Shareholder letter
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February 2025 To our Shareholders: Thank you for your continued interest in Wayfair. As always we are excited to share our thoughts with you here as we work to build Wayfair to its full potential. For the last couple of years, our shareholder letters reflected on the recent past and the Covid-era. This year our focus is on the present and the future; we want to start with where we are today and share what we think is to come. Navigating a Challenging Market The home goods industry is inherently cyclical, but the past few years have been particularly volatile. A confluence of macroeconomic factors - shifts in discretionary spending post-pandemic, supply chain disruptions, and historically high mortgage rates - have significantly impacted the housing market and, in turn, our category. Despite these headwinds, our category remains vast, valued at over half a trillion dollars across our four markets. As we reach what we believe is the bottom of this downcycle, we see substantial opportunity for Wayfair to capture greater market share, grow revenue, and do so while growing profit dollars. We will do this by being customer focused and execution oriented. We have a tremendous amount of opportunity in front of us, and so we will be both incredibly ambitious, and also very disciplined with respect to ruthless prioritization. "Winners, win" This is a favorite quote a friend of ours uses regularly. What this means to us is: (a) Resilience: Overcoming setbacks and still achieving goals. (b) Execution: Turning ideas into reality and delivering results. (c) Adaptability: Adjusting to market changes and staying ahead. and (d) Continuous Improvement: Always seeking ways to grow and optimize. Our plan in 2025 is to: (1) focus on tight execution to drive profitable growth through taking market share in what is likely a continued challenging market, (2) continue improving the 1
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financial position and strength of the business, and (3) invest in building the five long term moats of the business. Here are some details: (1) Focus on tight execution to drive profitable growth through taking market share in what is likely a continued challenging market. This is how we will do it: ● Enhance the core recipe (competitive prices, convenient and fast delivery, high in stock availability) - an always-on activity, with a number of efforts underway such as reducing retail pricing through new logistics cost gains, adding a number of convenience-oriented home-specific delivery services such as ‘delivered assembled’, and working with suppliers to drive up in-stock availability by concentrating on our curation programs. ● Go after the low hanging fruit - identify efforts where we are behind and that we can accelerate through focus and execution to get an outsized return. On these things we should be able to not just catch up, but do so quite rapidly. There is a list of efforts we are prioritizing here, and each has an owner and dedicated resources. Some examples include modernizing our merchandising platform, overhauling our B2B salesforce to better service and grow larger accounts, and developing more nuanced promotions capabilities, a beneficiary of tech resources now available post tech replatforming. ● Select a small number of high ROI efforts, and make sure to not only pursue them, but as they reach sustained velocity, to then accelerate these initiatives so that they make a meaningful impact. One example is Wayfair Verified, our merchant-led editorial program where we select a finite set of great items, physically inspect them, and provide customers with a discerning explanation of why these are quality items and ones that represent great price-value. Wayfair Rewards is another of these efforts, where customers gain benefits by making Wayfair their first stop for all things home, or physical retail stores, such as the our first large format Wayfair store which opened outside of Chicago last May. The aggregate of this list is meaningful in its potential impact. We have selected the items, defined ownership, set metrics, created a high frequency way to monitor & measure results, and are off and running. One obvious question would be - why is this different from 2023 or 2024? The main difference is that we spent the vast majority of our technology resources in those years working on tech replatforming. Replatforming was a crucial step in evolving our tech stack to a more scalable and flexible architecture. However, during this transition, we had 2
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limited capacity to focus on developing features and functionalities that drive growth. Now that the replatforming is far along we plan to use tech bandwidth to directly grow the business. Product-led growth has always been a key piece of how we have succeeded. (2) Continue improving the financial position and strength of the business. For the first decade of the business, 2002 to 2011, we were net income positive and funded the business from our own cash flow. We were incredibly growth oriented, did not take outside capital, and bootstrapped ourselves from $0 to $500 million in annual sales. This led to a decade of tremendous investment - including building a household brand in numerous countries, creating our logistics network (~25 million square feet across ~75 buildings providing an end-to-end logistics network optimized for the big and bulky goods we sell, to lower costs, improve speed, and provide a convenient and easy experience to our customers), and scaling our technology organization considerably. We ended 2019, pre-Covid with $9 billion in annual revenue. We now have $12 billion in annual revenue, a streamlined cost base due to removing $2+ billion of various costs, and a plan to grow revenue while growing profits. Before we elaborate on our thinking, we do want to make one important point. We discuss Adjusted EBITDA here because it is traditionally used in our industry. What we are optimizing for is not solely Adjusted EBITDA, but rather a true measure of economic profitability. To reiterate what we wrote in last year’s letter: We think the true economic profitability of the business is best measured by our ability to generate Adjusted EBITDA in excess of capital expenditures and equity-based compensation, essentially treating all expenses as if they were cash paid at the moment they are incurred. One of these expenses is equity based compensation, where we think the best measure is share count. We aim to not only reduce the amount of dilution going forward but ultimately reduce share count, thus accruing more benefit to all existing shareholders. In tandem, we will compound growth in free cash flow (FCF) with improving profitability and the working capital benefit that accrues as we grow. We believe that the combination of FCF (growing) and share count (ultimately, shrinking) are the two best ways to measure the financial success of the business. We are now in a solid financial position where we can settle debts with cash as they come due, and we are set to see earnings rise quickly as we return to growth. We intend 3
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to keep working to make our operation more efficient while we pursue growth in tandem. We expect that this will make Adjusted EBITDA, Net Income and FCF all grow over time. We will maximize our Free Cash Flow while simultaneously tightly controlling and ultimately reducing total share count, and treat this combination as our north star. The main update we wanted to share is how we think the P&L evolves over time. We are on the path to over 10% Adjusted EBITDA margins, but how, more specifically, does that play out? Here are the major cost/margin lines that lead to EBITDA leverage in the P&L: ● SOTG&A (basically corporate overhead) will improve the fastest - this has been happening for 2+ years during which we reduced expenses while revenue was roughly flat. Today, we still have opportunities to reduce expenses, including some assisted by Gen AI. However, the biggest factor is that we don't need to reinvest as revenue grows, resulting in considerable leverage over time. ● Gross margin gains are happening and will show up over time - the nuance in this line is that some gains are nearer-term and some longer-term. For a pair of nearer-term examples, cost leverage from our CastleGate logistics network is significant as we grow utilization, and continued growth in our supplier advertising (retail media) business will grow gross margin. Examples that will happen further down the line include the scale benefit we get from volume growth with suppliers, margin growth from our curation programs as demand gets more concentrated, and overall margin improvement as our emerging categories and specialty / luxury / professional / International businesses grow. The gross margin line is a mix of all of these things. ● Advertising cost reductions will show up the slowest - this is because the improvements in the business enable a new tranche of profitable advertising spend while demanding the same payback as before. Leverage in overall advertising spend comes as the portion of the base that is from loyal customers grows as a share of the total. We still have a lot of new customers we can reach profitably (for all of our brands, including even Wayfair.com where in 2024 at our first Wayfair physical retail store, the majority of customers were new to file), and a large number of customers who are early in climbing up the loyalty ladder. As we grow Wayfair Rewards, improve conversion via Wayfair Verified, and enhance delivery services, more customers become interested in shopping with us, and more start to climb up the ladder, and this productive spend offsets the savings from those who climb up into the higher loyalty tiers. So the expectation that ad cost by channel will only be run at tight paybacks is important and correct, but success 4
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can lead to increased opportunity to profitably reach customers (with payback and profit holding within the same multi-quarter basis), and so that is why this line is the slowest. When you revisit the bridge we provided in the summer of 2023 on how EBITDA climbs to 10%+ (this slide is also in the investor presentation we published today), you can see that the route to 10%+ EBITDA from where we are today is even stronger now than it was then. (3) Invest in building the five long term moats of the business. We discussed these moats as the core of last year’s letter. These explain why Wayfair can be the big winner in home, all while competing with very large retailers who at their core are general merchandisers, or home improvement focused stores. An astute observer will notice we changed this from 4 to 5 moats. The addition of how we work with our suppliers is not new - we have done this from the earliest days of the business - but rather is a recognition of the power of this difference and why we continually work to develop it. These are 5 moats we are working to build and deepen: 1. A Trusted and Beloved Brand that is the Go-To Place for All Things Home: Wayfair’s specialization and expertise within home provides us with unique capabilities to understand and solve the significant challenges that customers face when shopping the category which results in a platform that customers are loyal to and rely on as their first stop for their most important purchases. 2. A Delivery Experience Built for Home: A proprietary logistics network and delivery experience optimized for large and bulky home items that enables lower retails, faster speed and higher customer satisfaction. 3. A Differentiated Customer Discovery Experience: We combine inspiration, curation, and seamless navigation along with a powerful and trustworthy approach to product validation - ensuring customers find exactly what they’re looking for and feel confident that they will love what they buy. 4. A True Omni-Channel Experience: As we talked about in the letter last year, home is unique. As a dominant retailer we will meet customers wherever they want to shop. With a growing physical retail presence, Wayfair provides customers with the flexibility to shop and engage with Wayfair how they want while ensuring seamless experiences between on- and off-line. 5
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5. A True Partnership with Our Suppliers: Wayfair invests in building strong and deep relationships with our key suppliers - partnering with and empowering them to provide our customers with a world class offering and thereby driving significant mutual growth. Summary We operate in a handful of countries with a handful of brands, all of which are focused on home goods. The end market is over half a trillion dollars in these countries, and with $12 billion in annual revenue, we are both a large player, and one with small absolute market share. The market evolution of squeezing out the players in the middle who do not offer customer value has picked back up - it was in full swing until Covid, then the low interest rate tide floated all boats - and that is now over. Our opportunity to be the big winner in home is intact, and our ability to organize around it and win through execution has never been better. What do we need to do? ● Prioritize the things customers want ● Focus on what is in our control ● Ensure that our plans will drive profitable growth ● Leverage our tech strength as we are now moving past replatforming ● Make sure every dollar is worth spending ● Execute with rigor and speed The plan is not hard, but executing it is not easy. We are thankful for the team we have. It is a great team that is both a fun one to work alongside, but also a very capable one that can win. And we thank you, our shareholders, for your interest and support. Sincerely, Niraj Shah Co-Founder, Co-Chairman & CEO Steve Conine Co-Founder & Co-Chairman 6
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Use of Non-GAAP Financial Measures: To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP"), we use certain non-GAAP financial measures, including Adjusted EBITDA and Free Cash Flow. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. Non-GAAP financial measures should not be considered replacements for, and should be read together with, the most comparable GAAP financial measures. Adjusted EBITDA is a non-GAAP financial measure that is calculated as net income or loss before depreciation and amortization, equity-based compensation and related taxes, interest income or expense, net, other income or expense, net, provision or benefit for income taxes, net, non-recurring items and other items not indicative of our ongoing operating performance. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by Net Revenue. Free Cash Flow is a non-GAAP financial measure that is calculated as net cash provided by or used in operating activities less net cash used to purchase property and equipment and site and software development costs. We calculate forward-looking non-GAAP Adjusted EBITDA based on internal forecasts that omit certain amounts that would be included in forward-looking GAAP net income or loss. We do not attempt to provide a reconciliation of forward-looking non-GAAP Adjusted EBITDA guidance to forward looking GAAP net income or loss because forecasting the timing or amount of items that have not yet occurred and are out of our control is inherently uncertain and unavailable without unreasonable efforts. Further, we believe that such reconciliations would imply a degree of precision and certainty that could be confusing to investors. Such items could have a substantial impact on GAAP measures of financial performance. For full financial data and non-GAAP reconciliations, please refer to Wayfair’s earnings release issued on February 20, 2025, available at https://investor.wayfair.com/reporting/quarterly-results/default.aspx. Caution concerning forward-looking statements: This letter contains forward-looking statements within the meaning of federal and state securities laws. All statements other than statements of historical fact contained in this letter —including statements regarding our future results of operations and financial position, business and capital markets strategy and plans, profitability goals and the financial impact and expected savings of our cost efficiency plan, and objectives of management for future operations—are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “goals,” “aim,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these terms or other similar expressions. You are cautioned not to rely on these forward-looking statements, which are based on current expectations of future events. For important information about the risks and uncertainties that could cause actual results to vary materially from the assumptions, expectations, and projections expressed in any forward-looking statements, please review the “Forward-Looking Statements” section of the Wayfair earnings release issued on February 20, 2025 as well as the most recently filed Wayfair Reports on Forms 10-K and 10-Q. Wayfair does not undertake to update any forward-looking statement as a result of new information or future events or developments. 7