WAYFAIR INC. Forward Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our investment plans and anticipated returns on those investments, our future customer growth, our future results of operations and financial position, available liquidity and access to financing sources, our business strategy, plans and objectives of management for future operations, consumer activity and behaviors, developments in our technology and systems and anticipated results of those developments and the impact of the novel coronavirus (COVID-19) pandemic and our response to it, 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," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. Forward-looking statements are based on current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that known or unknown risks or uncertainties materialize, actual results could vary materially from Wayfair's expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise. Factors that could cause or contribute to differences in our future results include, without limitation, the following: •our ability to acquire new customers and sustain and/or manage our growth; •our ability to increase our net revenue per active customer; •our ability to build and maintain strong brands; •our ability to manage our global growth and expansion; •our ability to compete successfully; •the rate of growth of the Internet and e-commerce; •economic factors, such as interest rates, the housing market, currency exchange fluctuations and changes in customer spending; •disruptions or inefficiencies in our supply chain or logistics network, including any impact of the COVID-19 outbreak on our suppliers and third party carriers and delivery agents; •potential impacts of the COVID-19 outbreak on our business, financial condition, and results of operations; •world events, natural disasters, public health emergencies (such as the COVID-19 outbreak), civil disturbances, and terrorist attacks; and •developments in, and the outcome of, legal and regulatory proceedings and investigations to which we are a party or are subject, and the liabilities, obligations and expenses, if any, that we may incur in connection therewith. A further list and description of risks, uncertainties and other factors that could cause or contribute to differences in our future results include the cautionary statements herein and in our other filings with theSecurities and Exchange Commission , including those set forth under Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We qualify all of our forward-looking statements by these cautionary statements. 22
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Overview
Wayfair is one of the world's largest online destinations for the home. Through our e-commerce business model, we offer visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over twenty-two million products from over 16,000 suppliers. We believe an increasing portion of the dollars spent on home goods will be spent online and that there is an opportunity for acquiring more market share. Our business model is designed to grow our net revenue by acquiring new customers as well as stimulating repeat purchases from our existing customers. Through increasing brand awareness as well as paid and unpaid advertising, we attract new and repeat customers to our sites. We turn these customers into recurring shoppers by creating a seamless shopping experience across their entire journey - offering best-in-class product discovery, purchasing, fulfillment and customer service. COVID-19 Outbreak The situation surrounding the COVID-19 outbreak continues to remain fluid and the full extent of the positive or negative impact of the COVID-19 outbreak on our business will depend on certain developments including the length of time that the outbreak continues, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, partners, and stockholders, all of which are uncertain and cannot be predicted. See Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional details. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers. As a result, we have taken a number of precautionary measures, including implementing social distancing and enhanced cleaning measures and COVID-19 testing in our facilities, suspending all non-essential travel, transitioning a large portion of our employees to working-from-home, reimbursing certain employee technology purchases, providing employee welfare programs, providing emergency paid time off and targeted hourly pay increases and developing no contact delivery methods. In an effort to contain or slow the COVID-19 outbreak, authorities across the world have implemented various measures, some of which have been subsequently rescinded or modified, including travel bans, stay-at-home orders and shutdowns of certain businesses. We anticipate that these actions and the global health crisis caused by the COVID-19 outbreak, including any resurgences, will continue to negatively impact global economic activity. While the COVID-19 outbreak has not had a material adverse impact on our operations to date and we believe the long-term opportunity that we see for shopping for the home online remains unchanged, it is difficult to predict all of the positive or negative impacts the COVID-19 outbreak will have on our business in the short- and long-term. In the short term, we have continued to see increased sales and order activity in the market since the COVID-19 outbreak. To serve the increased orders, we have hired and are continuing to hire additional frontline and sales and service workers. However, much is unknown and accordingly the situation remains dynamic and subject to rapid and possibly material change. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities. Factors Affecting our Performance We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 23 -------------------------------------------------------------------------------- Table of Contents Key Financial and Operating Metrics We measure our business using key financial and operating metrics, as well as Adjusted EBITDA, Free Cash Flow and Adjusted Diluted Earnings (Loss) per Share (see "Non-GAAP Financial Measures"). Our Free Cash Flow and Adjusted Diluted Earnings (Loss) per Share are measured on a consolidated basis, while our Adjusted EBITDA is measured on a consolidated and reportable segment basis. All other key financial and operating metrics are derived and reported from our consolidated net revenue. We use the following metrics to assess the near and longer-term performance of our overall business: Three months endedMarch 31, 2021 2020 (in thousands, except LTM Net Revenue per Active Customer,
Average Order Value and per share
data)
Key Financial Statement Metrics: Net revenue $
3,477,518
Gross profit$ 1,003,027 $ 579,123 Income (loss) from operations$ 26,342 $ (262,068) Net income (loss)$ 18,234 $ (285,865) Earnings (loss) per share: Basic$ 0.18 $ (3.04) Diluted$ 0.16 $ (3.04) Key Operating Metrics: Active customers (1) 33,193 21,108 LTM net revenue per active customer (2)$ 461 $ 449 Orders delivered (3) 14,696 9,876 Average order value (4)$ 237 $ 235 Non-GAAP Financial Measures: Adjusted EBITDA$ 205,767 $ (127,277) Free Cash Flow$ 111,190 $ (354,623) Adjusted Diluted Earnings (Loss) per Share (5) $
1.00
(1) The number of active customers represents the total number of individual customers who have purchased at least once directly from our sites during the preceding twelve-month period. The change in active customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the last twelve months. We view the number of active customers as a key indicator of our growth. (2) LTM net revenue per active customer represents our total net revenue in the last twelve months divided by our total number of active customers for the same preceding twelve-month period. We view LTM net revenue per active customer as a key indicator of our customers' purchasing patterns, including their initial and repeat purchase behavior. (3) Orders delivered represents the total orders delivered in any period, inclusive of orders that may eventually be returned. As we ship a large volume of packages through multiple carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. We recognize net revenue when an order is delivered, and therefore orders delivered, together with average order value, is an indicator of the net revenue we expect to recognize in a given period. We view orders delivered as a key indicator of our growth. (4) We define average order value as total net revenue in a given period divided by the orders delivered in that period. We view average order value as a key indicator of the mix of products on our sites, the mix of offers and promotions and the purchasing behavior of our customers. (5) Adjusted Diluted Earnings (Loss) per Share reflects ourJanuary 1, 2021 adoption of ASU 2020-06, further discussed in Note 1, Summary of Significant Accounting Policies, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. Prior periods have not been restated. Under legacy accounting, Adjusted Diluted Earnings (Loss) per share for the three months endedMarch 31, 2021 would have been$0.62 . 24 -------------------------------------------------------------------------------- Table of Contents Results of Consolidated Operations Comparison of the three months endedMarch 31, 2021 and 2020 Net revenue In the three months endedMarch 31, 2021 , net revenue increased by$1.1 billion , or 49.2%, compared to the same period in 2020, primarily due to growth in our customer base, with the number of active customers increasing by 57.3% from the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . There was an increase in order frequency, with LTM orders per active customer increasing by 6.5% in the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Additionally, we believe our merchandising investments encouraged active customers to spend, on average, more in the three months endedMarch 31, 2021 , with LTM net revenue per active customer increasing 2.7% for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . OurU.S. net revenue increased 42.8%, while our International net revenue increased 85.0% in the first quarter of 2021 compared to same period in 2020. International Net Revenue Constant Currency Growth (see "Non-GAAP Measures" below) was 72.5% in the first quarter of 2021 over the same quarter of 2020. Three months ended March 31, 2021 2020 % Change (in thousands) U.S. net revenue$ 2,820,686 $ 1,974,983 42.8 % International net revenue 656,832 355,080 85.0 % Net revenue$ 3,477,518 $ 2,330,063 49.2 % For more information on our segments, see Note 10 to the unaudited consolidated and condensed financial statements, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. Cost of goods sold Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs and fees earned for supplier services rendered. In the three months endedMarch 31, 2021 , cost of goods sold increased by$723.6 million , or 41.3%, compared to the same period in 2020. The increase in cost of goods sold is primarily driven by an increase in the number of orders delivered, partially offset by operational efficiencies. The decrease in cost of goods sold as a percentage of net revenue is primarily a result of unlocking incremental margin from merchandising investments and operational efficiencies. Three months ended March 31, 2021 2020 % Change (in thousands) Cost of goods sold $ 2,474,491$ 1,750,940 41.3 % As a percentage of net revenue 71.2 % 75.1 % 25
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Operating expenses
Operating expenses are comprised of customer service and merchant fees,
advertising, selling, operations, technology, general and administrative
expenses and customer service center impairment and other charges. We disclose
separately the equity-based compensation and related taxes that are included in
customer service and merchant fees and selling, operations, technology and
general and administrative expenses.
Three months ended March 31,
2021 2020 % Change
(in thousands)
Customer service and merchant fees (1) $ 147,241 $ 89,463 64.6 %
Advertising 365,863 275,760 32.7 %
Selling, operations, technology, general and
administrative (1) 451,369 475,968 (5.2) %
Customer service center impairment and other charges 12,212 - -
Total operating expenses $ 976,685 $ 841,191 16.1 %
As a percentage of net revenue:
Customer service and merchant fees (1) 4.2 % 3.8 %
Advertising 10.5 % 11.8 %
Selling, operations, technology, general and
administrative (1) 13.0 % 20.4 %
Customer service center impairment and other charges 0.4 % - %
28.1 % 36.0 %
(1) Includes equity-based compensation and related taxes as follows:
Three months ended March 31,
2021 2020
(in thousands)
Customer service and merchant fees $ 5,894 $ 2,118
Selling, operations, technology, general and
administrative $ 78,002 Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by$21.6 million in the three months endedMarch 31, 2021 , compared to the same period in 2020, as a result of RSUs awarded in 2020 and the three months endedMarch 31, 2021 . The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes: Three
months ended
2021 2020
Customer service and merchant fees 4.1 % 3.7 %
Selling, operations, technology, general and
administrative 10.7 % 17.8 %
Customer Service and Merchant Fees
Excluding the impact of equity-based compensation and related taxes, our
expenses for customer service and merchant fees increased by $54.0 million in
three months ended March 31, 2021 , compared to the same period in 2020,
primarily due to the increase in net revenue during the three months ended
March 31, 2021 . Expenses for customer service and merchant fees, both including
and excluding equity-based compensation and related taxes, as a percentage of
net revenues increased in the three months ended March 31, 2021 , compared to the
same period in 2020, primarily due to customer service hiring to serve the
increased order volume.
Advertising
Our advertising expenses increased by $90.1 million in the three months ended
March 31, 2021 , compared to the same period 2020, primarily as a result of an
increase in online advertising. Advertising decreased as a percentage of net
revenue in
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March 31, 2021 , compared to the same period in 2020, primarily attributable to
efficiencies in our advertising spend and partially offset by increased
investment to generate future customer growth.
Selling, operations, technology, general and administrative
Excluding the impact of equity-based compensation and related taxes, our
expenses for selling, operations, technology, general and administrative
activities decreased by $42.5 million in three months ended March 31, 2021 ,
compared to the same period in 2020, primarily attributable to decreases in
personnel costs and unutilized rent, partially offset by increases in
depreciation and amortization. As a percentage of net revenue, selling,
operations, technology, general and administrative expenses decreased to 13.0%
in three months ended March 31, 2021 , compared to 20.4% in the same period in
2020, primarily due to the relatively slower pace of corporate headcount net
hiring relative to the increase in net revenue.
Customer service center impairment and other charges
During the first quarter of 2021, we enacted a plan to consolidate certain
customer service centers in identified U.S. locations. As a result, we recorded
a charge of $12.2 million during the first quarter of 2021, which included
$6.3 million for the non-cash impairment of ROU assets, $5.0 million for the
non-cash accelerated depreciation of fixed assets and the remainder for other
items.
Interest (expense), net
Our interest (expense), net decreased by $15.4 million in the three months ended
March 31, 2021 , compared to the same period in 2020, primarily attributable to
the adoption of ASU 2020-06 on January 1, 2021 , as well as a reversal of
interest expense we recorded in 2020 for a portion of paid in kind interest
accretion for the 2025 Accreting Notes that was not realized in 2021.
Three months ended March 31,
2021 2020 % Change
(in thousands)
Interest (expense), net $ (6,812) $ (22,218) (69.3) %
Other (expense), net
Our other (expense), net increased by $3.1 million in the three months ended
March 31, 2021 , compared to the same period in 2020, primarily attributable to
the net change in unrealized and realized gains (losses) from foreign currency
transactions.
Three months ended March 31,
2021 2020 % Change
(in thousands)
Other (expense), net $ (3,298) $ (246) 1,240.7 %
(Benefit) provision for income taxes, net
Our (benefit) provision for income taxes, net increased by $3.3 million in the
three months ended March 31, 2021 compared to the same period in 2020, primarily
related to the recognition of a discrete tax benefit due to excess tax benefits
on equity awards for U.S. employees, partially offset by taxes on income earned
in the U.S. and certain foreign jurisdictions and U.S. state income taxes.
Three months ended March 31,
2021 2020 % Change
(in thousands)
(Benefit) provision for income taxes, net $ (2,002) $ 1,333 (250.2) %
27-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources of Liquidity AtMarch 31, 2021 , our principal source of liquidity was cash and cash equivalents and short-term investments totaling$2.7 billion . In addition, onMarch 24, 2021 , Wayfair and certain of its subsidiaries entered a new credit agreement and$600 million senior secured revolving credit facility that matures onMarch 24, 2026 (the "Revolver"). The Revolver replaced our previous$200 million senior secured revolving credit facility, which was set to mature onFebruary 21, 2022 . Wayfair had outstanding letters of credit, primarily as security for certain lease agreements, for approximately$56.2 million as ofMarch 31, 2021 , which reduced the availability of credit under the Revolver. Excluding liquidity available through our Revolver, the following table shows sources of liquidity as ofMarch 31, 2021 andDecember 31, 2020 : March 31, 2021 December 31, 2020 (in thousands) Cash and cash equivalents$ 2,086,484 $ 2,129,440 Short-term investments$ 608,524 $ 461,698 Working capital$ 996,853 $ 880,208 We believe that our existing cash and cash equivalents and investments, cash generated from operations and the borrowing availability under our Revolver will be sufficient to meet our anticipated cash needs for at least the foreseeable future. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Further, we may from time to time seek to retire, restructure, repurchase or redeem, or otherwise mitigate the equity dilution associated with, our outstanding convertible debt, through cash purchases, stock buybacks of some or all of the shares underlying convertible notes and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, exchanges or liability management exercises, if any, will be upon such terms and at such prices and sizes as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described herein and in our other filings with theSecurities and Exchange Commission , orSEC , including those set forth Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . In addition, the COVID-19 outbreak and related measures to contain its impact have caused disruption in the capital markets, which could make obtaining financing more difficult and/or expensive. As a consequence, we may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt financing arrangements, those securities and instruments may have rights, preferences or privileges senior to the rights of our common stock, and the holders of our equity securities may experience dilution. We will continue to monitor our liquidity during this time of historic disruption and volatility in the global capital markets due to the COVID-19 outbreak. Credit Agreement and Convertible Notes Under the terms of our Revolver, we may use proceeds to finance working capital, to refinance existing indebtedness and to provide funds for permitted acquisitions, repurchases of equity interests and other general corporate purposes. Any amounts outstanding under the Revolver are due at maturity. As ofMarch 31, 2021 , we had$3.1 billion of indebtedness outstanding. The conditional conversion features of the 2022 Notes, 2024 Notes and 2026 Notes were triggered during the first quarter of 2021, and the 2022 Notes, 2024 Notes and 2026 Notes therefore became convertible in the second quarter of 2021 pursuant to the applicable last reported sales price conditions. The conditional conversion feature of the 2025 Notes was not triggered during the first quarter of 2021, and the 2025 Notes are therefore not convertible in the second quarter of 2021 pursuant to the applicable last reported sales price condition. The 2025 Accreting Notes are convertible at any time prior to the second business day immediately preceding the maturity date. In the three months endedMarch 31, 2021 , holders of the 2022 Notes and 2026 Notes converted$0.4 million of aggregate principal and received 4,244 shares of Wayfair's Class A common stock. During the same period Great Hill converted$253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair's Class A common stock. InApril 2021 , holders of the 2022 Notes converted$12.5 million of principal and received 120,278 shares of Wayfair's Class A common stock. Whether any of the Non-Accreting Notes will be convertible in future quarters will depend on the satisfaction of the applicable last reported sales price condition or another conversion condition in the future. If one or more holders elect to 28
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Table of Contents convert their Non-Accreting Notes at a time when any such Non-Accreting Notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. The credit agreement and indentures governing our convertible notes contain restrictions and covenants that may limit our operating flexibility. For information regarding our credit agreement and convertible notes, see Note 4, Debt and Other Financing, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. We do not expect any of these restrictions to affect our ability to conduct our business in the ordinary course. During the first quarter of 2021, we were in compliance with all the terms and conditions of our debt agreements. Stock Repurchase Program OnAugust 21, 2020 , the Board authorized the repurchase of up to$700 million of our Class A common stock in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan (the "2020 Repurchase Program"). The 2020 Repurchase Program does not obligate Wayfair to purchase any shares of Class A common stock and has no expiration but may be suspended or terminated by the Board at any time. The actual timing, number and value of shares repurchased in the future will be determined by Wayfair in its discretion and will depend on a number of factors, including market conditions, applicable legal requirements, our capital needs and whether there is a better alternative use of capital. As ofMarch 31, 2021 , Wayfair has repurchased 824,310 shares of Class A common stock for approximately$237.4 million under the 2020 Repurchase Program.
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