a bigger driver and also just how you're thinking about getting some more of the gross margin advertising margin expansions for 2026 more broadly?

Yes, yes. Great. I mean, so for 2026, what I'd say is we're definitely focused on driving further top and bottom line growth, and EBITDA growth will definitely outpace revenue growth. And I think the way we're going to do that is kind of what we've been talking about since the beginning of this year, which is that since late 2022 through now, we've taken share through continued investment and improvement in the core recipe which is price selection, speed and availability.

But then what we've been able to do this year is augment that with the two other pillars of growth that we've historically had through the bulk of our 20-plus year history, which is that we always improve the recipe, which is that core consumer value proposition. But then we augmented that with the second pillar, which was really about new programs and innovation. So some examples of what's been added over the last year and is really scaling is, for example, what we're doing in physical retail stores, our loyalty program, Wayfair Rewards, what we're doing with our editorial program, Wayfair Verified. Those are three notable examples but there's a long list.

And then the third pillar, and the third pillar is that we have a technology organization of around 2,500 people. And these are software engineers, data scientists, applied science folks, product managers, designers. And these folks, generally, the bulk of their effort is focused on improving the customer and the supplier experience, which drives up conversion, drives up traffic, allow suppliers to do more for customers. It compounds through repeat gains. And what we did for the last 2, 3 years since 2022 is we spent a couple of years working on reshaping our organizational model so that we could be lean and focused and execute well.

But we also spent about 3 years on a very large technology replatforming effort for almost all of our core systems. And as we've gotten substantially through that by the end of last year, we've been seeing the technology cycles return to driving the business forward. So that's part of why we're able to launch all the new programs I mentioned in the second pillar, and it's also contributing a lot to the experience, which is the third pillar. So when you take those three pillars of growth, you see how they provide this compounding benefit. You can then see how we've been gaining momentum through this year. And you can see how it should go into next year, you'll see further top line growth, further bottom line growth, and you'll see EBITDA growth outpace revenue growth.

Jolie, I want to touch on your question around how to think about the gross margin and the ATR for next year because I think that speaks to a really important point that we spoke about a little bit in the prepared remarks, which is thinking about that contribution margin. So the gross margin less the customer service and merchant fees less the marketing expense gets us to that contribution margin. Obviously, it's been sort of 15%-ish plus over the last few quarters. And we increasingly think that's a thoughtful way to sort of look at the business, right? We want to make sure that, that contribution margin is in a very healthy place.

And then the flow-through to EBITDA is really strong because that SOTG&A line below that is holding relatively constant. So as you think about that contribution margin staying healthy, and that could be some interplay between gross margin and marketing spend and then the flow through being quite strong, that's how that EBITDA dollar growth is really outpacing that top line growth. And we're very focused on the EBITDA dollar growth continuing.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

I want to first ask about sales, a little follow-up to the prior question. So your top line is running in a place where I think it aligns with the slide deck that you put out, I think, in 2022, mid- to high single digits, if not maybe close to that. Do you think the business is now at this inflection point where it continues to grow in that level? You said it was past some certain technology investments. I realize you can't control what the industry does, but it feels like you've gotten past a bunch of bumps or tough compares plus industry normalizing. So do you think we've gotten past this inflection point?

Yes. So I'm not 100% sure what you refer to. I think you might refer to the Analyst Day that we had in the summer a little over 2 years ago, in the summer of '23 and August '23. There, I think we were talking about kind of the long-term potential of the business, and we provided a view as to how the revenue growth could be kind of meaningfully into the double digits. But when you think about our different lines of business and the initiatives we had and the potential and then getting past the technology replatforming, et cetera, and that we're still very bullish on how this compounding benefit will continue to accrue and when our momentum will climb. And then we also give a view on EBITDA growth and how that could grow over time and get meaningfully into the double digits as well.

And you're seeing that play out as we go through time. And we think a lot of benefits are still ahead of us as we get the benefits of volume, as we continue to deploy technology, et cetera. So I would say we feel very good about the direction we're on from that meeting we had 2 years ago.

Yes. I think I'd maybe add to that. I think what you're seeing here is share gains, as Niraj spoke about, that are compounding frankly because of the initiatives that we started a year plus ago, so things like the replatforming being completed and tech advancements that Sharon (sic) [ Fiona ] spoke to, our loyalty program, Wayfair Verified, over time, you'll physical retail. And so you're seeing that ongoing momentum. Obviously, there's a macro context that we're operating in and we think the category itself right now is flat to slightly down, but that macro context could move things around on the top line.

Okay. And then a quick follow-up. Any predictions -- if paid search moves more towards agentic, how does that change the advertising line? Is this something you can think about? Is there visibility on this? Or it's just theoretical at this point?

Well, I think we can both think about it and it is theoretical at this point. So I'll give you some thoughts. But it's very, very early, right? And so I think the way to think about it is so there's no question that the use of the chatbot is growing quite quickly. And you could see how search will then evolve, and whether it's the search interfaces become -- that exist today like a Google search becomes more agentic or whether it's that chatbox become a new way to search, there's different things and they could all emerge into whatever that new version is.

At the end of the day, the goal historically of search was to show the best answers to questions. And the goal of these agents is to help you find the best answers to your questions. And it's just a different way of doing it, trying to get you closer to answers that help you. Ultimately, if Wayfair is providing the best offerings and provides the best solutions for people, we're going to surface really well. Ultimately, whoever are the media owners of those properties, there's probably a high chance they're also going to monetize them through advertising, right? And so I tend to think that paid search may turn into a different form of paid service and organic search will turn into a new service of how organic answers are provided.

We've had a long history of being a great partner to the media partners, whether you think about Google or you're thinking about Meta or you're thinking about Pinterest and the list goes on, been codeveloping products with them, being an early tester of them, being very optimized for them in the early days. And so the work we're doing with the various AI chat LLM companies is no different, and we're working with a number of them very closely. And that's part of the benefit of having a 2,500 person technology organization and being very technology oriented, how we think about how we approach the business and being led by folks who are definitely closer described to being engineers than merchants.

Your next question comes from Peter Keith with Piper Sandler.

Great results, guys. So clearly, there's some share gains happening with your business. But it does seem like the industry backdrop is getting better, which I think is surprising to some investors given a sluggish housing market and tariffs. So Niraj, I was wondering if you could just opine on the industry backdrop, if you think it's getting better and, if so, why and perhaps maybe there's some type of replacement cycle that's already starting up.

Yes, sure. So I guess I think the way to think about it, I think, is that the industry backdrop is getting better and a different way to say that is, it is no longer getting worse at a fast rate, right? And so if you think about kind of multiple years of double-digit declines, that means that you've kind of come pretty far off of where you were. And if you take the trend back to pre-COVID, we're quite far off what the long-term trend had been. Now what's happening now? Well, it's no longer declining at that type of rate, right? We think it's more like flattish.

So one way to describe that is that it came off perhaps you would call a high. It broke trend. And then it basically is kind of "bottomed out" or it's in a low -- a depressed low of some sort. And when you're at that depressed low, things like the replacement cycle, folks who move still for whatever reason, the degree that household formation is still happening, those things are still going to cause people purchasing items. So it's not like the lowest where you purchase 0 in the category.

But then there are cycles, and you're seeing that. Every quarter that goes by, the percent of mortgages below 4% ticks down because some amount of folks refinanced to a new mortgage because there is a reason to move. There is a reason to sell their house. There is something that overwhelms the fact that perhaps they had a low-cost mortgage and they're going to end up with a high cost mortgage. So it's happening, just happening slowly. And so I do think when you look forward, you're going to see that housing is at a low right now existing home sales. It will end up higher. You'll see that the purchasing in the category will end up higher. And we do think there's kind of a long-term trend that probably most things revert to the mean over some period of time, and it will probably revert to the mean over some period of time.

So I think that's where you can see that it will get better. It's just less clear that it's an acute upturn. And that's why we took some time this morning in the comments to try to clarify the strategy we have and the way in which we have the compounding gains and the compounding share gains and the compounding benefits to growth and even more to EBITDA is really around things we control. So some folks refer to that as self-help. But basically improving the recipe is something we can do, launching new programs, innovation, growing those is something we can do. Investing our technology into improving the customer supplier experience is something we can do. And so we think that is how we had only $12-ish billion in revenue out of $500 billion in the TAM have a lot of room to take share and grow even while the category is more anemic. And as the category gets more energy into it, we would expect that to accrue to even more benefits to growth.

Okay. That's very helpful. I guess I had a follow-up question, too, from a topic that's been kind of ongoing during the quarter, which was that Amazon had stopped advertising through Google Shopping early in Q3. And I guess I'm wondering if you think this provided any benefit to sales or maybe add leverage during the quarter.

Yes. So Amazon, they for a certain period cut their spending in that certain channel in half. Then they came back in and then they took spending down entirely. Then they came back in certain countries. And so they've done various things, probably different versions of testing what it's worth to them and the like. Most advertisers that do hold out tests. We mentioned that we just did some recently of some large-scale. Just you want to make sure that your advertising is productive and incremental and paying off in the way that you would need it to want to continue.

That does not -- what they did does not have a very big impact on us at all. And the reason is just that where they're advertising. When you think about the pockets that we specialize in, we're a very significant player already. So what happens is when you think about who surfaces on these paid services, in the auction, there's always multiple folks. And if you're already at a pretty high share. It doesn't really matter whether someone else comes in or out, they just get replaced by someone else. And it doesn't necessarily make sense for you to take more share because you're already purchasing the optimal amount of share that is worth to you.

And the places where they may advertise where it's less relevant to you, you're not going to go advertise there anyways even if the price went very close to 0 because it doesn't benefit you. It's not something that you participate in, not a category you sell in or where your offering makes sense to advertise. So the net effect is, I'm sure, for some folks who maybe were just under them in share who -- Amazon's bidding price was such that, all of a sudden, the inventory opened up and they're the next person who could grab it, it would benefit them. But that's going to be very narrow in who it would help. And in our case, given our specialist nature and where we focus and the degree of share we have there, it didn't really have an impact on us.

Yes. Peter, to your question around sort of what drove the ad spend leverage in the quarter, I would think about it as a few folds. First, we are seeing nice gains in free traffic. We've talked about that. I mentioned in the prepared remarks increased downloads frankly of the app and app usage, which is an area that we've been driving for some time. And then there are some onetime benefits because of our own holdout test this quarter. And so when you think about the sort of efficiency beyond that general 11% to 12% range, some of that was certainly driven by the hold out testing that we do. We think that's quite important frankly to ensure the efficacy of our modeling. But I would think about that in general. Yes, and those are onetime in nature.

Your next question comes from Maria Ripps with Canaccord.

Great. Congrats on the quarter. First, can you maybe give us a little bit more color on what drove sort of revenue acceleration in the later part of the quarter? Is there anything sort of worth highlighting in terms of performance by brand or consumer income levels? And can you quantify the impact of pull forward to Q3.

Maybe I'll just start on sort of revenue and then, Niraj, you can jump in. We don't typically disclose revenue by month or within the quarter. In general, revenue growth has been aided by all of these factors that we've been speaking to, which has been really the compounding share gains from initiatives that have been begun over a year ago, so Wayfair Verified, the loyalty program, the improvements to the site experience from the replatforming, and we're seeing that continue to build momentum.

As it relates specifically to brands and income, we are seeing strength in the sort of higher-end brands. That's been for quite some time. So Perigold, which is our luxury brand, and then the specialty retail brands, those all operate at a higher average order value, higher price point, has seen some really nice strength, which I think is consistent with what others have seen from consumers that, that higher income consumer has held in a bit better.

Yes. And what I would say, the strength we're seeing overall comes from the structural business initiatives we have, not pull forward. And we're continuing to see good momentum on the structural business initiatives, and it's just -- and those are things we control. So I wouldn't think of a pull forward playing a role into how the quarter played out.

Got it. That's very helpful. And then just a follow-up on agentic shopping, and I appreciate all the color there. Can you maybe give us a little bit more color on how sort of agentic shopping for the furniture vertical could be different from shopping across maybe like other simpler items? And can you maybe give us a little bit more specifics in terms of how you're optimizing your platform and listings thanks for organic chatbots search results?

Yes. So great. Maybe I'll let Fiona share some thoughts and then I'll add anything that maybe -- as well. Fiona, do you want to share anything?

Yes. So certainly, I think for agentic shopping, one of the things that is a little bit different for us in the home category is the fact that it is a more complex category. We've got high consideration items and very complex delivery promises. So one thing we want to make sure that we get right is the foundational first-party truth as to make sure that our catalog, pricing fulfillment is perfectly integrated. And that's the critical first step. And we're working on that actively with all the partners that I mentioned earlier, the AI platforms. And then we also want to make sure that once customers are able to discover our products also that they're able to transact, so something that we are also working on with the partners.

Yes. And I think one thing we've always found is that -- and this goes back to even back to the search days when you think about platforms like Google, Pinterest and Meta but certainly true today. This is a category -- it's not a UPC code commodity-driven category where you can specify what you need. And then a lot of the purchasing is replenishment purchasing, where you continue to buy the same items over time and you want them deliver to you perhaps or maybe pick them up. But either way, you kind of know exactly what you want. And so product discovery is something that is, I think, unique in our category. And so customers do have a lot of zeal to understand what's available, what styles are developing, what's changing and trends.

So I do think in the agentic world, there's a lot one can do with customers to help them with whether it's product visualization, taking their room and showing them images of what it could be. And I think there's things that can happen on these AI chatbots in there. But I think there's a lot we can also do on our own platform with customers, particularly with all the data we have about them. And I think what you'll find is that there are certain things that may start more upper funnel and as they move lower funnel and maybe different experiences they need that are helpful as the product discovery, product education, nuance decision-making all occurs.

Your next question comes from the line of Brian Nagel with Oppenheimer.

Congrats on a nice quarter. So the first question I want to ask, just with regard to -- it's a bit repetitive. But with regard to gross margin in the commentary this quarter and then, I guess, just recently about the focus now on contribution margin. Is there a philosophical change happening as you're thinking about gross margin? Are you seeing a lever within that line item now that you're increasingly likely to pull in order to drive a better outcome?

Let me -- I'll just say one thing, I'll turn it over to Kate to answer your question. I would say we're very focused on the long-term potential of the business, the long-term profitability of the business. And so if you think about long-term, how do we maximize EBITDA there's multiple ways to maximize EBITDA. Margin rate is one feature. Revenue volume is another feature. And obviously, if you multiply these things by each other, you then end up with the EBITDA dollars or we can talk about free cash flow dollars. Ultimately, we care about the owner's earnings dollars, which is really the thing we're trying to optimize, which is where we do think of the stock-based compensation is a real cost.

And so the owner's earnings dollars, which is what we care about, we're going to optimize. And we're going to do that by both growing, by managing costs well, and there's an interplay between the two. Now to answer your question more precisely from a financial modeling standpoint, let me turn it over to Kate.

Yes. I think Niraj articulated actually the philosophy and the philosophy that's been consistent for some time, right, which is ultimately what we're focused on is adjusted EBITDA dollars growth on this multi-quarter view. Perhaps what you're hearing from us is we're trying to do a better job of articulating how that happens and the components there.

So if we go to contribution margin, again, that's the gross margin less the CS&M less the AC&R. That contribution margin, we are also focused on optimizing contribution margin dollars on this multi-quarter view and how do we manage the levers that make up contribution margin to get to that point. As we think about those, the variable cost components that sort of drive that contribution margin, we are constantly testing what is the sort of optimum mix and what works best, again, with this multi-quarter dollars view, right?

And so to the specific question on gross margin, for the last many quarters, the optimum place to be has sort of been between this 30% and 31% range, closer to 30%, as you all have noticed. And that's been the right place again to optimize multi-quarter contribution margin dollars and then, obviously, multi-quarter adjusted EBITDA dollars because as we think about having that fixed cost piece of that SOTG&A controls, as we grow those contribution margin dollars, that flow-through to adjusted EBITDA dollars, you're seeing that these last several quarters is quite nice. So again, not a philosophical shift, but hopefully a better articulation of how we're managing it.

No, that's really helpful. I appreciate all the color. My follow-up question, look, I appreciate all the discussion today on gen AI and how Wayfair is employing the technology, and nice to meet you over the phone, Fiona. So I guess the question, I don't want to go too short term on this, but clearly, Wayfair, there's an improving market share dynamic here we've seen. The question is, as you -- is Gen AI helping that? Or -- and I guess maybe another way to ask it, from an investment standpoint, what should we be watching for in Wayfair results to basically say, look, here's a company that truly is using gen AI to break away from the pack.

Yes. So one thing I would say to that, Brian. So if you think about the potential of what you can do with gen AI, it's quite substantial. But like if you think about like a baseball game, last night went 18 innings, but say it normally goes 9 innings, you'd still say we're in like the first inning of what you can do. Now I think what we're doing is meaningfully out ahead of most retailers. But what we're doing is still very early days compared to what we think the potential is. And so the bulk of the gains are definitely yet to come.

And in terms of the market share dynamic, in terms of us gaining market share, meaning looking backwards over what's happened over this year so far over the last couple of years, gen AI would not have played a very big role in that. But what we're working on and deploying, we're very excited about, and we can see the trajectory of what it's doing. And so we think it will become meaningful over time. But this is just the latest in what's been an ongoing evolution of technologies. We've been using machine learning for a decade or longer, and there's a lot there's a lot we've always done with technology that's very helpful.

And I think basically, it's hard not to be excited about the potential of gen AI. And I do think you will see some companies be much more adept at using it in a way that's differentiated and faster than others. And so I do think it's yet the latest in something that will separate some from others through technology and the use of.

Your next question comes from the line of Steve Forbes with Guggenheim Securities.

Niraj, maybe a change of topics to the multichannel fulfillment offering. Curious if you could just expand on the general receptivity from their supplier network. Any comments on how you expect the offering to mature? And just how fast we could sort of think through CastleGate utilization as that program ramps over the coming years here?

Yes. Yes. Sure, Steve. So on multichannel fulfillment, so we talked last quarter. As a great example, when I talk about the three pillars of growth, I talked about the recipe, the second is programs, the third was technology. And a lot of the programs are enabled by technology. Multichannel is a great example of another program, right? And so that's something that required technology work for us to create it and launch it.

Obviously, it then is something we execute on our physical operations in our facilities. It's something that adds a lot of value to our suppliers. It helps us with a larger forward position inventory pool for our business. It creates a new revenue stream and margin stream associated with infrastructure we already have. And it's just another way we can be a deeper partner to our suppliers. So it has had many compounding benefits the profitability being one of the benefits, meaning the direct profitability program being one of the benefits. But there's all the other things.

And so suppliers have actually been pretty excited about it. It is optimized for what they care about, meaning that we focus -- we generally sell larger bulkier items. And so our program is optimized for larger bulkier items. Most of the fulfillment services suppliers can use that are out there are optimized for smaller, lighter packages, which is the bulk of packages that ship every day but not in the home space. And so it's been a great offering for suppliers that they've been excited by. We're seeing them -- they start by trialing it out, and then they like it, they start ramping up and then start growing their usage over time.

And so we feel good about how that's going to go. The fulfillment center infrastructure we have is quite large. And so it's just another way we can leverage it and use it and get volume into it. In terms of CastleGate penetration, I think we -- Kate, did we give us that about how it hit kind of an all-time high last quarter?

Yes. We said last quarter, there was roughly 25%. We give that stat from time to time. But I just -- sort of stepping back on that, you are seeing nice momentum there. And that's certainly obviously helping as we think about improving that customer offering and getting it as fast and as efficiently as possible.

Yes. And just to be clear, that 25% number is the percent of our order volume that shifts out of CastleGate facility, not the percent of our fulfillment centers that are utilized. I think I've seen sometimes confusion on that. So just to clarify.

Maybe just a quick follow-up. You talked about the replatforming in the shareholder letter earlier this year. I don't know if you could just maybe speak to how you would sort of qualify the benefits of moving past that, how they're trending relative to expectations and if any sort of new opportunities have emerged as you sort of plan for the next couple of years here.

Okay. So yes, so the way to think about it is so we're 23 years old. And what happens is as you build your technology infrastructure and, as I mentioned, we have a thousand people, so you're building a large technology infrastructure. Your systems, over time, there's a lot of benefit in replatforming them because what can happen -- what will happen with our core systems is that they basically got very intertangled over time. And they weren't built very discretely because when you're smaller, building discretely just would be much more expensive than undertaking and you don't get a lot of benefit.

But as you get bigger, the way you could scale is you want them to be discrete and just interface with each other through APIs and other interfaces or published streams of data so that when a team is working on something, they don't need to then go into every other system. They can engage with those systems through published interfaces or easy, simple, clean interfaces. And so what happens as you go through that replatforming is obviously it's a very intensive activity and quite expensive from an investment standpoint because you're spending your technology cycles for a long period of time on doing that work.

But what you get out of it is then your developer velocity or your speed of developing new things is dramatically faster. Your ability to preclude kind of errors or issues in the platforms is much higher so the quality goes up and you can actually also reduce costs. So it's undertaking that we've been very -- sort of it was a necessary thing to do. But now that we're quite far along in it, we're seeing the benefits in terms of our velocity, the things we can launch, the speed at which we can launch them, the ways in which we can use third-party products as well as what we do first party. And so it's been pretty exciting, and we're just -- I'd say there's a lot of gains to come.

But I highlight it because when we talk about the second pillar of new programs or when we just talk about the core supplier and customer experience, those are both highly reliant on technology and the use of technology. And so it's a very market difference that we're now back in a position where we have the technology cycles to invest in this way versus where we were committing those cycles to the replatforming. So it's just we're in a very different place and we're seeing the benefits.

That concludes our question-and-answer session. I will now turn the call back over to the Wayfair team for closing remarks.

Thanks, everybody, for joining the call this quarter. We're obviously excited with the momentum we're building in the business. Thanks for your interest in Wayfair, and we look forward to talking to you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Okay. Just in order to keep things on time, I think we're going to get going here. So it's my pleasure to introduce the team from Wayfair. We've got Niraj Shah, CEO, Co-Founder and Co-Chairman; and we've got Kate Gulliver, CFO and Chief Administrative Officer.

Niraj, I'm going to start with you. I did this last year, but I like to do it every year with you. The company has been around for quite a while, and you've been on this journey as a company from where it started in the early 2000s. Maybe just level set for those who don't know it as well, a bit of the set today where the company is and what its highest priorities are and how it's you've been on?

Sure. Okay. So where we are today? So today, we're a $12 billion retailer of home goods. We operate in 4 countries: U.S., Canada, U.K. and Ireland. When we talk about home goods, we're relatively expansive in what that means. So it's furniture and decor, it's housewares and then it's home improvement, including large appliances. But it's also only those categories. So we don't operate outside of home goods. That TAM is large in the 4 countries we're in. It's over $0.5 trillion, so it's a large end market. And it's one that's super fragmented. And so often, folks will say, well, who do you compete with? We effectively compete with a long, long list of folks. Our biggest competitors by the nature of the scale we're at would end up being Walmart, Target, Home Depot, Lowe's, Amazon, Costco, if you're focusing on the U.S. market, for example.

But in truth, that's just a short list compared to both the share they have is not that large, and then the list of competitors will be very long. Now in order to get to the scale we're at and to kind of achieve our vision over time, we've basically done a few things. One, we've always been very technology-led. So our corporate staff, which is around about 5,000 people, half of that are technologists. So we have a 2,500-person team that are software engineers, data scientists, product managers. And so while we'll use third-party technology, we'll also build a lot of our own in places where we think it matters.

The second thing we've done is we've built a proprietary logistics network, that's about 25 million square feet of space encompassing million square foot fulfillment centers, lots of transportation terminals where we deliver a lot of the big bulky items ourselves, consolidation operations where goods are made in Asia and other parts of the world, and we have an ocean forwarding operation. And so by controlling the logistics, we can take cost out, deliver things quickly and reduce damages, which are a big challenge in our world.

And the last thing we've done is we built a deep supplier network of tens of thousands of suppliers from all different regions of the world that we work with, with local teams that are our own folks in order to have the expansive catalog we have, which is what enables us to make sure customers can find the exact item they want and the item could be priced well, it can still deliver very quickly and we can have an offering that's kind of a fairly unparalleled.

When we talk about the future, so your question is like where are we going, we think we can build off this foundation that I just described and effectively be the destination that everyone wants to go to for all things home. And the way we're going to do that is we have the Wayfair brand, which is our mass platform. We have 3 specialty retail brands, AllModern, Birch Lane and Joss & Main, which operate at the high end of mass, and they exist as their own curated destinations as well. And we have a luxury platform called Perigold that has all the brands you would find in the design center, if you went with your interior designer to the design center here in New York or any of the design centers around the country, the 500, 600 brands that historically sold just through the trade.

And we're bringing those brands to life, not just online, but increasingly also, we've started an effort to launch brick-and-mortar stores, taking advantage of the infrastructure and the brand and the customer file we have. And we think a lot of what we can do over the next stretch of time, backed by the technology, the selection we have, the suppliers and the logistics capabilities will continue to make us the kind of a sought-after destination. So $12 billion is obviously small relative to $500-plus billion, the TAM. And we think there's a big opportunity to take a lot more of that as what is a very fragmented market will increasingly consolidate over time.

Okay. So there's a lot in there, and I think I want to try to unpack a lot of those big themes, but that was an excellent way to kick us off. Maybe sticking with the category first. So the category has been on quite a journey over the last 4 or 5 years. And there's been periods of time, including very recently, where you've been a noticeable share gainer irrespective of what's going on with the category. Can you level set your view as a company on where the category is today? And how you think you're set up relative to the category from a share perspective?

Yes, sure. So the category is a notoriously cyclical category. And consumer discretionary, durable goods. And so it's thought as -- and it is quite a cyclical category. And there's sort of a -- over the last 6, 7 years, there's been a big boom bust cycle. With housing where it is today with existing home sales being as low as they are, it's kind of viewed as a bust period. Now the category declined for 3 years, and now it's not really declining anymore. It's sort of flattish, but sort of flattish around the bottom. It would be below 2019 in units, for example. And so the way we look at it is it's a cyclical category, but our view is, with our model, we can take share in a down market, and we can take even more share in an upmarket.

So we don't view the cyclicality of it as something that should restrain our ability to grow. And so while the market is not a growth market from a TAM growing standpoint, the truth is, as I mentioned, there's a large number of participants and it's very, very fragmented. And so the ability to take share is actually a very real thing because if you can -- consumers still -- it's a category that has a lot of passion and excitement in it. It's a very emotional driven category. Everyone has a lot of pride in their home. They want to feel special and unique. And then there's a lot of functional needs they have. And so what we found is that the core execution of the things we're doing and being ambitious and driven let us take share in both sides of that cycle.

Okay. Maybe one more for you. You referenced earlier the logistics network. And CastleGate penetration continues to scale nicely. Can you talk a little bit about the investments you've made in building out a logistics network and how investors should think about that as a competitive differentiator for you as a platform when you think about the competitive dynamic in the industry?

Yes. Maybe I'll start and let Kate add on to it and talking about the economics of it. The core thing to realize is like this is what you've seen, any scale player in e-commerce will create a logistics capability oriented around the types of goods they sell. And for most generalists in e-commerce, that's going to be light, small packages. They're going to be very focused on sub-10 pound packages. That's the vast majority of what exists in e-commerce.

But in our world, our packages are heavier, bulkier. They're prone to damage. They have different characteristics. They often -- customers may want to put in a specific room in their house, they may want them assembled. There's all these other characteristics of the things we sell. So our logistics network is oriented around our types of packages. And so what we've done starting in 2015 until now, so over 10 years, as we built quite an expansive logistics capability. And it's not just these 1 million square foot fulfillment centers that we have in the U.S., in Canada and the U.K., but it's actually all the transportation logistics that take goods from where they're made and put them there and then it's the transportational logistics that take them from where they're sitting to the customer.

And what you find is most of the cost is in that last mile. The damage can happen anywhere in the chain. The speed of delivery is enabled by positioning them close to the customer from the get-go. And our suppliers who are small- to medium-sized businesses for the most part are not in a position to do this on their own because you need scale to do this.

So by offering them this logistics capability as a service, which is effectively CastleGate, they can pay us on a unit basis to get advantages that they couldn't get on their own. It helps them grow their sales on our platform. It helps their overall business work. It helps them turn their inventory. And it lets us do things that our competitors can't do in the category.

I don't know if you want to comment on kind of the investments?

Yes. So we've -- we really started building out the CastleGate network itself like 2015, 2016. And if you think about our CapEx expenditures, there's 2 broad buckets that we disclosed. One is our software development costs. That's really the capitalization accounting treatment of engineers. Then the other piece is the PP&E. And for many years, the spend in the PP&E was all about the fulfillment center network. And that was expanding the network, putting sortation devices in these fulfillment centers. And now we're at a point for the last few years where the network is largely what we need it to be. It has ample capacity for what were the volume we're doing through it. And it's well positioned.

So the locations are where we want the locations to be, we can access in the U.S. everywhere that we want to be accessing at a timely manner. So we've shifted more into maintenance mode from a capital investment perspective there. And on PP&E spend, what you see more is CapEx going towards maintenance CapEx in the fulfillment centers and then growth CapEx would really be going towards the physical retail stores. And we don't see a need to expand the network at this point. We feel pretty good about where it's at.

Okay. That's super clear. Kate, maybe sticking with you, one of the consistent things that come up in our e-commerce work is generally that the consumer is fairly receptive to discounting pricing, things like that. Can you hit the reset for us on where you guys sit today in terms of using pricing and promotion as a demand stimulant on the platform? And how do you think about sort of balancing those needs relative to your broader profitability goals?

Yes. It's a great question. So the way that price works in our platform is the supplier sets -- they have their wholesale. We add on top of that our take rate, of course, and then the cost to ship that product and sort of any returns or damage allowance depending on the product and customer service costs. And that sort of sets the ultimate retail price. So we can adjust that by investing in the take rate, but largely things like promotions are actually largely invested in by the suppliers themselves. So when we talk about promotional activity, that's generally suppliers leaning in for that specific period. And we've seen a lot of success with promotional activity over the last few years, mostly because it's a really important marketing lever to get folks into the site.

And in fact, during a promotion, roughly about 30% of the revenue generated from a promotion is on the specifically promoted items for that promotion, about 70% is on other items. So you're really seeing that as sort of the draw to get folks in during a period where the category itself has been relatively out of favor. And so it acts as sort of this big banner way of getting folks to get excited about the products. So as it comes to promotions, we do think they're quite important. They continue to outpunch, but we're able to do that while also managing our gross margin nicely. We have been, over the past years, and we've said this, we have been focused on investing in price.

We want to make sure that we're on category by category, we really look at the sort of elasticity curves for each category. We want to make sure that we're at the optimum place on that curve. And so depending on where we are, we will invest in price, that's really in the service of making sure that we're optimizing on gross profit dollars. So making sure that we're growing gross profit dollars on this multi-quarter view we've talked about before. That has tended to lead us over the past few quarters in the 30% to 31% range on gross margin.

Okay. Super clear. I just want to stick with you with maybe one more topic, talking a little bit about how advertising continues to scale on the platform. Maybe just set us a marker in terms of where we are today in terms of supplier advertising as a contribution to the business model? What are you sort of building internally to continue to sustain growth in that? And where can it go over the longer term?

Yes. So we first started disclosing a stat on supplier ads. I think the first time we talked about percentage was in August of '23, and we said it was about 1% of revenue. And then at the end of last year, we said it was about 1.5%. So it grew nicely. We said it's continued to grow since there. Really, we've been able to improve the tooling for our suppliers there. We've also been able to educate them better on how it works. And frankly, we've increased the supply available. And the demand is really there. So as we increase the supply, we've seen nice growth. That obviously flows through to that gross margin line. It comes into a contra cost. And we've said over time, we think that can help us move up the gross margin line.

For the time being, some of that, we've actually reinvested back in the customer experience, whether that's in the form of price or we continue to evolve and enhance the delivery experience and speed, those kinds of things. And so for right now, we've been investing that and still holding in that sort of 30% to 31% range, but we certainly see significant ongoing potential with supplier ads growth. It will be different than some folks compared to areas like Instacart, so grocery, it will be very different than that. We don't talk about it getting to those levels of penetration. We've talked about in sort of that over longer-term model, it's sort of in this 3% to 4% range.

Maybe to just put a point on this. Are there things you hear from suppliers as advertisers they want you to build their scale over time to cement the relationship? We talked a little bit earlier about logistics as a mechanism by which suppliers and sellers get real additional value as a platform and create loyalty. Anything on that front just to highlight?

You mean within supplier ads specifically?

Yes.

Yes, I mean we -- I think we've been responsive to that and have been part of the tech work that's been around that has been based on supplier requests. So certainly, there was a desire to improve the bidding process and improve the tech there, which we have done. We are working on some co-bidding technology with suppliers currently, which is both something that we're interested in and something that they're interested in. So things like that.

Okay. Understood. Niraj, you said earlier, you talked about the brands. Can you break that down a little bit? You gave us a little bit of detail about where these brands sit. But when I talk to companies that have platforms with multiple brands, how do you think about aligning those brands in the marketplace? And are you seeing very different performance by brands these days relative to where your expectations might be? How do you think about that broader portfolio act?

Yes. So Wayfair is our mass platform. And then Perigold is our luxury platform. And so the goods that would be on both is a very, very thin sliver at the very, very high end of Wayfair, very, very bottom end of Perigold. So think of those 2 as almost missing. They're not technically missing, but it's close to it. Okay. And then in the specialty retail brands, AllModern, Birch Lane, Joss & Main, those are highly curated brands. They each run, call it, roughly 10,000 products on each. So the very narrow assortments, typical of a normal specialty retailer. And think of them as brands that would do quite well at the higher end of Wayfair. So they're run on Wayfair.com at the higher end is where their share would be. But the bulk of the Wayfair volume would be below where they sit. And kind of the good, better, they would be sort of like the best of the assortment that sits on Wayfair.com in terms of the mass price point.

So we purposely set it up so that our brands are not in direct competition with one another in terms of how they sit. And we try to do it in a way that we're really leveraging our strengths, meaning they all leverage our logistics infrastructure. They all take advantage of one of our technology investments, not just the consumer-facing technology, but the supplier-facing technology, the marketing tech stack, et cetera.

And then the benefit for a supplier is a lot of suppliers may have sub-brands that play in different places in the market or they may have goods that they want to distribute in different ways. And so for a supplier gives them more ways to work with us if they have the relevant goods. And then again, all our brands only play in the same categories I discussed. So it's not really -- we're not interested in playing outside of home. Home is quite a big category with a lot of complexity. And I think part of the reason the opportunity is so large is that most folks don't really specialize in it. So if you're small and you specialize in it, you don't have the scale to do a lot of the things that would really benefit the customers and the experience and the economics. If you're large and you're a generalist, you're not going to do the specialty things you need to do for this category. So there's this like a situation where we have the scale to do things like a logistics network or the technology investments we make. And yet we're a specialist in the category.

Got it. I don't think I've ever got a chance to ask you this, but just building on some of the topics we've talked about ads and what it does for suppliers and logistics and what it does for suppliers, how does that array of brands allow suppliers to flex up and down the market and become more loyal to you as a platform because they have multiple brands they can align different parts of their own sort of array of products with?

If you're a supplier who's making premium goods, you really don't want them to be distributed in a place that's selling lower end goods because, a, they're not going to sell well there; and b, it could degrade the brand that you build for the premium end of the market. So if you're at the higher end of the market, you really are only interested in distribution that's going to have you with peer brands, your competitors that have the same high-quality brands.

And if you think about where that can exist online, you really don't find in our category anyone else who has that at scale online. There are some folks who have their own curated assortment like an Rhouse or an RH, but they're effectively a competitor of the 500, 600 brands that operate at the high end of the market. And those brands that operate in the high end of the market don't have a good way to reach the end consumer who now is very digitally savvy and she has an iPad, she has a Mac, she has an iPhone. She doesn't necessarily want to go through her designer for everything. She wants to -- she can see ideas on Instagram, and she wants direct access to the offering. That's what Perigold provides her with.

On the mass side, there, you'd say, well, you're competing with Walmart, you're competing with Amazon. Well, they're -- if you look at those platforms and you pick a category, you pick barstools, you pick whatever category you want, Pages 1 through 10 are full of the really lowest price -- opening price point basic items because that's what the tonnage that's done on those platforms really is about. If you say, well, actually, I'm not looking for a premium item, but I'm looking to browse and shop through the middle, where can you get that experience? And that experience requires you to understand style and have that product assortment, help someone navigate, have them understand the differences, you can have the logistics capability if you're going to offer fast delivery.

And all of a sudden, if you're looking for something noncommoditized, we stand out as a place where you can really shop the category. So we're offering customers this kind of category-specific experience, but in the different spots in the market where they might be.

Okay. And maybe just one last follow-up on this topic. When you think about the array of brands you have and how you're positioned in the broader home category, understood you don't want to really move beyond that. Are there any white spaces where you don't think you're addressing in the home category today? Or do you think you've got sort of the strategy and the brands aligned with where you want to apply?

We like our setup of our retail brands and where we are, but I would say some categories we're in, we're still very small in. So in the home improvement space, for example, we've been in lighting and plumbing for a while. But if you look at something like cabinetry or large appliances, we're a smaller player in that. And large appliances, if you're looking for Samsung and LG and GE and Electrolux, you can only find that Home Depot, Lowe's, Best Buy, Costco would be the only 4 national retailers that carry them outside of Wayfair. So the brands are very careful in who they'll have to distribute them because they want the margin to be in the product. They want to make sure that customers are making good decisions. They don't want to deal with a lot of customer issues, technical issues, problems, returns. And so you need a really good retail experience.

Well, what's happened is that when those brands were very comfortable with the distribution they had and -- but Wayfair presented them a way to get in front of the audience they couldn't reach, which they want to reach that -- at the core demographic they want is sort of like 35 to 55 female has a family, homeowner and who's making those decisions around the laundy room and the kitchen. And you think about who our core demographic is and what they can do on Wayfair, they get very excited. So that's a nuance point, but large appliances is an end market. It's $45 billion end market in the U.S., for example. We're a relatively new entrant to that. We have a very tiny piece. And the handful of the 4 folks I named have half that market.

Yes. Understood. Okay. That's clear. You referenced earlier physical expansion, and you've talked very positively about the lessons learned and the early yield and returns coming out of the Chicago physical location. Probably one of the #1 questions we get from investors is just better understanding the why on Chicago and the learnings from Chicago and then how to think about Atlanta in '26 and New York in '27 and where you want to take this strategy for the longer term, even Kate alluded to it as sort of a bit of a mix in your capital program towards retail. So just level set for us, what have you learned by opening Chicago? And where does this strategy take us in the next 5-plus years?

Yes. So first, it's like 30 seconds on the background. So a couple of points. So one, as you mentioned, Eric, we've been at this for a long time. So we didn't pursue retail out of the gate. We waited until we had reached some level of scale. And if you look at a traditional brick-and-mortar retailer, they have costs concentrated not just in the cost of the stores, but they have cost in the inventory in their supply chain. They have cost in the distribution logistics capability, delivery capability they need to build and costs associated with building a brand or the marketing to establish who they are.

And if you think about us, those latter 3 are basically some costs. Our brands exist and customers know who we are. The inventory sitting in the supply chain is owned by the suppliers. It's well established, and there's a lot of inventory sitting in that supply chain because obviously, we have a $12 billion online business that goods are constantly flowing. And then we have that logistics and delivery capability already established. So the economics for us in opening stores is that you have to spend the money to open a store, you then get to monetize it where 3/4 of the volume is still off-line, 1/4 is online. And there's a lot of use cases where a customer may want to touch and feel something they may want to work with a designer in person. They may need to want to talk about financing. And all of these things are easier in person. So all of a sudden, we unlock a very large piece of the TAM for just the investment of opening the stores, riding on the infrastructure we effectively is a sunk cost that we already have, right? So that's sort of the business strategy.

Then for each of our brands, what to do for stores is appropriate to the brand. So for the specialty retail brands, it's an 8,000 to 10,000 square foot store format, and we have 9 of those open. And so there, we continue to work on developing those, and then we'll open up more as they continue to grow.

For Perigold, we opened one earlier this year at Highland Village in Houston, it's just under 20,000 square feet. And we have one opening in about 1.5 months, months' time in West Palm Beach in City Place, and it's about 30,000 square feet. And so that's a model that we think, again, for Perigold at the high end, it's the right format for what Perigold store would be. Well, for Wayfair, the format we decided on was to be a destination and to be large enough to showcase all our categories. And so that's a 150,000 square foot format is what we opened in Wilmette in the northern suburbs of Chicago. We didn't say that we had to open in Chicago, but what we wanted to do is we want to find a good location. We wanted the real estate to be in a very good location. We don't want to take a lot of risk in being off kind of the center. And we think we can draw. And so we don't think we actually need to be in the center, but we -- for the first handful, we didn't want to take -- underwrite that risk, right? So we figure, well, let's make sure we're in a good trading area.

And so we ran sort of a search across the top 25 metros. And so where can we find a location, where the time line works and we like that location for what we want to achieve. And this location in Chicago was with the developer we liked. We liked it, so we pursued it. So that's been open a little over a year now. It opened end of May a year ago. And it's been very successful, and we continue to iterate on it and try things and continue to see the performance grow. It also created a halo with the state of Illinois went from growing at the same rate at the U.S. to growing 15 percentage points faster than the rest of the U.S. So we measure the halo in also very scientific ways around the trading area with the data science model around different tracking we can do. But the state of Illinois halo math is sort of the easiest to talk about, right? It's like you know what's delivered to the state of Illinois before, after you can compare it to the U.S. numbers, and you can see the spread. And that has continued to endure.

So we have a view as to why we think it's very successful, and we have a view as to how we can make it even more successful. And that's why we didn't immediately open more. We want to have time to iterate and work on it. But we're going to open next year in Atlanta, early in the year in Denver later in the year for the Wayfair brand, both large-format stores and one outside of New York in Ridge Hill in early '27. That's what we've announced so far. And we think the economics are pretty compelling.

Great. Okay. Kate, I want to bring you back into the conversation. One of the bigger decisions over the last 12-plus months was the decision to close the German operation. So post that decision, help us level set where the international strategy for Wayfair is today?

Yes. So sort of stepping back a little bit, what led us to that decision on Germany, when we looked at where we were outside of the U.S. and the opportunities in these markets, while we believe we have a chance -- we had a chance to win in Germany, the investment required and the time horizon required were not as exciting as the opportunities in Canada and the U.K. and, frankly, some of the other places that we can invest in the U.S. And so when we thought about the ROI on the further investment in Germany, it was just not as strong as it was in these other areas, and that's what led to the closure of that business.

We're really excited about Canada, the U.K. and Ireland, obviously, which operates out of the U.K. market. We don't have any plans right now to expand beyond that. We are not, say, sort of focused on going into other parts of Europe. But we do think in the U.K., our brand has a lot of resonance that we can continue to grow and build that brand. Certainly, Canada, which is even farther along than the U.K., and we've talked some about our position in Canada on prior calls, we're a leader there. The business has done quite well, and we continue to see sort of nice evolution in both of those markets.

So as we look forward, it's really how do we bring some of what we've done in the U.S. now into those markets over time. So how do we think about some of these other brands eventually in those markets? How over time do you think further down the line about physical retail, those kinds of things. And so we remain really excited about the opportunity in Canada, U.K., Ireland.

Okay. Moving on to maybe 1 or 2 more topics before we run out of time. Just you guys have put down some real markers around operating efficiency and executed very well against them. We've talked a lot today about growth and aligning the platform for growth for the longer term. How do you think about continuing to drive operating efficiencies and striking the right balance between capturing that growth, but then still delivering against some of the things we've talked about it? Analyst days and events where you've put those markers down?

Yes. I mean obviously, we -- last time we had an Analyst Day in August '23, we talked about moving on the path towards 10% adjusted EBITDA margins. You saw us make really nice progress on that, landing at the 6% last quarter. And as we look at it, we continue to really be focused on how do we keep that OpEx really tight. We've taken significant cost out of that. So how do we keep those dollars tight. And then how do we keep this concept of contribution margin that we've talked about a little bit at sort of 15% or better. And so when we look at contribution margin, which is our gross margin, less our customer service and merchant fees, less the advertising expense that hit that nice sort of 15% plus last quarter, we think that's a good place for it to operate from.

Within that, the mix across some of those lines could change, but that's a pretty good place to operate from. And then below that, you have our SOTG&A line, which is largely a fixed cost line. And we said that the dollars there should be able to hold in that we don't need -- we've cleaned up that line quite a bit. It's gone down on an LTM basis every quarter now for the past 9 or 10 quarters. And now we're at a point where it's quite clean and efficient, but we should be able to grow the top line without adding to that. And so that's what sets you up for nice incrementality.

Okay. Maybe one last one for you, Kate. Again, similar to the efficiency narrative you guys put some really interesting markers down over the years about getting the capital structure to where you wanted to take it. You executed against those. What are the priorities or the rank order of priorities for an incremental dollar of capital in the business today? And how do you think about the right mix of reinvesting back in the business versus continuing to look at capital structure and capital return?

Yes. We feel pretty good about the opportunity to continue to invest in the business on a CapEx perspective, keeping it within that 2% to 3% range. We've actually been running under that, but we think sort of generally that 2% to 3% range is fine. So that's what we've talked about for some time. We don't see a need to go beyond that based on what we think about the sort of evolution of physical retail, the fulfillment center network, et cetera. And so as we think about overall capital structure, we're -- our focus over the last year had been, one, improving our optionality, right? So getting to a point where we had sort of other avenues open to us besides the convertible instruments, we obviously proved that. We were able to access the high-yield market quite successfully.

And then two, the focus was on managing those newer maturities, which we've now effectively managed on the '25 and '26 converts. So now as we look forward, we have these '27 and '28 converts, which are deep in the money at this point. And our focus on those and sort of overall in the capital structure is twin goals of really managing that gross debt, continuing to bring that gross debt down a bit. You've obviously seen our leverage ratios improve quite a bit because the EBITDA has been improving as well. But bringing down that gross debt, continuing to bring that down and then starting to think about the dilution impact of the '27 and '28 and how we sort of get ahead of that and start to manage that. And that's really the focus right now.

Yes. So that's the prism. Understood. Niraj, I want to end on maybe sort of both a mixture of how you're balancing the short to medium term against the longer term. So obviously, we live in an environment where there's a category, there's a certain pace of consumer spending going on and then there's a tariff dynamic in the market today. But we've also talked a lot about the long-term growth. So talk a little bit about how you think about balancing your focus in the organization on the long-term growth while also navigating through some of these shorter-term dynamics.

Well, the optimization function we're running is we're basically focused on how we're going to generate the best long-term profit stream. So we think about concept of owners' earnings. So basically, if you take EBITDA, but then you take out stock-based comp, you take out CapEx, you're left with the kind of the true earnings power of the business. Well, how do you maximize that number? Basically, there's 2 ways to do that. One is you make sure your costs are very lean. So you're always focused on cost.

The second is you want to grow the business as fast as you can with the good unit economics you have and ideally make the unit economics better as you expand through time. So when you think about all the initiatives we're talking about, something like logistics as a way to grow revenue, it's also a way to get the costs down. It's a way to grow the unit economics over time. So certain things let you do both.

Some other things, something like advertising, you say, well, advertising that gets me a revenue stream into the future that's profit profile I'm excited to spend money on today. But if it can't generate that, then I don't want to do that. And then what I really want to do is have less advertising on a unit basis in the future. And so how do I -- every customer get, how do I then convert them into a more loyal customer that's coming direct.

So things like the loyalty program we launched, the investments we're making in our app or a series of things that do that. So all the decisions you make end up being a combination of getting yields today and yields in the future and then you're trading off. If you're making an investment today for the future, you need to believe it's generating a significant amount of profit into the future. But I think what we've been able to show is that we can be -- we have enough scale, but there's a lot of profit we can actually grow in the near term while still investing in things that will generate increasing amounts of profit into the future.

Okay. Well, I think we're going to leave it there with about a minute to go. Please join me in thanking Wayfair for being part of the conference this year.

Thank you.

Thank you.

As we get towards the end of the day, we'll try to keep everyone real entertained here. A lot of interesting stuff going on with Wayfair and the macro environment. Thank you, guys, for being here. Really appreciate it.

Same here.

Let's talk tariffs. I think that's where we have to start. So there was more tariff noise last week. It was last week, right? Whatever...All right. Let's talk tariffs. I think that's where we have to start. So there was more tariff noise last week. It was last week, right, whatever.

Recently.

There's constant recent tariff noise. Constant recent tariff noise. Can you talk about kind of maybe broadly, I know so far, the impact has been limited. potentially that can change. Anything you know about this latest round in conversations with the administration? Or where are we with that? And how are you guys thinking about it?

Sure. So needless to say, we try to keep track of everything that's going on. We're we try to talk with folks to understand what's going on. We remember a number of trade associations. I wouldn't say we have any insights that would be really additive to what you're able to read in the press if you follow what's happening. So in that sense, I'd say what we know, probably not dramatically different than what you know. But what I'd say is like the tariff landscape has kind of been a continued evolution. It's not something that's had like 1 or 2 key moments. It's had many, many key moments. And I think the main takeaway, I think what we would say is that we have a model where we have a tremendous number of suppliers. They operate in a tremendous number of countries, offering a tremendous amount of aggregate selection, and they're always competing with each other.

And so there's different scenarios in which one would benefit versus each other. Tariffs would create an environment where perhaps one benefits versus another. We have a lot of domestic U.S. suppliers, for example. But there's a lot of other environments where one benefits against each other. If ocean freight becomes expensive, that helps some and hurt some. Ocean freight becomes inexpensive, that helps some hurt some. So there's kind of always things that are changing in this landscape over the years. Tariffs is currently something that's changing.

I would say our model being advantaged the way it is, is part of how you're seeing us do well, which is that we just have this wide base of suppliers, and we have a logistics network that enables us to move these goods from wherever they're made to the markets in which we service customers. We have the ability to warehouse these goods. We have the ability to deliver them both economically with a high value of service. And that kind of proprietary logistics network, coupled with the breadth of suppliers we have is, I think, kind of endemic to our model and uncommon if you look at the folks we compete with.

Yes. I would add to that. I think we went out in the May call and we reiterated it in the August call that we were prepared to manage the tariffs. And then I actually think you got to see us work through managing the tariffs. And we said prices have remained on the items that are selling, prices have remained quite competitive and quite strong. And our nimbleness here and the sort of competitive tension that the marketplace created would help to mitigate some of those impacts for our consumers and help our model prevail. And I think whatever sort of future tariff dynamic happens, you're seeing the benefits of that model in real time right now.

Right. Yes, I saw yesterday that lumber prices are at or they've plummeted, I think, was the word the Wall Street Journal used and ocean freight costs are down significantly. So I guess there are a lot of moving pieces all of this.

There's always a lot of gray area.

There's areas of savings that suppliers have seen also as well, right? Okay. Maybe just kind of pulling on this a little bit more. So trends have gotten better. Your revenue numbers were up in 2Q. I guess one of the things that people are really trying to get a good handle on is, are we seeing any pull forward in demand first? I think you talked about it on the call that you're not, but maybe you could elaborate on why you think that's the case or if that still remains the case. And then the other thing that I think people are worried about on the tariff front, understanding your competitive positioning, I want to elaborate on that also, but that there is that we haven't seen the price increase really come in yet and that, that will start to play out later this year and into next year. Just wanted to get your thoughts on that before I move on from this topic.

So Ygal, your first question was around, was there a pull forward in demand. And so with regards to that, we have not seen a pull forward in demand. In one category, we're a relatively small player, which is large appliances. Back to Liberation Day, there was a very short period where we did notice a pull forward in demand. It lasted about a week. Other than that, like literally, if you look at the overall business and the demand kind of profile, you wouldn't be able to tell me when various announcements happened.

How do you understand the -- if you're seeing a pull forward demand or not?

Well, I mean, you basically have kind of what conversion rate is, what aggregate sales levels are by all these subcategories in the catalog. We're able to look at it by kind of income segment of our customers. So we're able to look at its different ways. And then you can see when you have like a break in trend. So for example, in the period -- kind of the early period of COVID, you saw in the early weeks, you saw a kickup in cookware and mattresses and very specific subcategories, not in others. Then as it went on, you saw other categories pick up a few weeks later. And you -- so you can see when there's like a -- I mean, so whatever we're doing around about 100,000 orders a week, so rough numbers. So you have enough volume that you can cut it up different ways, and you have obviously order of magnitude more traffic than that, right? And so you can kind of tell what's going on.

Okay. And what are vendors saying right now in terms of absorbing price increases or passing through. So far, we haven't seen a big impact. But as we kind of go through the rest of this year and into next year?

I mean, again, what we've seen is we've seen a pretty stable environment. And there's no real reason to believe that, that's going to dramatically change. Now what perhaps happens with the landscape, if the landscape changes, that could change. But the reality is suppliers are pretty keen to make sure that they're profitable in how they operate, right? They're also keen to make sure that they're generating a certain volume of sales so that their fixed costs are covered and they can flow goods from factories. And they have a strong interest in turning their inventory. They don't like the inventory aging. So they're balancing those criteria when they price goods. On our platform, they can change the price any time. And within 5 minutes, it will reprice the retail price. So they know that they have that ability.

So by having that ability, they know they don't need to front-run things. They don't need to decide something now because it takes 90 days to go through, which is common in a lot of retailers. So we prevent them from having to make knee-jerk reactions by allowing them to make a decision as they go. We then provide them with data on what's happening in aggregate on our marketplace so that they can understand the competitive dynamic. And they, of course, can monitor what happens to their sales if they make changes.

And what we're seeing is that they found ways to kind of manage their cost structure such that they've been able to stay competitive by and large, so that they can keep their demand. And that's obviously important for them, right? So forget about us, important for them because if they raise their prices and their competitors don't, they're going to lose demand to their competitors, that's going to hurt their own business.

Okay. Kate, you made a comment that the items that are selling haven't seen price increases. Does that mean that others have seen price increases and they've kind of fallen behind? Or am I reading too much into that?

Well, I mean the way to think about it is we're quite focused on those first few pages of the sort order, where price is on those pages because we know that, that's where a significant amount of the conversion happens. And to what Niraj was just saying, certainly, if you do raise price, and it's not to say that nobody has raised price, right, like price moves around within suppliers all the time. But because of the competitive tension inherent in the marketplace where you have a lot of highly substitutable products that are largely unbranded, if you're selling multiple chairs that are similar to this, that share that is the most price competitive will move to the top of the sort order and demand will concentrate towards that chair, right? And so you'll lose out on volume.

So what we're seeing is within sort of like-for-like items in the sort order in the first few pages, those prices are staying consistent, meaning we are not seeing a tariff impact there. So the supplier is absorbing the cost or value engineering the product. They're taking advantage of lower ocean rates, as you said, things like that. But I wouldn't necessarily imply that, that means that the tail is rising. I just -- our focus is primarily on those products that are moving quite a lot of volume.

All right. Got it. Okay. So let's talk about your competitive positioning. You talked about it a little bit. In times like these, you guys tend to take share. I think what's been impressive is if you kind of look back to 2020, when you've taken share, you've maintained it. So maybe if you could elaborate a little bit more on what's letting you do that. Are your competitors or kind of like traditional brick-and-mortar competitors? Have they been raising prices that's been letting you take share here? Is it something else?

So I mean if you just zoom out for just a moment, we went public in 2014. At the time, we were 12 years old. The Wayfair brand was only 3 years old, and we're doing about $1 billion in revenue. And then you just -- through -- up to pre-COVID 2019, we went from $1 billion to $9 billion during a period where obviously the category did 9x, right? So we took a tremendous amount of share. Then during the COVID period, you have this kind of small period of time where revenue burst way up and then you have kind of the post-curve COVID demand moves to brick-and-mortar, demand moves to entertainment, leisure, travel spend, kind of levels up to $12 billion. So we're $9 billion pre-COVID, we kind of get to $12 billion.

We still outgrew the category in that period, correct?

And -- yes. So if you look at the last 2 years, we've been outgrowing the category. And so basically, the way we take share now is not super different the way we took share 2014 and 2019, which is we basically put together an excellent offer. So the core recipe is price selection, availability and speed of delivery. So that's -- when I talk about having a lot of suppliers with a lot of selection coming from a lot of places, that vast ability -- kind of vast selection allows customers to find any product they want, and they can find the ones that are of that style and quality level priced very competitively because they're obviously not going to pick the competitive one that isn't, right? So they have access to that.

Our delivery capabilities allow that to be delivered quickly. And then we help suppliers keep the best-selling ones in stock by giving them guidance on demand. So that's a core recipe. And that's kind of what led us take share in the last couple of years. But if you look at the kind of 2014 and 2019 period, we sort of augmented that with 2 additional factors. One is we had a large technology organization with which we could build sort of customer and supplier-facing features and functions that allow them to kind of have a better and better experience and do more and more. And the third thing is we're constantly launching new programs and innovative things that helped us grow.

Well, during kind of that 2021 to 2024 period, we were undergoing a big tech replatforming effort that basically consumed the vast majority of our technology organization. And as a result, we were kind of not in a position to launch a lot of new programs nor are we in a position to do a lot of the feature function work that we normally do. As we've gotten through that, and I kind of talked about that in the shareholder letter that we published in February, we're back to having all 3 legs of the stool.

So kind of working on that core recipe. We've got that -- we have a 2,500-person technology organization working on kind of improving the supplier experience, the customer experience, whether that be the app or the web or whether that be what the suppliers have for functionality and do things for customers. And we're launching new programs. And so we've talked about a few a lot. We talked about our loyalty program, Wayfair Rewards. We've talked about what we're doing with brick-and-mortar stores. We've talked about Wayfair Verified, which is our editorial program. We've talked about those 3 because they're very tangible, very visible, they're easy to get your head around. But there's a whole bunch of other things that we're working on as well.

So now when you kind of have all 3 things now working for you again, you're going to be able to take share from your competitors in a very fragmented category at a nice pace that will compound. And I think what folks are now noticing is that now that we have all 3 legs of the stool, we're not taking share at a more modest pace, which is what we can do when we have the core recipe, we can take it at a faster pace. which is because we are back to having all 3 legs of the stool.

Okay. And that share is coming from -- I think you've talked about like Amazon is taking share, you guys are taking share.

Yes. What we said is like, if you look 2019 to now and you look at the bigger players and the ones that notably taken share are us, Amazon and HomeGoods, and they just -- 3 of us, which are very different in terms of what we sell, the types of goods we sell and the like. But we stand out notably versus a lot of other folks because a lot of the other major players are actually down in share from 2019. I'm pointing 2019 because it's before COVID. Now what you don't see in that because that's a panel of only the larger players is that a large amount of the TAM is in small to midsized players. And if you compare it to them, they're losing share at an even faster rate, and it's being consumed generally by either the stronger regionals or by a handful of the biggest players.

Some of the regionals have gone out of business, and there's certainly been consolidation from bankruptcy market as well.

Okay. Anything else you want investors to know on the share gain sustainability because that's probably one of the biggest questions we get outside of the macro stuff.

Yes. I think the biggest thing to understand is like, so where is it coming from? It's coming from the fact that it's a very fragmented market, and there's far more players seeding share than gaining share. Now why are we able to attract it relative to others? The answer goes back to -- it's a combination of like so we're a specialist in the category, so our shopping experience is focused on that. We have logistics capability focused on that. We have kind of that broad selection and offering that really is uncommon. So we have those core assets. And then you think, well, how do you bring that to bear? You keep improving that core recipe, you're launching new programs and you keep making the technology better.

And that is effectively how we've grown the business from 20 years ago to now. And we're doing that again. I think that post-COVID period, is an aberration a little bit because of kind of the boom-bust cycle of COVID and a little bit because of the kind of multiyear tech replatforming effort we went through. But I think now that those are behind us, I think it's easier to see that the patterns return to the pattern that existed. I think that will only become clearer to investors over time as each quarter goes by.

Yes. Okay. Great. Maybe let's talk on some of those efforts and I'll start with the large-format physical footprint stores. And so you launched in Chicago. Maybe talk a little bit about how that's going. Atlanta is coming, New York, Denver in the next couple of years. It sounds like that strategy is kind of going as you expected. You talked about at your Investor Day, right, that's 50% of the market that you didn't have access to and now you do. So how is that going? And kind of where does that ultimately get to?

So today, brick-and-mortar, I think, is roughly 75% of the market. But like in the long term, if you believe online grows to be 50% and the brick-and-mortar ends up being 50%, if you never did it, that would be 50% you wouldn't have access to today, it would be 75% that you don't have access to. The other thing I would say about brick-and-mortar stores is that generally, if you look at the cost structure of a brick-and-mortar retailer, you have to have the cost of the stores, but you have a cost of the inventory, you have a cost of the delivery capability. You have a cost of the brand, the marketing to build the customer base. You have these other costs in the business.

And for us, basically, those are effectively sunk costs with the exception of the cost of the store itself. So we have this leverage. When we open up a store, in the case of the Chicago store, which is in the northern suburbs of Chicago in Wilmette, 60, 70 miles away, it might not even be that far. In Romeoville, we have 1 million square foot fulfillment center, and we have these around the country, and it's full of inventory. Our suppliers own the inventory. We have a 90 million customer file in the U.S. or I guess, globally, but we have a very large customer file. So we have customers for a household brand in the U.S.

So we're able to take the store and get real leverage out of it because of the position we're in, and we can provide experiences that are harder to provide online and obviously, touch and feel an item, work in person with a designer. There certain things like offering financing, which we do through third parties, it's easier topic in person than over the website. So it gives us a real advantage.

Now what we've seen with the store in Chicago is that the store on a 4-wall basis does well. It also creates a halo. We've talked about the lift. If you look at the state of Illinois, which obviously, we have much more scientific data science models. I show you the lift when you zoom in. But the state of Illinois is like an easy way to look at it because the state of Illinois, State of Illinois. And so you just look at orders from State of Illinois, and you see a significant lift in the State of Illinois pre-post and that's sustained itself.

And then you look at the customers in the 4 walls who check out and the majority of them are actually new to file despite the large file we have. So it's -- you can see the economics -- those would imply that the economics are quite good. The economics are quite good. And so we have a plan of what we're continuing to do in Chicago that we think can improve its performance. And then we have new stores coming next year. We have Atlanta earlier in the year. and Denver later in the year. We've announced one of the 2027 stores, which is the one outside of New York in Ridge Hill.

Yes. Okay. Great. I visited the one in Wilmette. I thought it was great, and looking forward to the New York one. And just shifting to CastleGate. So you hit on it. And at earnings, you spent more time talking about it than I think you have recently, including launching some new offerings. So just to read off some of that. So you talked about a 40% year-over-year increase in CastleGate forwarding use, expanded into some new countries. CastleGate penetration on your own fulfillment centers has reached 25%. It's up 400 basis points year-over-year. Expanding into multichannel for your merchants, for your vendors. Talk about that opportunity and CastleGate broadly because that's a really differentiated offering and kind of where that can go and maybe financial profile, what it can add to margins?

I'll say a couple of thoughts and then I turn it over to Kate. But so CastleGate, so if you think about the goods we sell, like they're big and bulky, they're typically heavy. They might be fragile in the sense that there are items that can get damaged. So how you move these items, how you handle these items really affect your cost structure, your cost of delivery, if you can forward position them from where they're made close to where the end demand is, that really changes the last mile delivery economics, which is a significant piece of your cost structure. You can reduce damage, which is significant. And to do that, you need to have a logistics network that's optimized for these types of goods. These are not the types of goods that are the volume of what people are buying in e-commerce. So most large e-commerce retailers are focused on small packages, under 5-pound packages because that's the vast majority of what people buy. That's not what we're optimized for.

So CastleGate is a network we built out to enable our suppliers to basically get access to the kind of benefits you get by having volume because logistics only works with volume and our suppliers individually don't have the volume you would need to optimize the logistics. So they pay to use this network that we've built. And then as we get more volume and more scale in it, we can keep adding functionality to it. So CastleGate forwarding is ocean forwarding, where we work with the top carriers, folks like Maersk and Hapag-Lloyd and others.

And we keep adding lanes, so that's access from new countries. We have consolidation operations in those countries so we can forward position into more locations economically for our suppliers. They then get the benefit of more sales because the delivery speed gets better, the retail prices get lower. They're paying us for those logistics' services. So both we get the benefit of the increased volume and we get the benefit of the CastleGate revenue P&L itself. And we keep adding services to make it easier for our suppliers to put more goods in, turn those goods and get economic benefits. So that's a little bit of what we talked about. And so Kate, maybe I'll turn it over.

To what I understand sort of what are -- what's the margin profile? How does this sort of impact the P&L. I think the largest benefit of actually offering multichannel is that it makes the CastleGate program, as Niraj is saying, more appealing to our CastleGate customers, right? So we certainly had feedback from suppliers that one of the things they want to be able to do if they work in CastleGate is to make sure that the product isn't sort of stuck in the network if it's not moving and that they have other options and multichannel gives you that other option. So by far, the most important thing is how can it help overall adoption of CastleGate for all the reasons that Niraj mentioned in terms of the value of CastleGate.

On multichannel itself, I would think about it as slightly accretive to gross margins. And the way that we've priced it is to be competitive with other 3PLs. Somebody asked earlier today, so I'll just clarify here, is the revenue showing up as a contra COGS or in the revenue line. It shows up in the revenue line. It's not a contra COGS. So sort of additive a little bit on the revenue line. It's very, very small today though, so it's tiny. And on the gross margins, it should be slightly improving versus where we are.

Would you ever open up CastleGate outside of Wayfair?

You mean...

So just as a 3PL for, I don't know, some...

Some other types of products or...

Yes. Yes, like a non-Wayfair customer.

Well, certainly, the multichannel we will sell to -- we'll sell it to. It is acting like a 3PL where we will sell to other you can purchase from another retailer and we'll fulfill it for you. So that is the primary benefit of the multichannel, but it's still within our space in terms of furniture and decor. We're not right now opening it to TVs or tires or something.

But that has to be a Wayfair vendor that's selling through another retailer, Wayfair supplier that's [ selling ], but not someone...

Yes. Yes. Right now it's not a total third-party supplier.

Can it bring more suppliers to Wayfair?

Well, we do think it helps for supplier adoption in that if one of your concerns, was I only want to work with 3PL. And I'm not sure that one that only exclusive to Wayfair is the right one for me, I think it can bring more suppliers to the CastleGate platform and maybe in that way, short brings more suppliers to Wayfair. But that's not the primary reason. We more -- you're working with Wayfair, but you haven't yet adopted CastleGate, how do you think about CastleGate adoption?

Okay. Niraj, you mentioned the loyalty program. Any updates on what you're seeing there? Is it driving any top line at all right now?

Yes. So the -- so it's a paid program. So you have to pay $29 to join. It has significant benefits. And so the customers who join are ones that they'll obviously expect to get more than that in benefits per year. And so we're seeing that member base ramp nicely. So it keeps growing and the behavior that members who subscribe exhibit relative to similar customers who have not yet signed up is you do see increases in their repeat rate and the purchase rate, et cetera. So it is playing out kind of as we expect. I would say it's still early. We launched it last October. So it hasn't -- it's not even 1 year old yet. So kind of -- we think we're getting benefits from it, but we think most of the benefits are yet to come as it ramps to become a meaningful customer base.

Got it. Okay. Just shifting to gen AI a little bit. So you launched a few products, Decorify, Muse, the Discover tab, which I think is a gen AI also, right? How has that driven growth or certain KPIs, anything? Has that been a benefit for you guys? And maybe within the technology organization that you're talking about as well, as you've shifted from the replatforming, is Gen AI helping you guys there, launching products, efficiencies?

So we -- so again, part of kind of our core belief going back to when we started the company, Steve and I are both engineers by background is that technology could be a significant differentiator. So we've always had a significant technology organization. We've always invested in technology pretty aggressively and generally disproportionate relative to our competitors. And so gen AI, we think -- presents a lot of opportunity. The examples you gave just now, all of them are examples of features that customers would experience. And so that's clearly a place where there's a lot of gen AI activity, what we're doing. But we've also been using gen AI to make -- it's really improved the volume and efficacy of our ad units. We've been using gen AI to add kind of both QA and add a lot of attribute and missing data to our product catalog. We've been using it to kind of facilitate and improve and lower the cost of answering customer service inquiries. We're doing the same thing on supplier support.

So there's like a long list of places we're using gen AI and a bunch of them affect our cost structure, which makes us leaner. A bunch of them help suppliers do things, which then helps the whole platform model work. And then a bunch of them are directly features customers interact with, which would then drive up conversion rate, engagement, repeat visits. So we're being pretty aggressive kind of across the board. And we think it's just kind of early days of what we can do because if you look at the quality of the models that are out there and what you can use them for and the quality of the data you get back. It's just every few months, the quality steps up. And so there's things today where you run a pilot and you see the potential, but it's not quite something you put into production yet, but you invest in it anyways because you believe in a few months' time, you will be able to do that, and that's kind of been the case.

Okay. What about a bigger picture on the way gen AI is changing the Internet search, agentic AI, agentic commerce being built into LLMs over time. Are you guys preparing for that at all? How do you envision that changing?

Yes. So I mean the same way we've been kind of an early partner with Google and Meta and Pinterest as they develop new ad units, we're similarly with OpenAI, with Gemini, with Perplexity, they all want to find a way to make queries that are shopping related, higher efficacy, higher quality so that they can answer the questions better. Ultimately, if it's a commodity purchase where you're just doing replenishment of the same items over and over, I think there is a potential for like an agentic sort of solution that disintermediates the retailer because that same basket of goods, everyone says our target 8% more expensive than Walmart for the same basket of goods.

What they're referring to there is literally the same basket of goods. It's like a SNICKERS bar 8 pack and a Chips Ahoy cookie, whatever, 13-ounce or whatever, it's the same identical items. So there, it's sort of like if a brown box is going to show up from any retailer with the same exact items, at some point, price and speed is all I care about, right? I don't care whose name is on the box.

I think in a bunch of other categories, if you talk about apparel or you talk about home, I think a lot of what's going to happen is upper funnel. It's sort of the providers want to kind of help customers kind of start to go off in a direction, but I think a lot of the mid- to lower funnel will still happen on platforms like us. But what we're going to do is we're going to invest in making sure that we show up in those places. And we're also going to keep adding more and more bespoke experiences on our own platform such that customers prefer to really shop in our environment, because it's shopping our category is still difficult in the sense that you want to understand what's out there, you want to pick just the perfect item. You sort of aren't willing to just say, I want a gray sofa period.

And so -- and then not just ourselves, but like leading players typically have assortments that are meaningful portion of what you have is unique to you. And so it's not exact match products. And so I can show you a gray sofa and you get it home and think it's terrible. I can show you another gray sofa, might even look similar. You get it home and you think one is terrible, one is fantastic.

Right. But you can build that Agentic experience into Wayfair, right? Like help me understand...

Yes. We have pilots running that are basically like an AI designer. We have a bunch of pilots that are running. You mentioned a couple of the efforts we have around inspirational content. So yes, you're going to see us -- we've actually launched some broadly and we've launched some narrowly. But yes, we're aware of a bunch of things.

I think that's where our scale and the significant first-party data that we have really helps us, right? Because we actually have the volume of data to be able to do that, to be able to personalize it, to be able to make that shopping experience, whether it's truly agentic, but to make it leveraging those skills. And I think that is different than regional brick-and-mortar players.

Is it helping on the supplier side in terms of their listings, how they price, like our suppliers using it at all?

Yes. So some of what we're building are basically -- we do some things today with gen AI to help suppliers with their listings, but there's actually a bunch of tools we're building, which will allow them to improve their catalog and improve what they're doing on our platform, yes.

How it's merchandised, how rapidly that can happen.

Okay. All right. I want to shift to some of the cost lines. Let's just start with advertising. So advertising was interesting, came in ahead of expectations in 2Q. You've seen real deleverage in that number since 4Q, so over the past couple of quarters. Can you talk about how you're thinking about your performance marketing spend between various channels? You talked about like going mid-funnel and social and I think influencer as well. How is that evolving? What's the opportunity there? And how does that change the long-term opportunity on the advertising expense line?

Yes. I mean I can start and then if you want to jump in. So I sort of step back a little bit and go back to Q4, which is where that ramp really started, and we hit north of 13% on that ad expense line. And what we said then at the time, and I'll reiterate again here is that was not where we intended to continue to operate from. But you saw some sort of step-up costs related to testing some of these other areas that you just mentioned, areas of performance marketing where we felt that we should be leaning in a little bit more than we were and then mid-funnel and some of the other areas where we were not actually probably testing deeply as we should have been before and where we thought that there was certainly opportunity to go further.

And so you have some onetime pieces, some of which you get leverage on as time went on, right? We always describe the marketing spend as paying back in the sort of multi-quarter view. And so part of what you saw in the second quarter is certainly we're getting some benefits from that. We also said there are places where we're constantly evaluating what's efficient. And when we see inefficiencies, we want to pull back there. And so that will move around a little bit. And so as we think about marketing spend in the go forward and what's the right range, we obviously hit in that 11% to 12% range in the second quarter. We guided to that again. Clearly, that's a place we're comfortable with right now. We're overall really focused on that contribution margin concept that we talked about on the call.

So thinking about the gross margin less the customer service and merchant fees and less marketing expense, that being sort of 15% or better. And that means that we're trying to think through all of the time, the dynamic between the gross margin and the marketing spend and sort of how those 2 are interrelated. The customer service and merchant fees has continued to improve nicely but doesn't obviously move around as dynamically. Margin and marketing being sort of 2 of our bigger levers.

To your question around where are we seeing success in these channels, we are seeing quite a lot of opportunity in the mid-funnel. So there may be places that we want to continue to lean in on the mid-funnel. So boosted creator, sponsored creator content, some of the work that we've done on TikTok and YouTube, all of these places are starting to bear fruit. And as we see the kinds of returns that we expect from those channels, we can lean in a little bit more into them given that they were much newer and more nascent in the latter half of '24.

Okay. And the gross margin line, so maybe just for now, just staying, you've got the 30% to 31% range. What gets you at the lower end? What gets you to the higher end? But I think near term, you've talked about being beyond that. So what breaks you out from that 31% that helps you get to that 10% plus EBITDA margin that you commented?

Yes. So a few thoughts. So first, as we looked at gross margin, generally, it's made sense to hold this 30% to 31% when we try to optimize for gross profit dollars on this multi-quarter basis. And you can think about the same concept against the contribution margin line, how are we optimizing for contribution margin dollars on this multi-quarter basis. And again, that's generally been sort of 30% to 31% on the gross margin line for right now. And so as we've seen things that could have expanded the gross margin line, we talked in the Q2 call or the Q1 call in May about supplier advertising and actually ongoing growth there. That's actually become a really nice driver of gross margin, but we've been able to reinvest some of that, we think, quite profitably into customer experience in the form of price or delivery speed or, say, deluxing, which is another part of the delivery experience.

And what we're always testing for are those investments, again, helping to grow the gross profit dollars on this multi-quarter basis. So those levers that we've always talked about in terms of growing gross margin around mix, around logistics, CastleGate penetration obviously helps that, around supplier ads, those all still exist. The debate is always where does it make sense to invest or not. So we certainly still see the potential to get to that 35%.

I would say, though, in terms of getting to that 10% adjusted EBITDA margins, obviously, we've made really nice steps there over the last year plus. And as you think about how much more do you need to get there, you can do it with a few points of gross margin, a little bit on the AC&R and ongoing SOTG&A leverage. And I think that's really important on the SOTG&A piece because what we've said on that is, obviously, that's come in consistently over the last 2.5 years. And that even as the business has returned to growth and continues to grow, we don't need to add to that line.

So if you hold in that contribution margin of roughly 15% and your SOTG&A for the time being isn't growing, and Niraj just spoke about some of the AI pieces, maybe you get some benefits from that. So you're able to grow and not add dollars-wise to that line, you should be able to use that to get to that 10% as well. So you can see ongoing growth in gross margin, as we talked about, those levers are there. We're very focused on the contribution margin piece. And as that flows through, you start boosting the EBITDA margin.

Okay. Great. We didn't get to Q&A, sorry, but we're out of time. Thank you, guys, so much for being here. We really appreciate it.

Thank you.

Thanks.

Have a great day.

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wayfair Second Quarter 2025 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the conference over to Ryan Barney, Head of Investor Relations. Ryan, you may begin.

Good morning, and thank you for joining us. Today, we will review our second quarter 2025 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&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 third quarter of 2025. 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-K for 2024, 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. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings release and investor presentation which contain descriptions of our non-GAAP financial measures and reconciliations of non-GAAP measures to the nearest comparable GAAP measures.

This call is being recorded, and a webcast will be available for replay on our IR website.

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

Thanks, Ryan, and good morning, everyone. We're pleased to be here today to discuss our second quarter results with you. The second quarter was a resounding success defined by accelerating sales and share gain in tandem with expanding profitability. As we've discussed over the last few years, we can and will grow profitably while taking significant share in the market. We operate the business by balancing and investing for the future with growing our current profitability with the objective of maximizing EBITDA and free cash flow over the long term. The second quarter was a nice proof point of the journey that we've been on and even more exciting of what is to come. Year-over-year revenue growth of 6%, excluding the impact of Germany marks the highest growth rate we have seen since early 2021.

Our over 6% adjusted EBITDA margin demonstrates the significant leverage in our model. And as previewed in our Investor Day 2 years ago, is just the beginning of what we believe we can achieve over time. Switching gears as we started the quarter, there was intense focus from investors on the ramifications of tariffs on our sector and how this would impact Wayfair's competitive position. As we've previously described, the marketplace forces of our inventory-light model give us unmatched flexibility. With our global network of more than 20,000 suppliers offering over 30 million products and constant competition to present the strongest value to the customer. The benefits of this model continue to prove self-evident despite the various ebbs and flows of the broad business environment.

Specifically, when we look at the actual items that customers are viewing and purchasing today, prices have remained relatively consistent with the first quarter. As we spoke about in the spring, suppliers take different approaches to managing cost increases. While some may pass through price increases, others who want to win share in a demand-constrained environment, we'll choose to keep their prices more competitive, and we use all the methods at their disposal to do so. Our model allows us to service the products with the best value for our customers, enabling us and our suppliers to gain share and grow revenue. Pricing consistency is largely reflected in our results on average order value as well. Sequential growth in the second quarter mirrored what we saw last year was worth talking through some of the moving pieces. AOV is an output of unit prices, items per order and mix. We've seen some modest growth in average items per order but mix is the primary driver of year-over-year AOV growth.

Our specialty retail brands in Perrigo continue to outperform. Q2 is the peak of the outdoor category in which we're a large participant and Wayfair Professional posted double-digit growth after a few quarters of increasing momentum. The strength in our top line was a combination of healthy AOV growth and a nice step-up in order growth from Q1. This is partially a function of the new long-cycle initiatives that we've been seeding and many of those efforts have started to bear fruit in 2025. We'll quickly run through a few of those now, but I'd encourage anyone less familiar with Wayfair and to review some of our prior calls for more detail.

We introduced Wayfair Verified in the fourth quarter. A curation program designed to give customers a short put items in the catalog that reflect the highest quality and value standards across every style and price point. Wayfair Verified is an editorial review program where our merchants hand inspect key items and provide firsthand detail on why they have selected that specific item. The Verified checkmark provides a guidepost for shoppers as they navigate our endless aisle and the response from customers has been very positive. These items are driving outsized performance, converting over 25% better achieving approximately 20% higher Net Promoter Scores and generating higher repeat purchase behavior compared to non-verified items. The number of items of the program and the prominence of them in the experience will continue to grow over the course of the year.

The second initiative to call out is Wayfair Rewards. Our paid loyalty program that launched last holiday season. The initial excitement we saw for Wayfair Rewards at the time of launch continues to gain traction with member growth and customer lifetime value curves, exceeding our initial expectations. We'll have more details to share on the success we're having in the not-too-distant future. Finally, physical retail continues to generate momentum across our portfolio of brands as May marked the 1-year anniversary of our first large format Wayfair store outside of Chicago. We saw an impressive in-store response to major promotional events of the quarter, like Way Day and Memorial Day, showcasing the power of bringing the Wayfair brand to life in an omnichannel experience.

While the sale payload in the metro area from the store has been tremendous, the impact on categories where Wayfair is less top of mind is even more pronounced. In the Chicago DMA, we've seen over a 50% increase in lower ticket frequency purchases like kitchen accessories and a more than 35% increase in higher consideration home improvement purchases like bathroom renovation items and kitchen cabinets. Earlier this year, we announced additional Wayfair stores coming to Atlanta in 2026 and New York in 2027. And just this past week, we announced plans for a Wayfair store outside of Denver to open in late 2026. We're excited to see the impact that these stores have in these key metros as we look to replicate the success we've had in Chicago. We also opened our first Perigold store in May in hiring Village in Houston and is off to a great start with a second store opening in West Palm Beach this fall.

These are just 3 initiatives. The full list of initiatives is quite long and some of the most exciting ones are due to the tech replatforming efforts over the last few years. Ongoing improvements in the shopping experience, Gen AI powered enhancements for customers and suppliers and an expansion of our supply chain capabilities, are just a few of the areas seeing rapid advances. Stepping back now, the road map we have on these various initiatives, combined with our relentless focus on top tier execution, paints an exciting picture ahead where Wayfair is accelerating share capture and growth.

All of this is possible due to the deep partnerships we have with our suppliers across technology and people. but also be a deep operational integration across all aspects of their business. Our logistics offering is one of our key competitive moats and an area where we see growing supplier eagerness to lead in. As a reminder to those new to Wayfair, CastleGate is our proprietary logistics network spanning inbound logistics, storage and outbound fulfillment and is possible due to the exhaustive technology and operations with more than 60 buildings totaling 22 million square feet across multiple continents.

We've been investing in CastleGate since 2015 and have built out 1 of the world's only networks, custom designed for the fragile, heavy and bulky products that define the home category. CastleGate Forwarding is our inbound logistics and ocean freight forwarding operations. We enable suppliers to maintain a regular flow of goods as production shifts around the globe, and they fill up operations in new geographies. Many of our suppliers are small businesses who individually lack the volume to consistently secure cost-effective and reliable ocean freight capacity on their own.

Our forwarding services provide access to large, high-quality ocean carriers on a minimal terms, which we can then share at competitive rates with our suppliers. We enable this by not just providing the transportation capability to move the goods, but by also offering cost-effective ways to consolidate the goods to enable forward positioning to many locations. We've seen a 40% year-over-year increase in total volume using our CastleGate forwarding offerings over the last year, driven by increases in both active suppliers shipping on our service and average containers per supplier. We've also expanded to new markets like Brazil and India, unlocking additional volume and enabling suppliers to more easily diversify their production footprint. Recent supply chain volatility has only reinforced the value we offer our suppliers. In fact, we've seen a more than 30% increase in long-term inbound commitments with suppliers compared to where we started the year.

Once product has made its way into the domestic markets, Suppliers are keen to leverage our CastleGate fulfillment network as the best way to forward position their products. The percentage of our revenue that comes from products shipped out of our own fulfillment centers, what we call CastleGate penetration sits at roughly 25% today, up about 400 basis points year-over-year. The benefits from the CastleGate network are numerous. Suppliers achieved broad forward positioning and speed badging, which lifts conversion, lower incidents and return rates, lower ship costs and thereby lower retail prices to consumers. Lower prices, of course, drive conversion and enhance customer perception, leading to improved customer lifetime value.

Logistics is one of the few areas where improvements help the supplier, the customer and Wayfair, all at the same time. With the uptick in CastleGate penetration, we've seen the percentage of items on site with speed badging increased by over 800 basis points year-over-year. The percentage of items with 1- and 2-day badges increased by approximately 400 basis points as we exited the second quarter. We've also seen a nice drop in average ship distance per order versus last year, driven by the growth in penetration. CastleGate further enhances the customer experience from improved reliability with materially higher exact on-time reliability rates than dropship driven by our tight control over fulfillment and carrier partnerships. This enhances the customer order to delivery experience and results in higher customer NPS.

Suppliers enjoy the benefits they get from participating in the Cascade network and one piece of feedback we've heard over the years is the desire to take advantage of our capabilities for more of their order loan. To that end, we're excited to share a key development in our logistics offering, the expansion and marketing of CastleGate to suppliers were fulfilling orders outside of their Wayfair business, what we call multichannel. Multichannel has existed in the background for quite some time, but in a different format and a very small scale is primarily for clearing distressed inventory. Over the past 18 months, we've invested in operational and technology efforts to evolve this offering into a comprehensive third-party logistics service tailored for the home category. [indiscernible] is our core service offering and provide suppliers with competitive rates premium service, integrated inventory management and streamlined order fulfillment for any of their customers.

After testing with a small subset of suppliers in 2024, we launched the full offering to our entire supplier base earlier this year. The response has been resounding. Multichannel volumes are rapidly scaling, and we now have hundreds of suppliers utilizing the offering. We have line of sight to continued momentum as existing multichannel suppliers are growing their inbound volumes and with a healthy pipeline of new suppliers onboarding to the program. For suppliers, multichannel provides a competitive 3PL alternative specializing in heavier, larger home goods. For Wayfair, the benefits are significant as well. First, we generate an additional revenue stream and profit center that is accretive to adjusted EBITDA margins; second, and perhaps more importantly, multichannel opens up the next leg of CastleGate penetration by growing the inventory pool with which we can offer an enhanced customer experience.

Suppliers can now more efficiently include a broader product set in CastleGate and can stock it deeper expanding our offering of forward positioned items and growing their in-stock rates, translating to better speed and lower prices for customers and improving our network efficiency. Ultimately, the multichannel offering creates a win for our suppliers, a win for our customers and a win for Wayfair. That's the philosophy we bring to everything we do. Every dollar we spend solves for the best outcome across our customers, suppliers and Wayfair. Two decades of this approach has taught us that building great things takes time, but when done with thought, care and prudence we can have a pay off well worth the weight. You're seeing some of that this quarter.

With years of work we've done leading to some of the best growth and profitability flow through our business that we've seen since the pandemic. We couldn't be more excited for what lies ahead in 2025 and beyond. And thank you.

And with that, let me turn it over to Kate.

Thanks, Niraj, and good morning, everyone. Let's dive into our results for the second quarter. Starting with the top line, net revenue grew 5% year-over-year and 6% excluding the impact of our exit from Germany. This was driven by strong performance across all of our brands and geographies, with our U.S. business up over 5% and our International segment growing over 3% compared to the second quarter of last year. showcasing the momentum we're seeing in Canada, the U.K. and Ireland. Our Q2 sequential order growth of 10% reflects strong execution and share capture despite a complex operating backdrop.

Let me continue to walk down the P&L. 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 came in at 30.1% of net revenue. For over a year now, we've discussed how our ability to measure demand elasticity in virtually real-time enables us to make tactical investments on a level of granularity and precision that few other retailers can replicate. The result of this work drives our share spread wider and leads to outcomes like we saw in the second quarter. Growing orders as well as growing gross profit dollars, and we continue to see high return from these investments today.

Niraj spoke at length about consulate and the way that our model is advantaged as we drive penetration higher. This gives us more flexibility as we think about strategic areas of reinvestment and our goal to maximize adjusted EBITDA dollars. Multichannel is an important part of that puzzle. So it might be worthwhile to walk through the economics as it starts to scale. Multichannel revenue gets recognized as net revenue and program costs mostly sit in cost of goods sold. The offering has a similar gross margin profile to the business in aggregate and critically, the flow-through becomes very attractive as we think about bridging from the gross margin rate of the multichannel business to its profit contribution. The cost after gross profit are much smaller than they are for the business at large, meaning multichannel has a variable profit profile closer to its gross margin, making for accretive economics as this business grows.

This is an important concept that we've discussed in pieces before, but bears some reiteration now. We are always solving for growing multi-quarter adjusted EBITDA dollars. We achieved this by optimizing revenue growth with our flow-through after accounting for gross profit, customer service and merchant fees and advertising costs. Most of these expenses are largely variable by gross profit and customer service and merchant fees or can be dialed up and down based on payback like advertising expense. These flow-through dollars offset our selling, operations, technology, general and administrative or SOTG&A expense, our bucket of fixed costs.

Let's walk through how we did on that basis this quarter. Customer service and merchant fees came in at 3.6% of net revenue for the quarter. Advertising was 11.4% showing a solid path of sequential decline from the peak Q4 2024 and Q1 2025 levels. There are multiple factors coming together to drive the advertising leverage seen in this quarter. First, as we've shared in the past, we are rigorous about holding each of our channels to specific payback periods and that we adjust spend when testing data indicates that we are over or under our threshold. We were also seeing some efficiency here from areas where testing data has shown we should pull back spend to hold to our target.

We are constantly evaluating the effectiveness of our marketing spend and due to our proprietary ad tech stack and tooling, we can nimbly react to ROI data. Second, as we discussed last year, we made a sizable push into the middle and upper funnel channels beginning in the fourth quarter of last year. Some of those are more nascent channels to Wayfair like TikTok, Instagram, YouTube and more where we are testing the efficacy of these investments. Last fall, we explained how there is an initial deleverage period that comes as you ramp to scale spending across several channels at the same time and that many of these take multiple quarters to pay back. These investments set the stage for future revenue, and you see this bearing fruit here today as revenue of dollars associated with prior quarter spend flows in. It's also worth noting that we are seeing encouraging momentum in direct traffic.

Starting with our loyalty program, Wayfair Rewards is more than a way to generate incremental share of wallet in order momentum, but naturally leads to more direct traffic as customers return to Wayfair to spend the rewards dollars on their next signed for their home. We also continue to see healthy engagement with our app, where the second quarter marked the highest level of installs since Q4 2020 and the percent of wafer U.S. revenue from the app continues to climb steadily to all-time high of approximately 30%.

Now coming back to the concept of flow-through. We drove a rate of 15.2% in the second quarter. 30.1% gross margin, less 3.6 for customer service and merchant fees and 11.4% for advertising. That's the best result we've had since 2023 and was critical to the success we had on driving EBITDA and free cash flow dollars in the quarter. We think this is a helpful construct for investors to bear in mind as they model the business as it takes a more comprehensive view of our cost structure than any 1 of our variable line items alone. -- and combined with SOTG&A leverage drive total EBITDA flow-through. Selling operations, technology, general and administrative expenses were $370 million in the second quarter. This was down by roughly $30 million compared to the second quarter of last year. While we did see a modest sequential growth, some of this was due to mix shift between OpEx and capitalized labor.

In fact, when you pair the SOTG&A with our site and software development costs in the quarter, our capitalized labor line, we have now reached the lowest levels of combined spend since Q2 2019, a testament to the years of cost efficiency we have driven across the organization. In total, we generated $205 million of adjusted EBITDA dollars in the second quarter for a 6.3% margin on net revenue, including a 7.8% adjusted EBITDA margin in our U.S. segment.

As Niraj mentioned earlier, we are now realizing the powerful profitability flow-through of our model, which we have been building towards for years even in a very challenging environment. We ended the quarter with $1.4 billion of cash, cash equivalents and short-term investments and $1.8 billion of total liquidity. Cash from operations was $273 million and capital expenditures came in at $43 million. This reflects the March technology restructuring following our replatforming efforts, which drove lower capitalized labor combined with tight discipline around fulfillment CapEx and some timing variance on physical retail, some of which will rebalance in the quarters ahead. Free cash flow in the second quarter was $230 million, the strongest free cash flow generation since the third quarter of 2020 with approximately 20% quarter-over-quarter revenue growth, driving a healthy working capital benefit.

We deployed approximately $200 million of cash in the quarter to retire more of our 2025 notes and nearly all of our remaining 2026 notes at attractive discounts to par. Looking ahead, after just a small step of the remaining 2025 due in October, we will sit with a clean balance sheet all the way out to September of 2027. This has been a remarkable evolution in our capital structure over the last year, driven by intense operating discipline and rapid profitability growth.

Let's now turn to guidance for the third quarter of 2025. Beginning with the top line quarter-to-date, we are trending up in the mid-single digits year-over-year, and we would expect to end the quarter up in the low to mid-single digits. This outlook for the full quarter continues to include approximately 100 basis points of drag from the exit of our German business earlier in the year.

Turning to gross margins. We will guide you to the lower end of the 30% to 31% range once again. Just like our operating philosophy across all parts of our business, whether it's investments in the customer experience and sharp pricing or thinking about the growth of multichannel over time, we will always be thoughtful and data-driven about whether to pocket gross margin gains or tactically reinvest them. Customer service and merchant fees should be just below 4% in line with recent quarters. We expect advertising to be in the range of 11% to 12% of net revenue, reflecting a continuation of the dynamics we saw last quarter. This range should be the correct ballpark going forward.

Stepping back, we do not view any of these line items in isolation. And then in a given period, $1 of investment that impacts the gross margin line may have higher ROI than $1 on the advertising line and vice versa. As you've seen us demonstrate, we remain nimble in our investment mix across the P&L, solving for the highest volume of revenue and EBITDA dollars across a multiyear view. Finally, SOTG&A is expected to be in the range of $360 million to $370 million once again in the third quarter. This is the right quarterly run rate for the business today in light of all of our operating efficiency work. Following the guidance down, we anticipate adjusted EBITDA margin to be in the 5% to 6% range for Q3.

Now let me touch on a few housekeeping items. We expect equity-based compensation and related taxes of roughly $75 million to $95 million, depreciation amortization should be approximately $73 million to $79 million; net interest expense of approximately $30 million, weighted average shares outstanding of approximately 130 million and CapEx and a $55 million to $65 million range. Wrapping up this quarter's results are just an early illustration of the strength of our model. Our healthy top line growth and robust profitability are a reflection of the value we bring to both our customers and our suppliers as well as the tremendous evolution we've undertaken in our cost structure, all while continuing to invest for the years ahead. As you've heard us say many times in the past, this is a Wayfair now built to both drive exciting share capture and profitability expansion at the same time. We have never been more focused on the opportunity in front of us I'm confident in our strategy, discipline and execution. Thank you.

And with that, Niraj, Steve and I will take your questions.

[Operator Instructions] Your first question comes from the line of Christopher Horvers with JPMorgan.

So some related top line questions. Can you talk about how you think the market grew and how your share gains have shaped up over the past year or so and through the second quarter here. And do you think any of the strength in the business is related to consumer pull forward around fear about tariffs? Obviously, the quarter-to-date is very strong still. But anything you pick up on the consumer side, whether it's pull forward or some differential between the low and high end consumer would be really helpful.

Thanks, Chris. Well, great. Let me share, I guess, a few thoughts related to all that. I guess what I would say on the market, if I just start with the macro, and then maybe I'll talk specifically about Wayfair. If you just look broadly at the market, what I would say is that the market this year is definitely better than the last 3 years where it was down substantially each year. But I think the market is still flat to down low single digits. And I would describe the market not as having strength, but it's sort of feeling like it's bottomed out, like bumping along the bottom. And in terms of pull forward, we have not seen any signs of pull forward. Like if I showed you a demand chart and ask you, "Hey, where this year were tariffs announced, when were they escalated? When were they rolled back, when were they settled?" You would not be able to find any point in that demand chart that would make you feel confident something happened here or something happened there. So that's not really there.

There's no question the higher end market is stronger than mass. That's definitely the case. I think you kind of see that in a lot of different data, but that's not really surprising if you just think about, the category being discretionary. So what I would say is the category is kind of -- it's not a bottom, it's bumping along the bottom after a few years of declines. It's not showing great strength, but it's just maybe you could call it stable-ish because flat to down low singles is not moving around a ton. What's happening in Wayfair, I think, is very different, which is that I think our strength is structural. And I think what we've been doing over the course of time is building momentum. And over this year, we've been seeing momentum built from Q1 to Q2, and we've seen momentum continue to build Q2 to Q3.

So we're actually, I think, pulling away. And I think the reason for that is specific to some Wayfair specific drivers. And the way I think about that is that we sort of had one main pillar, and we've talked a lot about it, which is how we've taken share every quarter since the fourth quarter of 2022, which is that we focused a lot on improving the core recipe, which is price, selection, availability, speed of delivery. And by working with our suppliers, being very focused on those things, we may able to kind of continue to improve the customer experience with those things, the customer benefits from those things. And that has been a driver of our share gain. I would say what's notable though is, historically, we've had 3 pillars in how we grow. And we've had that 1 back intact kind of post-COVID since fourth quarter '22, and it's worked for us to take share. But we now have the other 2 pillars back intact. And that's the notable change.

So a second pillar missed basically just remind everyone on the call, we have a 2,500-person technology organization. So those are software engineers, data scientists, product managers, designers, and we build a tremendous amount of our own technology. And with that, we're able to improve the customer experience and improve the supplier experience in a way that grows the business. Well, for a number of the last few years, we basically focused that team on replatforming a lot of our core systems. And so that took the vast majority of our development cycles. And both at the time and in hindsight, was the right decision.

So even though we weren't able to progress the business with technology, the truth is building the modern platforms to facilitate faster developer velocity and to basically deprecate the old platforms, it allows us to really be much stronger with the technology we can put forward. Well, now that we're very far into that replatforming effort, a lot of the cycles of that team are now back building feature and function to improve the customer experience, improve the supplier experience, and you see that affect things, whether it's conversion rates, whether that's enabling suppliers to do more on the platform, whether that's launching new gen AI with powered features, whether that's efficiency gains in our operations. And so that's been a great boost. So that second pillar is back intact.

And then the third pillar is somewhat related to that second pillar, but it's -- as you know, from 2022 to 2024, we also embarked on getting our organizational structure back working great post COVID. So that's the balancing of senior with junior folks, the rightsizing of teams. And that took a lot of work and was very distracting. Well, as we got through that, we have a great team today, a great team in place. And now they're back driving the business forward at a faster speed than we've had before. And one of the ways that they provide benefit to the business is launching new programs. So we talked about a few of these on the call at Wayfair rewards, Wayfair Verified, brick-and-mortar stores. There's a long list.

There's improvements we're making in logistics. There's a whole series of things. Those new programs are somewhat reliant on the team having the cycles for it and somewhat reliant on the technology support for those. So now we have these 3 pillars back in place, right? The recipe keeps getting better, the technology cycles are available to drive the business forward, and we've been launching and growing new programs. And so I think that's where you're seeing the momentum build.

And then my follow-up question is for Kate. How do you think about the long-term profitability latter higher? If you went back to the 23 Analyst Day, you definitely saw the benefit of leverage on advertising, leverage on SOTG&A, a key piece to the low double-digit plus EBITDA margin target was also gross margin. So can you talk about like -- is there something changing in the business that makes that sort of paradigm and framework different as we look forward versus what you talked about in 2023?

Yes. Thanks, Chris. So as you alluded to in the Analyst Day in '23, we spoke to getting towards north of 10% adjusted EBITDA margins. And I think you're seeing us actually make really nice progress on that path, and we feel very good about our ability to achieve that and continue to see momentum there. To your point, there are a few different elements to that. I referenced on the call, part of how we look at it internally is to think through the components that really drive to what we would call our contribution margin. So the gross margin lets the customer service and merchant fees and less the ad costs and ensuring that we're optimizing on that contribution margin to then cover off on the SG&A and provide that really nice incremental flow-through that you saw this quarter, and we want to continue to see.

And we do trade off across the elements within there to ensure that we're doing the right thing to maximize over time adjusted EBITDA dollars, which ultimately then drives one of our core north stars, which is driving positive owners earnings. So the adjusted EBITDA dollars less the CapEx plus the SEC. You saw that very nicely positive this quarter. And so the combination of the gross margin, the customer service, the AC&R, those things driving to that contribution margin, trying to drive that up over time, then help you get to that adjusted EBITDA dollars and help you get to that adjusted EBITDA margin that we talked about.

So I want to say that there's anything fundamentally different in the way that we're looking at the business, but we do want to provide a framework to help folks think through how we make trade-offs across those lines to ensure that we are driving to maximizing adjusted EBITDA dollars, which then in turn, obviously, drives that margin.

And the only thing I would just chime in to add to what Kate said because Kate, I think recapped it really well. That positive owner's earnings and maximizing that is really a goal we have. So if you think about that, well, how would you do that? Well, if you kind of run out scenarios, you would see that, hey, if I believe I can grow revenue at a pretty meaningful rate and do it while protecting the flow-through at a significant level, you would see that, that compounds very quickly. And so you end up optimizing for that because that is what's going to give you the kind of that asymmetric upside. And so we're very focused on that. You're starting to see that manifest when you see the highest revenue growth, highest profit since 2021. And and we're telling you momentum is building, well, okay, well, where could that go if that builds over time? Well, that's where we believe the opportunity is.

But so that's not focusing on revenue growth, and that's not focusing on profitability, it's a combination of the 2, right? So you need you need to have the flow through. And if you couple that with meaningful revenue growth, then you really are going to maximize the dollars.

Your next question comes from the line of Peter Keith with Piper Sandler.

Great results, guys. Following up on the flow-through question. So the flow-through margin does look particularly good right now, and the Q3 guide looks like it's holding steady at a strong level, maybe even strengthening I'm wondering, are we at like a new normal, we can see the power of the model with revenue growth? Or is there somewhat of an elevated contribution margin today as we're kind of coming off the bottom and now starting to see some of that incremental growth.

Yes. I can start and then Niraj, feel free to jump in. I think actually for many quarters, we've spoken about the impact that the cost discipline we've held over the last few years, the impact of that on overall profitability as we started to see momentum in the top line and that this was really poised for significant flow-through as you saw that momentum. And we're really pleased with contribution margin this quarter and then obviously, the incremental margins being very solid this quarter because of that stock holding in there and remaining in that $360 million to $370 million as we said.

So I think what you're hearing from us is this is what we expected to see. We've been driving the business to this point for many years now, and you see the momentum in the top line really manifesting and that nice adjusted EBITDA flow-through in that nice adjusted EBITDA margin. So it's not -- there isn't anything abnormal.

Just to make sure -- I think I understood the question correctly. So I think if you look at that contribution margin of 15%, I think you were asking -- is there some reason that, that's too high. I would say if you do think back to the Investor Day and thinking about what we're talking about now, -- we think -- no, we think that's a good level. And that's the point. It's like if you have a -- if you have that level of contribution margin and you couple it with meaningful revenue growth, that's how you create the outcome we're talking about.

Okay. Very good. And then I did want to follow up on the marketing. And so it is interesting that you made the investment in Q4 around influencers. You saw the deleverage then and now you're seeing accelerated growth. Could you unpack that a little bit? Are you starting to see an uptick in some of that middle and upper income customers coming into the funnel, which could be a direct result of that marketing? And how has it been going? And could you even accelerate it further?

Yes. So what I would say, so if you kind of look inside the ad cost bucket, I think what you would see is there's 2 significant trends that are both happening at the same time. One is that the emerging channels, which would be things like influencers or things like TikTok, like segments where we've been underpenetrated arguably behind and we focused on figuring out the right recipe to crack them economically, we made really good headway there, and we're growing them quite nicely, and they are getting us in front of a new incremental set of customers. So we're really excited about that.

I will say that the amount of the total budget that's spent in those areas is still pretty modest but it's actually performing really well, growing nicely. I would say the bigger thing that's happened on the ad cost line is through a lot of testing and some enhances to some of our measurement models, we've also been able to identify pockets of our spend, which we do not believe were contributing at the economic payback we wanted. So even though they were creating some revenue for us, it was not at a cost level that would make sense to us. So there, what we've done is we've trimmed out those pockets of spend because we're now able to identify them better. And as we trim them out, it creates a revenue headwind. So like-for-like, ad costs would be higher, revenue would be higher, but it makes sense to. They're not worth that level of spend.

And so what you've seen is that, overall, even though we're growing these emerging channels, on net, we're getting a lot of advertising cost leverage because of how those 2 add together. And we're pretty excited about the combination of those 2 things that are happening. And you could hear from Kate kind of our expectation that we -- there's nothing kind of onetime about that.

Your next question comes from the line of David Bellinger with Mizuho.

Could you just help us understand the progression of the revenue growth through the quarter, especially in the U.S.? And you mentioned not a lot of price moving across the platform yet. So how should we think about that layering in over the back half?

Yes. So I think you're talking about the Q2 revenue growth perhaps and maybe a little bit of the Q3 momentum. Obviously, we don't guide revenue by month, but I think what you saw here was a very solid Q2 revenue growth and Q2 revenue comp. We did make the point on the call that we're not seeing any changes in price. And we do think that, that's frankly due to the benefit of the marketplace model. And so you're seeing that marketplace competitive dynamic enable that prices that are on Page 1, those best sellers, the ones that are at the top of the sort order where folks are actually driving the volume are maintaining their price efficiency. And that's resulting in ongoing customer engagement that result in order volume inquired being slightly positive this quarter. And indeed, as we look into the second quarter, you actually see order volume building more momentum into the -- sorry, to the third quarter order volume building more momentum.

So as we think about how this trends in the third quarter, we've actually said we're actually trending mid-single digits quarter-to-date coming off of a very nice Black Friday and July promotion, and we feel really good about the momentum that we're seeing in the business.

Great. And maybe a longer-term question, as you start to explore some of this Agentic shopping, AI agents, we're starting to see more of this across consumer, understanding Wayfair is using Corian use, is there anything else we should be aware of in terms of customer-facing AI. We've seen some of this new beta testing on the app, a Discover tab with some AI generated images. Near you're just talking about the pivot from the developers to showcasing more features. So anything new there? Anything else we should be aware of going forward?

Yes, that -- Thanks, David. So what I would say is there's a bunch of places that are consumer-facing where the experience is getting improved through Gen AI. And so some of that you'll see in things like search results in store order, in product descriptions and product level imagery attribute sort of coverage and accuracy. So there's a lot of things like that, that are already happening. And then there's a lot more to come. And so 1 of the things I'm sure you kind of think about in our category, it's different than a category where you know exactly what you want, where most retail categories or branded and a large portion of those are consumable categories where you're buying the same thing or you're buying something and you kind of very specifically know what you want.

Here, where there's a lot more product discovery. There's a lot of content around trends. You might create different types of events. You're trying to personalize based on someone's style and their price point, your you're trying to have engaging content, so they come back more often. And then how you can use video and the cost and the quality of what you can create on video is dropping really fast withgen AI. So there's a lot of things that we're also working on that are yet to come. And then there's sort of really engaging features like you mentioned, to corified Mus. That's what we do in the Discover tab. And there's more coming there as well, including a lot of types of experiences that would have a lot more to do with like what we're doing with influencers, off-site and what we could do on site.

So I would say that's an area that you can just kind of keep watching. And so we've done a bunch of things, but there's a lot more coming as well. And I think in our category, it can make for a very rich experience.

Your next question comes from the line of Oliver Wintermantel with Evercore ISI.

Could you guys comment on the revenues from repeat customers versus orders from new customers. It looks like orders from new customers grew a little bit faster this quarter. I want to see what the trends were there for the quarter.

Yes. Oli, as you point out, we did see new order growth this quarter, which is exciting. We always want to see that kind of momentum, but we're not seeing anything fundamentally different in the repeat business as well. And so as you think about how do we build the top line and the share gains over time, some of those share gains are going to come from lifetime value of repeat customers, and some of those share gains are going to come from new customer acquisition and new customers engaging on the platform. And so what we want to be seeing is both of those moving in the right direction, we feel really good about directionally where those -- where each of those are trending.

Got it. And then a follow-up on mix. I think Niraj, you said that within AOV mix was the was the biggest driver. If you can maybe comment on the 3 parts, like units per order items per order or the mix, if -- what the magnitudes were?

Yes. Thanks, Oli. I think -- so if you think about mix, where we've got some higher-end brands and lower end brands, we have different geographies. We have different categories, mix has a lot of impact in that number. And so I think we talked about this earlier in the call about how some of the other factors or items are up marginally, but mix is a very big piece of the total. So I guess, well, the same way we were talking about the price level of items has not really changed. And so most of what you're seeing in AOV is really mix. I guess that would be [indiscernible].

Yes. And I think, Oli, it speaks a little bit to there could be mix within our categories, but there can also be mix across our brands. So that helps -- you're speaking to the momentum we've talked in the past about Perigold, some of the specialty retail brands and our B2B business, all of these things come in at substantially higher AOVs. And so that mix helps drive the overall AOV up even when you're not seeing like-for-like pricing changes. And I think it's important there was a lot of discussion around are we going to see like-for-like pricing changes. So I think it's important to call out that's not what we're seeing. We are seeing some typical seasonality in AOV, and we are seeing this mix benefit in AOV.

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

Nice quarter. The first 1 is on market share. Is there any evolution you're seeing in the source of your gains? Obviously, you've had a string of multiple quarters of consecutive share gains, but fragmented industry, are you seeing any different changes in terms of where you are picking up share? That's my first question.

Sure, Jon. Thanks for your question. I would say, at a high level, no. I mean what we're still seeing is that it's obviously a very large category. It's very fragmented. There's been some notable companies who had decent size who went out of business. There's also a very long tail of smaller companies who have gone out of business and then there's a lot of folks who are just losing share over time. There's a relatively small number of folks who are winning and taking share. And in the past, we've mentioned that Amazon is taking share. We mentioned HomeGoods is taking share, and we've commented that. We believe that ourselves and those 2, if you look back over the last few years are the 3 notable largest share winners that's what would look consistent in the data as we look at it over time.

So the same story is playing out, and it's just kind of continuing.

And then just a quick follow-up on David's question, maybe more from an external lens. But we've been seeing a growing percentage of your site traffic being referred by folks like chatGPT or Perplexity small overall, but growing exponentially. So maybe if you could discuss how Wayfair is positioning itself externally to benefit from consumers increasingly using these LLM as shopping assistance.

Yes. Sure, Jon. So I think you're describing it well in the sense that whether it's OpenAI or Google Gemini or Perplexity, the amount of traffic coming from them is rising, but it's very, very small. And so that said, given the magnitude of the change, it's not something you're going to ignore. So our view is we're kind of doing multiple things. One is how do you optimize the interaction with them so that those platforms can understand Wayfair well so that as they're recommending things they can recommend Wayfair.

Then a number of those platforms also have desires to get into shopping in the same way Google got into Google Shopping or Pinterest got into shopping. And the different goals of how high in the funnel they want to stay and it's going to vary by category because, again, if you're replenishing commodities that you buy on a weekly or biweekly basis, that's 1 level of execution they can do if it's a if it's a much more complex category, there's a different level of assistance they can provide.

And so we're working with each of the major players on ways that we can optimize things together. I think this is an area where our technology strength can help us a lot because a lot of what our team can do the same way we've been a close partner with Google and Meta and Pinterest and others over the years as they've evolved their kind of upper funnel products, and we've been able to help them and benefit by being very early in. It's analogous, I think, to what's happening here. And I think we benefit from being a category where, frankly, a product selection is not a commodity UPC item with SKU number where just -- who's got the cheapest price that can have it delivered by Friday, where that's a thing where the customer actually wants to pick the right thing where it's complicated to pick or delivery is a complicated activity. These are fragile heavy pro to damage items.

So I think that's the other thing we're seeing is that each category type will manifest differently. And I think we're set up well for our category and to be a partner with these folks as they become a larger source of where customers start.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Pedro Gil on for Simeon. Nice quarter. My first 1 is about demand. How do you reconcile the improvement in demand that you're capturing this quarter with the fact that housing turnover is still depressed. And are you seeing an uptick in the replacement cycle absent the housing cycle? And as a follow-up, -- what are you hearing from vendors in terms of profitability? Do they feel like they're earning enough? Or do prices potentially need to increase in the back half of the year?

Yes. So on demand. I mean I tried to kind of address this earlier in some of my comments in the sense that I wouldn't say the category is doing great. So to your point about housing turnover being depressed, if you look at the demand level in the category. You've had 3 years where it went down by kind of significant amount per year, and now you have it kind of flat to down. I think I said I thought it was flat to down low single digits. And -- so that's not a strong environment. And I think 1 of the reasons it is that way is exactly what you mentioned about housing turnover and existing home sales being off by so much. So I think that's still the case.

Now the way I reconcile how we're doing with that, to your question is that I think our strength is structural and specific to Wayfair. And that was what I was trying to describe with the 3 pillars and effectively, how we're able to grow through our own actions I think it's important to realize the category is still a very big category. They have hundreds of billions of dollars of spend in this category, and it is very fragmented. It's arguably far too fragmented and the strong players are providing an experience that's much, much better than what the average participant can provide. So what would it naturally then make sense for customers to do? I think that's where we can pull demand away from places that someone may have gone by providing that customer with a better experience. And that's across the recipe. That's across what we can do with technology, and that's across what we can do in new programs. So we think that's what's happening. And we think there's like a lot of evidence to support that, and you can kind of see that yourself.

On your second question around suppliers and profitability, other margins workable. I think what we've seen from suppliers is that they're very keen to not raise prices on goods. Because what they've seen is if they raise prices on goods, they lose demand for those goods quite quickly. And it's a competitive world. There's a lot of suppliers. We have over 20,000 suppliers on our platform. And they are to some degree, in competition with each other. So they know that, hey, if I take an item, it's doing well, I raised its price, it could kill that item. I don't want to do that. So suppliers are pretty keen to figure out how to maintain those prices. And there's a lot of levers between is there room on the manufacturer's margin? Is there room in their margin? Is there room and what they've built in for ocean freight pricing where ocean freight is stayed at lower level prices and has not become elevated again.

And so there's ways to work to make sure that items that are popular with customers at a certain price point can stay that way. And so this is what we're hearing broadly from suppliers.

We have time for 1 more question, and that question comes from the line of Brian Nagel with Oppenheimer.

Nice quarter. So my first question, and it's going to be repetitive, so I apologize, but just looking at the sales trajectory here in Q2 and then the guidance into Q3, there's clearly been a nice inflection stronger. So I guess the way I want to ask the question is, did -- over the -- this period, so to say, did Wayfair pull some specific lever or it was more a matter of just kind of the business coming together to drive the stronger top line?

Yes. Thanks, Brian. I would actually say I think the demand has been building. And I think it's just now building to a level that it's easier to see and obviously, as it continues to build, it will become increasingly easier to see, right? So I think the way I would describe it is that there's no single lever. In fact, I think I highlighted that if you do add costs like-for-like, you would actually see a higher level of revenue growth. So in other words, we created a revenue headwind by rationalizing some of the ad costs based on some of the improvements we were able to make in the way we were able to measure and model different tranches of the ad cost in a way that's actually been a great benefit for us overall. Because, again, as I mentioned, revenue growth is one goal the contribution margin flow-through is the other goal, the combination creates this growth in dollars and the owner's earnings, which is really the ultimate goal. And so there's not one lever. It's what I described with the 3 pillars playing out and that's been playing out, not necessarily this quarter, but over the course of this year, and you're seeing this building?

Yes. The momentum as Niraj said earlier, a few times, the momentum feels to us, driven by the structural business initiatives, not by any onetime events, any unique pull forward, anything like that. And that momentum is continuing.

Okay. That's very helpful. And then my second question, just with regard to gross margin. So again, you're kind of guiding towards for Q3, that lower end of that normalized range. But you've mentioned a lot of how much control you have over this and kind of your decision to reinvest upside. When you're looking at the gross margin, and particularly as sales are turning stronger, what specific is that -- what is that reinvestment? What -- where are you putting that upside back into the model, so to say?

Yes, it's a great question. I mean, as we've spoken about in the past, we always want to be thoughtful about how we're continuing to drive value for our customer, right? And so one of the levers that we think about is investing in price. We've talked about in the past using our large first-party data sets to really have a fine-tuning on that elasticity curve and where we think we should be optimizing on that curve. And so often, when we think about price investments, which can take the form of take rate reductions or co-investment and promotion, we're thinking about where we want to land on that elasticity curve to overall drive gross profit dollars on this multi-quarter basis, ultimately flow through, right, that 15% contribution margin that we hit this quarter and we talked about and ultimately driving adjusted EBITDA dollars and adjusted EBITDA margin.

And so we'll take into account where we think we should be on that elasticity curve to ensure that we are optimizing there. But we also invest in other parts of the customer experience like, for example, speed or improvements in the delivery experience from deluxing or consolidation of delivery. All of these things are really important to us to help overall drive value for our customer and drive that adjusted EBITDA dollar growth and adjusted EBITDA margin.

And that concludes our question-and-answer session. And I will now turn the conference back over to the Wayfair team for closing comments.

I just want to thank everyone for your interest in Wayfair and for joining us today. We look forward to talking with you again next quarter, and I hope everyone is enjoying the summer.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.