Wayfair Inc.
Q3 2022 Earnings Call Transcript

Published: 3 Nov 2022

[Operator:]

Good day, and welcome to the Wayfair Third Quarter 2022 Earnings Release Conference Call. Please note, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions]. At this time, I will turn the conference over to James Lamb, Head of Investor Relations. Mr. Lamb, you may begin your conference.

[James Lamb:]

Good morning, and thank you for joining us. Today, we will review our third quarter 2022 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 we will make forward-looking statements during this call regarding future events and financial performance, including guidance for the fourth quarter of 2022. 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 2021, 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.

[Niraj Shah:]

Thank you, James, and good morning, everyone. We're glad to reconnect with you today to share the details of Wayfair's third quarter results. This last August marked our 20th anniversary. It was in the summer of 2002 that Steve and I first started this business out of a nursery and Steve's home. We were still nearly a decade away from adopting the Wayfair name at that point, but since the beginning, we've had a vision of creating a premier online shopping destination for the home. We've got big and bold every step along the way, and for nearly a decade, we were able to self-fund our growth as we reinvested operating profits back into the business. In 2011, we rebranded as Wayfair, and for the first time, raised outside capital as we look to scale up our growth. In the decade since, we've grown the business by nearly twentyfold and made meaningful investments in building out our catalog, customer file, geographic presence, logistics platform and more. With the size and scale we've achieved, we are now in a position where we can operate the business for both profitability and growth and are well on our way to returning to a state of self-funding once more. Last quarter, we talked about controlling the controllables and orienting Wayfair in this environment around three key principles

[Kate Gulliver:]

Thanks, Niraj, and good morning, everyone. Before I dive into third quarter results, I want to take a moment to emphasize the point that you've just made. The key principles of cost efficiency, nailing the basics and earning customer and supplier loyalty has become driving tenets across our organization. In particular, cost efficiency is a mandate to put each dollar of spend under close scrutiny. We started by closely examining our operating expenses related to headcount across two dimensions

[Operator:]

[Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer.

[Brian Nagel:]

So my first question, again, it's probably more for Kate. You talked a lot about just the advertising expense and the elevated numbers that we saw here in Q3, and then it sounds like it persist in Q4. The question I have is when should that normalize? What will it take for it to normalize? And was that a 20 odd -- at some point in '23? Then the follow-up question, I'll slow down now. I guess this is more for Niraj. We talked again about CastleGate and the penetration there around 25%. So I guess this is maybe a longer-term strategic question. Where should that number be? Where is that infrastructure, so to say, designed to be? And I guess from a more touchy feely standpoint, if I'm a customer of yours or a partner of yours now not using CastleGate, why is that? It seems like it's a pretty good offering.

[Niraj Shah:]

It's Niraj. Let me actually jump in and start off on the ad cost question, and then Kate can certainly chime in on that, and then we'll go to your CastleGate question in a second. I think the main thing, I think, to make sure you understand about that add cost to ACNR percentage number, is there's a set of things that move that number around. And a lot of them have to do with mix. And one of the things that's happening right now is that if you think about that composition of that number, you have a significant amount of traffic that effectively has zero land cost. And that's where we have a household brand, we have tens of millions of customers. We have the people downloaded the app. And depending on how top of mind the home category is, they come and they shop Wayfair. Then we also have what we do in the paid channels. And this is where we manage each channel to a take payback. We've kept all the channels at pay back. So we've not extended any all those channels are coming in at the payback numbers we want. And there, we're going out and we're targeting and running ads in a way to draw people in. Now what happens in times where the category is super top of mind like Q2 of 2020, for example, you're just getting tons of that direct free traffic, and that's going to average this number down. But in times where, frankly, the category is not top of mind, which, to be honest, this category, particularly online is not a top of mind right now, things like travel and leisure and entertainment and taking share on the discretionary dollar, what happens is just that free traffic is a little less. Those numbers each other don't need to move very much for the ACNR percentage to move up or down, even though every channel is a payback. So what I described, that's the single biggest factor that's moving that percentage around right now. And we don't particularly view that as problematic. And the reason we don't see that as problematic is that we've seen the cycle before, and we know where it will refer to as the environment normalizes. That said, there's a component of the spend that is in buckets that are either very hard to measure or are high ACNR or in the experimental phase where they're not at the percentage we want to get them to before, we'll scale them, and we're running different experiments and tests to figure out how to get it there. And so that bucket is something that, frankly, we have been looking at, and we're getting a tighter with. And so that will allow us to basically reduce ad cost without really reducing as much revenue because we're taking off the things that are the "most expensive things" or the least proven things. And so that's kind of the way to think about it and why the ad cost number maybe is where it is, but also how we can manage it. But Kate, anything you want to add on that?

[Kate Gulliver:]

Yes. I think that covers it. I think as Niraj mentioned, obviously, as the mix shifts continue to happen, we may see some of that 12% to 13% as we guided to. But over time, we're obviously managing very closely some of that longer-term payback and bringing that in as necessary.

[Niraj Shah:]

Let me just jump on your second question on CastleGate penetration. So as you noted, it's at 25%, which basically means that it's recovering quite nicely from the low hit last year when inventory was super scarce. And it's on its way to, we think, records and then break those records. It is a great offering. And so we actually have quite a large number of suppliers in it. I think the way to think about it is why would a supplier not be in it. They might not be in it, either they might be still at a stage where they're just testing it. So they might be in a very small way relative to potential. There are some suppliers who may not be in it yet. And part of that is we obviously focused on having these conversations with our category management team with suppliers who we actively work with. We also have a long tail suppliers who work with us through Partner Home, or extranet, our systems. And a lot of the CastleGate self-service functionality is relatively new. We continue to bolster that. So there's a lot of suppliers who get onboarded as it becomes easier to do it in a self-service manner. And then depending on where a supplier's origin points are, there are certain lanes that we have been able to really optimize with the way we do ocean freight and consolidation. And then there are certain locations we do not yet have the inbound flow set up for, so that just makes it a little harder for supplier to use CastleGate. They have to handle the inbound flow on their own. And as you know, this past 1.5 years has been a really complicated period because they went from sort of too much demand, too little inventory. So that was sort of -- that would work against CastleGate penetration and supplies couldn't even flow enough good for the orders they had obviously, you saw our penetration numbers get hurt. So you can imagine new suppliers are not signing up for CastleGate in that period, right? Now you go into a period where there's effectively excess amounts of inventory. So now you have suppliers who are either have been in CastleGate, now there's a lot more in, I want to drive sales, but you also now have a lot of a like, okay, hey, I now want to figure out how to grow my business in a tough environment. I want to try CastleGate. I want to do things that I wasn't willing to do weren't willing to do last year because I just didn't have that need. So I think we're in a phase of more CastleGate adoption, suppliers using it more heavily. We're adding a lot more optimization into it as we're building up the technology around the inbound flows. So this is all the reasons it will grow. In terms of what level will it get to, we haven't discussed an exact percentage out there, but what we have talked about is we built a really good logistics footprint. So that phase of opening up buildings just for footprint's sake is over. We do have some buildings coming over time that basically help us fill in some gaps in places where we need basically capacity so that we can bring more goods in. And then, frankly, as the demand environment normalizes, we'll be able to see turns in our network go up, which means that the flow of goods through our buildings, more buildings will increase just because right now, the way that you see a supplier having an inventory overhang, well, they would have an inventory overhang, not just in their own building, but in CastleGate as well because the demand forecast change for everybody. So that's I think the way to think about it. Hopefully, that's helpful.

[Operator:]

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

[Steven Forbes:]

I wanted to start with the outlook for overall logistic cost. So Niraj, curious if you could help frame how you see inbound and outbound. Is it just the cost environment in general as we look out to 2023? And sort of frame it around what has traditionally been, right, about 20% of overall net sales or the combination of the two. Do you see relief right as we look out over the next 12 to 24 months?

[Niraj Shah:]

I would say, if you think of the 20%, we referenced that a number of times in the past. And what that was say, hey, if you took every aspect of the end-end logistics, it was round about $0.20 of every revenue dollar. That was sort of before what happened last year, more than the cost kind of really mushroomed up. So it would have rose significantly from that level. And now if you look at what's happening, things like ocean freight have come back down fairly significantly. And so it's back down to a level that would sort of put you back in that 20%. Some of the things like over-the-road trucking are coming down. They're still somewhat elevated to those aspects have come down more than other aspects. But I think broadly, what you should think about is like supply chain costs are reentering that kind of normal historical range, that $0.20. That wasn't true last year. And so it is a deflationary force. And frankly, supply/demand is -- right now, there's excess supply relative demand. That will normalize back out. So now all of a sudden, all the things we're doing to really add efficiency and elegance around having products travel less miles, by forward positioning them in the right place to begin with, that offers the customer with the speed bag of delivery. It offers the customer effectively a lower retail price because the ship costs get factored into the retail, so they see a better price. And we also see less damage. And that is taking share. And so that's a customer value proposition that we are optimizing for that also -- it's averaging down that shipping cost over time, which is the reason we've been building up the logistics.

[Kate Gulliver:]

Steve, I'd probably just add that as we spoke to on the call, in addition to some of the logistics costs coming in line. We also have taken a series of actions around our operational costs, and that combined is helping us see improvement on that gross margin line, 29% this quarter. And we have confidence in that continuing to grow throughout 2023 due to those combination of actions.

[Steven Forbes:]

Maybe just a quick follow-up staying on that same topic. I guess if we think about the impact, right, of lower overall logistic cost and the pass through the consumer, can you just help us sort of frame the 2023 outlook for average order value directional-wise? Is it probably fair to say that we should expect average order value to be down, or is it too early to tell given mix changes potentially, et cetera?

[Niraj Shah:]

Yes, I think there's -- a short answer, I think AOV does drop some. The question is like how much. And that's where it gets hard to exactly quantify the how much. But there's definitely some inflation that's already reversed and you're seeing suppliers sort of being proactive around that. My cost to bring this item in in the future is lower. I have too much right now. Why don't I start pricing it closer to what the future cost can be so that I can move through it faster. So there is relief in the form of reflecting these costs coming down, absolutely. In terms of how that flows through to revenue, it gets a little tricky because if AOV falls, actually conversion rate and orders pick up. And so you actually don't net lose all of the AOV in a flow through to revenue. So depending on what you're trying to think about the AOV impacting, there's an offset that plays out to.

[Operator:]

Your next question comes from the line of Jonathan Matuszewski with Jefferies.

[Jonathan Matuszewski:]

Just on the $0.5 billion of savings coming out of the business, thanks for the examples you shared regarding returns monetization and other things. How should we think about the impact of those costs coming out to customer experience and potentially customer demand? That's my first question.

[Niraj Shah:]

So just a size, we did refer to the $500 million of savings. And so if you remember back to the last earnings call in August, we talked about a set of things that we'd already decided to do. That's what the $500 million. We said we'd provide you detail and quantify it a little later. And so we're now quantifying that. But since that expanded the plan, so we've added several hundred million dollars on top of the 500. So what you can see is like from a cost standpoint, we decided to be very aggressive around making sure that we're not carrying any excess costs that forces us to either drive up retails or not have the profit profile we want to have. And if you think back to our history for a decade, we operated out of cash flow. We grew the business 500 million in sales with no outside capital. And we did that by being very lean. And so when we kind of looked at our cost structure with a fresh set of eyes, there's just a lot of things there that we just saw that, frankly, while we're just busy managing that dramatic growth from the $9 billion overnight to up over 50% because of COVID, there's a period of extended period of time where maybe not everything was equally focused on as much as it should be. And so the return of monetization is just one example. There's a number of those areas. The way to think about what these things do is the impact to customers is effectively, it's either neutral or positive. And why do I say that? Well, either we're taking out cost that's not providing customer benefits, that's neutral if you think about that doesn't hurt the customer, or it's positive if you think about the fact that in some cases, they lower retails or some of the cost optimization we're doing in transportation actually increases the speed of delivery. So we're like net doing things that are making retails better, making speed better, taking out costs where we think it's adding, not adding to value. So we're not looking at the cost coming on the back of customers. In fact, we're looking at the proposition increasing. And what we're doing is we're sort of -- we're sort of streamlining and cleaning up some things that you could argue maybe should have done earlier. Kate, anything you want to add on the cost?

[Kate Gulliver:]

Yes, I just want to make sure we clarify. So that 500 million is what we're -- what Niraj was sort of just referencing on the gross margin line, about 40% of that 500 million, we think about is operational cost savings and improvements that will flow through in that gross margin. And then that several hundred million more fees will come back in February with some more details on that for you and provide more context then.

[Jonathan Matuszewski:]

And then my second question, just on the second Way Day, I think this is the first year you held a second event here. Is this just a reflection of the current inventory environment, or are you kind of changing the philosophy in terms of how you're working with suppliers going forward? Should we expect to see kind of more regular holiday period into perpetuity? Obviously, you clarified that it doesn't impact kind of gross margin all that much. But just kind of curious what we should expect in terms of promotional holidays going forward as the inventory situation changes?

[Niraj Shah:]

I think it's important to point out, we've always had, along with every other mass retailer, frankly, a pretty solid calendar. They're around the major shopping holidays, right, President's Day, Labor Day, Memorial Day, Cyber 5. So we have a calendar through the year, Way Day, safe thing give back, which we redid 5 days of deals this year. And so we have a calendar then the way to think about it is you can flex it up or down depending on the environment. And so right now, to your point, there's excess inventory and customers are -- even though they have plenty of money, they're a little more sitting on the sidelines, and that's kind of a reflection of when we look at the customer sentiment. And so promotion-- what you do in those environments is you flex out the promotional kind of calendar, and it works well. But what you don't do is you don't keep it there forever. So then as the environment normalizes, we bring it back to the normal promotional calendar that we have. And then there's periods. They're somewhat rare, but like during COVID, promotions just didn't carry the same bang that they normally do because people are just buying what they wanted every day. So there's a little bit of -- there's times work flexes the other way, too, although those are somewhat rare. So just think of it the bulk of the time you have in your normal calendar. That's what you've normally seen us do, which still has a fair amount of sale of [Indiscernible]. And then during a period like this, there will be a relatively short period of time, but you flex up. And this is -- the Way Day 2 is an example of flexing up, but don't think that's like a normal environment thing.

[Operator:]

Your next question comes from the line of Maria Ripps with Canaccord.

[Maria Ripps:]

Can you just talk about your fulfillment capacity in the U.S. at this point and where you are from the utilization standpoint? And do you see the possible need to optimize your footprint, sort of in a scenario that revenue continues to be soft in the near term as you focus on cost optimization initiatives, especially as Kate highlighted sort of the next layer of additional savings.

[Niraj Shah:]

I think the way to think about our footprint is -- so we have a good footprint. It's fairly heavily utilized right now, but it's not necessarily at the turns level that we and our suppliers would target. And that's just a function of this inventory cycle that you're sort of going to be hearing about from everybody everywhere. You've already been hearing about, which is just folks flowed in demand against the demand profile that sits slowed. They have too much inventory or imbalance on what inventory they have. And they're all now working through it. So if you think of the buildings, it's like two factors, in fact, how much goes through the building. One, of course, is it full or not, what rate doesn't move in and now the amount of stuff in the building is quite good. The rate at which is moving in and out is lower than we would all like. that's why do you have a Way Day 2 or why you do these things or why are suppliers leaning in on price. Well, they want to rightsize their inventory. They want to get back into balance. They want to clear up the excess inventory. They know that giving customers value right now is really the only thing that will kind of dramatically change how share works. So that's happening. I think when you think about the buildings, I think it's important to realize that the buildings actually reduce our cost versus increase our cost. Because without buildings you can't -- when I talk about logistics optimization and taking cost out, the way you do that, the easiest is excess miles. Because if you bring something and so you bring it into port of L.A., we have 70% of the people in the East Coast of the U.S. items are sitting in California. Then they got to move really long distance on that final mile leg, which is your most expensive leg to the customer. Now all of a sudden, you say, hey, I'm going to put some goods off the get-go. I'll put some in Dallas, I'll put some in Jacksonville and some in New Jersey and some in Chicago, et cetera. In relation to what roughly demand balance is, all of a sudden, the customer sees a faster speed, but frankly, our shipping cost goes down dramatically because that inbound leg is not very expensive relative to the outbound leg. And but obviously, without a building in that place to put the goods in, you can't do what I just said. Our suppliers typically have one warehouse. A small percentage have two warehouses, and it's a negligible percentage more than that. So what happens is, the supplier doesn't have the infrastructure to do this on her own. This is part of why CastleGate is appealing to them. It's that they then get the benefit of the forward positioning. They're good to get the speed badge, the retails for their goods can drop. And that creates -- that's a big value proposition for customers, right, and drives demand to those items. Those items are higher converting to move up in the store. So it's a self-fulfilling positive cycle. And so driving volume through the building is actually a key piece of the strategy to take out cost.

[Kate Gulliver:]

Yes, I'll just add, Maria, you mentioned how do we think about buildout of the FCs in relation to our cost savings initiatives and that core goal for '23. And as far as the capital expenditure is related to the FCs, we're very focused on building that when we need it, not in advance of when we need it. So we intend to be very moderated and thoughtful about any incremental capital expenditure there.

[Maria Ripps:]

And then secondly, is there anything you're seeing sort of in customer behavior, maybe more recently, it would give you some clues that customer count should return to growth here sometime in the near term?

[Niraj Shah:]

Yes, I mean I think what we're seeing in customer behavior is that customers are responding well and as we would have expected to what we're doing in relation to the macro environment. So if we look at the macro environment and we see customer sentiment low, we see excess goods, we know the playbook for that. That's why do we have a Way Day 2, et cetera. So we know how to run that playbook. So we run that playbook of these exciting events. We're seeing suppliers participate in a great way. We know how to market those out to customers and we're seeing that they respond. So they're coming in, they're buying. We're seeing that work incredibly well as you've seen gross margins holding up. So what we're not doing is we're not doing it by discount. Because what we're doing is we're investing in running that playbook. Suppliers understand how to use that playbook. Customers respond well to that playbook. It's a perfect playbook for this environment. And it's working really well. And that's kind of why we also gave you some feel on the impact of Way Day when we talked about the revenue levels. And I think that this environment is going to be here for a little while. It's not something that's going to go away. And the amount of excess inventory is going to also take a little bit of time to work through. So this is -- you can think about this environment lasting, I would probably say a small number of quarters. But it's not weeks or shorter months.

[Kate Gulliver:]

Yes, but long term, our view of the potential, the total TAM, our position in that, where e-comm penetration should land, that has not changed. So while there may be some volatility in the near term, our long-term outlook has not moved.

[Operator:]

Your next question comes from the line of Greg Melich with Evercore ISI. The question has been withdrawn. Your next question comes from the line of Alexandra Staiger with Goldman Sachs.

[Alexandra Steiger:]

I wanted to follow up on the active customer growth question here. Given the scale and reach you achieved during the pandemic, how do you think about the potential of customer reactivation to support forward growth? And how large do you see reactivation as an opportunity relative to new customer growth going forward?

[Niraj Shah:]

I think reactivation of people is actually, frankly, a big opportunity, right? And so if you think about it, we have over time built a large kind of following amongst customers, a number of which have a wrap, a number of which are on our e-mail list, a number of which visit regularly. Right now you have a macro phenomenon where basically customers -- this category is just not the top of mind thing. And there's swings that happen. And they revert to the mean over time. We are doing a lot to make sure that we are positioning as the go-to home retailer, the largest specialist in home, that we are getting those customers coming back to us as the category becomes back more further top of mind. And then there are specific things on the marketing side we're doing to help drive that as well. And we have the benefit because a lot of what's happened on the ad landscape out there is it makes it very hard for someone who doesn't already have that customer file to effectively market at a reasonable cost. What we have because of the first-party data in the direct regions, we have the ability to reach directly to these customers. And that's a pretty -- that's a very major benefit. Only the largest companies have that benefit today because of what's changed in the privacy landscape, and then some of the technologies I'm targeting out there. And so reactivating customers that have not purchased in the recent past, we view this is a huge opportunity. There's a lot of things we're working on along those lines.

[Operator:]

Your next question comes from the line of Anna Andreeva with Needham.

[Anna Andreeva:]

Two questions from us. You mentioned that environment got worse as the third quarter progressed, but consumer obviously continues to respond. I'm not sure if I missed this, but what was the monthly cadence during the third quarter? And then secondly, could you talk a bit more about international continues to be a pretty meaningful drag on the business, obviously, macro is difficult. Do you think getting closer to breakeven is realistic for '23 in international bucket? And what are some of the expense opportunities in the business that you could implement to get there?

[Niraj Shah:]

Yes, great. Let me start to answer some of your questions. I'll ask Kate to jump in too. On the environment getting worse in Q3, I'm not sure exactly what the comment we made was referring to that.

[Kate Gulliver:]

We don't typically disclose monthly trends. Certainly, I think although we've said and what I would reiterate is that we do see the customer coming in during promotional activities right now, and those tend to be highlights for us at this moment. And the broader macro context, obviously, is a little bit uncertain right now.

[Niraj Shah:]

But I would say, like, I don't think the environment is worsening. I think it's more like been steady. It's not improving. It's like steady as maybe the way I would phrase it to, give you the context of what I'm seeing. On the international, there's no question that out of the 4 countries -- we operate in 5 countries today, technically we have 4 major ones in terms of U.K., Germany, Canada and the United States. The United States economically is holding up the best of those 4. And that's effectively a macro, you see that in the macro data, and then, of course, we see it in our micro data. Now every country has a different set of issues it's working through. And in all of them, we believe that online sales of home goods is below the normal trend that will revert to. But as we mentioned, the timing of how exactly that curve plays out is very hard to estimate. So what are we doing? There's a big focus on micro tailwinds where we know we can drive share up, and we're executing on those. And we're actually seeing those working. Then to your question on cost, we've also -- we talked about the 500 million and then we talked about 700 million more on top of the 500 million. We're taking out a tremendous amount of cost, which we think positions us incredibly well. So if you think about the netting and if you're getting tighter on cost, a lot of that's driving down retail as well. And then at the same time, you think that there's micro tailwinds where you can take share based on things you're doing. Now, of course, you have the macro, which is quality for a period of time, but the netting of all that, we think, is quite a positive story. And so we think that will play out quite well. In terms of how to think about international, I think really at the country level, every country is working through a different set of things. And obviously, the countries were smaller in. So I think the opportunity for the tailwinds to be faster there is higher when we have a smaller share. But honestly, the macro conditions in these countries is quite different, and some of them are quite challenged right now.

[Kate Gulliver:]

And as we said, we intend to get to EBITDA profitability regardless of the top line. That's in aggregate. We're very focused on that goal. We've seen a structural reason why the international sector over time can't perform as well as the U.S. sector. And certainly, when we talk about that $500 million in cost savings and that several hundred million more, that's across our entire business, that's not focused on one geography.

[Operator:]

We will take one more question. And your final question comes from the line of John Blackledge with Cowen.

[John Blackledge:]

Two questions. First on competitive positioning, I think Wayfair's U.S. revenue is down kind of like high single digits through the third quarter. How do you think Wayfair is doing relative to the U.S. home market through the third quarter? Do you think Wayfair's competitive positioning has changed at all versus pre-pandemic? And then just second question, in the past, you said returning customers typically cost 4% to 7% added expense as a percent of revenue. Does that still hold? Or just given the macro environment, is it more expensive to get a returning customer?

[Niraj Shah:]

So on the first part of your question, competitive positioning in the U.S. So I think the U.S. was down, I think, 6%. And I think what we're seeing in the U.S. is that our competitive positioning, super high level of competitive positioning is the same as it's been. Our competitors are the same set of competitors. There's a long tail of competitors. So we have a few sort of large competitors and then a long tail folks in the category. I do think when we talk about the micro tailwinds though, I do think there are some things that through the cycle of COVID kind of hurt us. And so I tried to talk about kind of the big three sometimes, but they're basically product availability got pretty bad for a period of time, the speed positioning. So the forward position of the goods got quite bad. And then the retail got quite bad of the combination of how inflation was passed through and the lack of forward positioning. So if you think about that, that kind of erodes an offer. Well, where are we now? We're now reasonably far into a cycle, which is reversing those things. So speed is -- we've gotten all-time highs on speed, and that's continuing to climb at a fast rate. Availability has recovered quite nicely, and that actually has still nice headroom ahead of it, that we have very good insight into, and retail prices have been falling quite nicely. And like if you look on our side, you look at what we're offering right now for holiday and you compare it to others, I think you'd be like, yes, wow, it feels quite good. So there's sort of these things that are playing out quite well. So we feel very good about our position both as a home retailer and the bespoke things we're doing, and then specifically on these core elements of the offer and particularly where we are relative to where we were a year ago due to the kind of these external forces that were far out of our control. Now the economics of returning customers. Returning customers are definitely show you a lot of leverage. In fact, the way it works is the cost to go from one order to two orders is obviously well, and that's kind of where I think we said. We talked about repeat on average being 7%. The way I think about it is like 1 to 2 is the number percentage and then that percentage drop when you go from the second and the third order and then that percentage drops again when you go from the third to the fourth order. So as someone kind of thinking of this like this loyalty [indiscernible] they climb up the ladder, they get increasingly less expensive to -- from an ad cost standpoint for that next order. I think the thing that's complicating the ad cost outlook right now that makes it murky is the thing I tried to talk about earlier, this free channel, pay channel mix shift which is affect a by-product to the macro environment, and you will -- just like you've seen it go one way you'll see it reverse back. But I think that's what makes it harder for you to see the ad economics underneath. And so I'd just remind you of that because that I think is kind of the thing that's causing it to not be as clear.

[John Blackledge:]

Thank you.

[Niraj Shah:]

Okay, great. Well, I think with that, I think we're wrapping up the call. So thanks everybody for joining us this morning. And I hope you all have a great holiday season.

[Kate Gulliver:]

Thank you all.

[Operator:]

This concludes today's conference. You may disconnect at this time.