Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K 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 Exchange Act. All statements other than statements of historical fact contained in this Annual Report on Form 10-K, 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,
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consumer activity and behaviors, developments in our technology and systems and anticipated results of those developments and the impact of the COVID-19 outbreak 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 Annual Report on Form 10-K 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 the Securities and Exchange Commission, including those set forth under Part I, Item 1A, Risk Factors of this Annual Report on Form 10-K. We qualify all of our forward-looking statements by these cautionary statements.
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
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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.
In fiscal year 2020, our business reached an inflection of profitability, benefiting from years of investment developing our logistics platform, international footprint and technological capabilities. The sharp acceleration in demand for home products and an uptick in purchasing online during 2020, both heightened by COVID-related factors, served to highlight the durability of Wayfair's business model as well as the attractive nature of our customer unit economics. As of December 31, 2020, we had reached 31.2 million active customers over the last twelve months, and 70% of 2020 orders came from repeat buyers. We continued to manage our advertising spend according to a return on investment-oriented approach that carefully tracks and monitors the results of advertising campaigns to ensure the appropriate return targets are being met. We also leveraged operating costs such as infrastructure expenses and employee salaries, particularly as the pace of hiring slowed and proved substantially below revenue growth.
COVID-19 Outbreak
We are continuing to closely monitor the impact of the COVID-19 outbreak on our business, results of operations and financial results. The situation surrounding the COVID-19 outbreak remains 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 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, 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, establishing 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 around 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 .
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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:
Year Ended December 31,
2020 2019 2018
(in thousands, except LTM Net Revenue per Active Customer, Average Order Value and per share data)
Key Financial Statement Metrics:
Net revenue $ 14,145,156 $ 9,127,057 $ 6,779,174
Gross profit $ 4,112,171 $ 2,147,332 $ 1,586,723
Income (loss) from operations $ 360,349 $ (929,941) $ (473,279)
Net income (loss) $ 184,996 $ (984,584) $ (504,080)
Earnings (loss) per share:
Basic $ 1.93 $ (10.68) $ (5.63)
Diluted $ 1.86 $ (10.68) $ (5.63)
Key Operating Metrics:
Active customers (1) 31,194 20,290 15,155
LTM net revenue per active customer (2) $ 453 $ 448 $ 443
Orders delivered (3) 60,999 37,641 28,084
Average order value (4) $ 232 $ 241 $ 239
Non-GAAP Financial Measures:
Adjusted EBITDA $ 946,888 $ (496,544) $ (214,986)
Free Cash Flow $ 1,082,297 $ (597,698) $ (137,094)
Adjusted Diluted Earnings (Loss) per Share $ 5.04 $ (8.03) $ (4.11)
(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.
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Results of Consolidated Operations
Net revenue
In 2020, net revenue increased by $5.0 billion, or 55.0% compared to 2019, primarily due to growth in our customer base, with the number of active customers increasing by 53.7% in 2020 compared to 2019. There was an increase in order frequency, with LTM orders per active customer increasing by 5.4% in 2020 compared to 2019. Additionally, we believe our merchandising investments encouraged active customers to spend more on average in 2020 than the prior year, with LTM net revenue per active customer increasing 1.1% in 2020 compared to 2019. Our U.S. net revenue increased 53.3% in 2020 from 2019, while our International net revenue increased 64.8% year over year. International Net Revenue Constant Currency Growth (see “Non-GAAP Measures” below) was 64.9% in 2020 from 2019.
Year Ended December 31,
2020 2019 % Change
(in thousands)
U.S. net revenue $ 11,900,658 $ 7,764,831 53.3 %
International net revenue 2,244,498 1,362,226 64.8 %
Net revenue $ 14,145,156 $ 9,127,057 55.0 %
For more information on our segments, see Note 13 to the consolidated financial statements, Segment and Geographic Information, included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.
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 2020, cost of goods sold increased by $3.1 billion, or 43.7%, compared to 2019. Of the increase in cost of goods sold, $2.5 billion was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $0.6 billion as a result of the increase in products delivered during the period.
The increase in cost of goods sold is primarily driven by an increase in the number of orders delivered, partially offset by efficiencies gained in shipping costs from our logistics network. 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 efficiencies generated from our logistics network.
Year Ended December 31,
2020 2019 % Change
(in thousands)
Cost of goods sold $ 10,032,985 $ 6,979,725 43.7 %
As a percentage of net revenue 70.9 % 76.5 %
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Operating expenses
Operating expenses are comprised of customer service and merchant fees, advertising and selling, operations, technology, general and administrative expenses. 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.
Year Ended December 31,
2020 2019 % Change
(in thousands)
Customer service and merchant fees (1) $ 509,559 $ 356,727 42.8 %
Advertising 1,412,173 1,095,840 28.9 %
Selling, operations, technology, general and administrative (1) 1,830,090 1,624,706 12.6 %
Total operating expenses $ 3,751,822 $ 3,077,273 21.9 %
As a percentage of net revenue:
Customer service and merchant fees (1) 3.6 % 3.9 %
Advertising 10.0 % 12.0 %
Selling, operations, technology, general and administrative (1) 12.9 % 17.8 %
26.5 % 33.7 %
(1) Includes equity-based compensation and related taxes as follows:
Year Ended December 31,
2020 2019
(in thousands)
Customer service and merchant fees $ 16,072 $ 9,473
Selling, operations, technology, general and administrative $ 270,600 $ 226,129
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative increased by $51.1 million in 2020 compared to 2019 as a result of increased restricted stock units awarded in 2020 from 2019.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes:
Year Ended December 31,
2020 2019
Customer service and merchant fees 3.5 % 3.8 %
Selling, operations, technology, general and administrative 11.0 % 15.3 %
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 $146.2 million in 2020 compared to 2019, primarily due to the increase in net revenue during 2020. Expenses for customer service and merchant fees, both including and excluding equity-based compensation and related taxes, as a percentage of net revenues declined in 2020 from 2019, primarily due to order volumes that increased faster than our customer service hiring to serve the increased orders.
Advertising
Our advertising expenses increased by $316.3 million in 2020 compared to 2019, primarily as a result of an increase in online advertising. Advertising decreased as a percentage of net revenue in 2020 compared to 2019, primarily attributable to efficiencies in our advertising spend and partially offset by increased investment to generate future customer growth.
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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 increased by $160.9 million in 2020 compared to 2019, primarily attributable to increases in personnel costs, rent, information technology and depreciation and amortization. As a percentage of net revenue, selling, operations, technology, general and administrative expenses decreased to 12.9% in 2020 compared to 17.8% in 2019, primarily due to the pace of corporate headcount net hiring relative to the increase in net revenue.
Interest (expense), net
Our interest (expense), net increased by $91.9 million in 2020 compared to 2019, primarily attributable to new issuances of convertible notes.
Year Ended December 31,
2020 2019 % Change
(in thousands)
Interest (expense), net $ (146,397) $ (54,514) 168.5 %
Other (expense) income, net
Our other (expense) income, net increased by $11.5 million in 2020 compared to 2019, primarily attributable to the $12.8 million loss for the extinguishment of debt for the 2022 Notes.
Year Ended December 31,
2020 2019 % Change
(in thousands)
Other (expense) income, net $ (8,633) $ 2,881 (399.7) %
Provision for income taxes, net
Our provision for income taxes, net increased by $17.3 million in 2020 compared to 2019, primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, offset by the recognition of a discrete tax benefit related to excess tax benefits on equity awards for U.S. employees.
Year Ended December 31,
2020 2019 % Change
(in thousands)
Provision for income taxes, net $ 20,323 $ 3,010 575.2 %
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Liquidity and Capital Resources
Sources of Liquidity
At December 31, 2020, our principal source of liquidity was cash and cash equivalents and short- and long-term investments totaling $2.6 billion. In addition, we have a $200 million senior secured revolving credit facility that matures on February 21, 2022 (the “Revolver”). Wayfair had issued letters of credit, primarily as security for certain lease agreements, for approximately $57.0 million as of December 31, 2020, which reduces the availability of credit under the Revolver. Excluding liquidity available through our Revolver, the following table shows sources of liquidity as of December 31, 2020 and 2019:
December 31,
2020 2019
(in thousands)
Cash and cash equivalents $ 2,129,440 $ 582,753
Short-term investments $ 461,698 $ 404,252
Long-term investments $ — $ 155,690
Working capital $ 880,208 $ (234,381)
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 the SEC, including those set forth in Part I, Item 1A, Risk Factors . 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 Debt
Under the terms of our Revolver, we may use proceeds to finance working capital 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 of December 31, 2020, we had $3.3 billion of indebtedness outstanding. The conditional conversion features of the 2022 Notes, 2024 Notes and 2026 Notes were triggered during the fourth quarter of 2020, and the 2022 Notes, 2024 Notes and 2026 Notes therefore became convertible in the first 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 fourth quarter of 2020, and the 2025 Notes were therefore not convertible in the first quarter of 2021 pursuant to the applicable last reported sales price conditions. The 2025 Accreting Notes are convertible at any time prior to the second business day immediately preceding the maturity date. There have been no material conversions to date of the 2024 Notes, 2025 Notes or 2026 Notes. During 2020, Charlesbank 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. In January 2021, 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.
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 convert
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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.
For information regarding our credit agreement and convertible notes, see Note 6, Debt and Other Financing included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.
Stock Repurchase Program
On August 21, 2020, the Board authorized Wayfair to repurchase, from time to time, 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 replaced our previous $200 million stock repurchase authorization approved by the Board in 2018 (the “2018 Repurchase Program”). Wayfair repurchased 432,548 shares of Class A common stock for approximately $143.0 million under the 2018 Repurchase Program before it was simultaneously terminated and replaced by 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 of December 31, 2020, Wayfair has repurchased 823,470 shares of Class A common stock for approximately $237.2 million under the 2020 Repurchase Program.
Trends and Historical Cash Flows
Year Ended December 31,
2020 2019 2018
(in thousands)
Net income (loss) $ 184,996 $ (984,584) $ (504,080)
Net cash from (for) operating activities $ 1,416,731 $ (196,818) $ 84,861
Net cash for investing activities $ (236,075) $ (854,837) $ (260,287)
Net cash from financing activities $ 352,588 $ 786,504 $ 467,463
Operating Activities
Cash flows in connection with operating activities consisted of net income (loss) adjusted for certain non-cash items including depreciation and amortization, equity-based compensation and certain other non-cash expenses, as well as the effect of changes in working capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital and our net income (loss).
Cash from operating activities in 2020 increased by $1.6 billion from 2019 primarily due the increase in net income (loss) of $1.2 billion, increase in cash from operating assets and liabilities of $215.4 million, increase in depreciation and amortization expense of $93.3 million, increase in amortization of discount and issuance costs related to our convertible notes of $72.2 million, increase in equity-based compensation of $48.8 million and increase in other non-cash items of $14.3 million.
Investing Activities
Cash for investing activities in 2020 decreased $618.8 million from 2019 due to the increase in sales and maturities of short- and long-term investments of $464.7 million, decrease in purchases of property and equipment of $85.7 million, decrease in purchases of short- and long-term investments of $72.2 million and decrease in other investing activities of $15.5 million, partially offset by the increase of site and software development costs of $19.3 million. Purchases of property and equipment and site and software development costs (collectively, "Capital Expenditures") were 2.4% of net revenue for the year ended December 31, 2020 and related primarily to equipment purchases and improvements for leased warehouses within our expanding logistics network and ongoing investments in our proprietary technology and operational platform. On an absolute dollar basis, we expect Capital Expenditures for the first quarter of 2021 to be within the range of $68.0 million to $78.0 million as we continue to build out our technology and logistics network.
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Financing Activities
Cash from financing activities in 2020 decreased $433.9 million from 2019 due to the payments to partially extinguish our 2022 Notes of $1.0 billion, $380.2 million of Class A common stock repurchased through stock repurchase programs, repayment of $200.0 million of the outstanding balance under our Revolver, partially offset by the $200.0 million proceeds from the borrowing under our Revolver during 2020. The decrease is also attributable to the increase for premiums paid for our 2026 Capped Calls and 2025 Capped Calls of $109.3 million, partially offset by the increase of $1.1 billion for proceeds from the issuance of our 2025 Notes and 2025 Accreting Notes and increase of $3.4 million other investing activities.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities. We do not have any off-balance sheet interest in variable interest entities, which include special purpose entities and other structured finance entities.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020:
Payment Due by Period
Total Less than
1 year 1 - 3
Years 3 - 5
Years More than
5 Years
(in thousands)
Long-term debt (1) $ 3,513,999 $ 26,765 $ 68,991 $ 2,460,005 $ 958,238
Operating leases (2) $ 1,250,722 $ 149,590 $ 326,111 $ 308,007 $ 467,014
Purchase obligations (3)
$ 333,270 $ 97,415 $ 235,855 $ — $ —
Other commitments (4) $ 127,879 $ 2,497 $ 17,791 $ 17,972 $ 89,619
(1) Represents future interest and principal payments on the Notes. For information regarding our convertible notes, see Note 6, Debt and Other Financing , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(2) Represents the future minimum lease payments under non-cancellable leases. For information regarding our lease obligations, see Note 5, Leases , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(3) Represents the future payments for enforceable and legally binding software license commitments. For information regarding our purchase obligations, see Note 7 Commitments and Contingencies in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(4) Represents the future minimum lease payments for additional, non-cancellable operating leases, primarily related to build-to-suit warehouse leases that have not yet commenced. For more information see Note 5, Leases , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Non-GAAP Financial Measures
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this Annual Report on Form 10-K Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income (loss) before depreciation and amortization, equity-based compensation and related taxes, interest (expense), net, other (expense) income, net, provision for income taxes, net, non-recurring items and other items not indicative of our ongoing operating performance. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management and the Board to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis as these costs may vary independent of business performance.
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Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and the Board.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
• Adjusted EBITDA does not reflect equity-based compensation and related taxes;
• Adjusted EBITDA does not reflect changes in our working capital;
• Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;
• Adjusted EBITDA does not reflect interest expenses associated with our borrowings;
• Adjusted EBITDA does not include other items not indicative of our ongoing performance; and
• Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
Year Ended December 31,
2020 2019 2018
(in thousands)
Reconciliation of Adjusted EBITDA:
Net income (loss) $ 184,996 $ (984,584) $ (504,080)
Depreciation and amortization 285,711 192,419 123,542
Equity-based compensation and related taxes 296,872 240,978 136,415
Interest expense, net 146,397 54,514 28,560
Other expense (income), net 8,633 (2,881) 204
Provision for income taxes, net 20,323 3,010 2,037
Other (1) 3,956 — (1,664)
Adjusted EBITDA $ 946,888 $ (496,544) $ (214,986)
(1) We recorded a $4.0 million loss related to severance costs associated with February 2020 workforce reductions. The values were recorded in selling, operations, technology, general and administrative expenses. In 2018, we terminated the lease of a warehouse we had vacated in 2017 and recorded a one-time gain of $1.7 million related to the difference in the expected future net lease commitments and the actual costs incurred to terminate the lease.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this Annual Report on Form 10-K Free Cash Flow, a non-GAAP financial measure that we calculate as net cash from or for operating activities less Capital Expenditures. We have provided a reconciliation below of Free Cash Flow to net cash from or for operating activities, the most directly comparable GAAP financial measure.
We have included Free Cash Flow in this Annual Report on Form 10-K because it is an important indicator of our business performance as it measures the amount of cash we generate. Accordingly, we believe that Free Cash Flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
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Free Cash Flow has limitations as an analytical tool because it omits certain components of the cash flow statement and does not represent the residual cash flow available for discretionary expenditures. Further, other companies, including companies in our industry, may calculate Free Cash Flow differently. Accordingly, you should not consider Free Cash Flow in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider Free Cash Flow alongside other financial performance measures, including net cash from or for operating activities, Capital Expenditures, and our other GAAP results.
The following table presents a reconciliation of net cash from or for operating activities to Free Cash Flow for each of the periods indicated:
Year Ended December 31,
2020 2019 2018
(in thousands)
Net cash from (for) operating activities $ 1,416,731 $ (196,818) $ 84,861
Purchase of property and equipment (186,040) (271,742) (159,205)
Site and software development costs (148,394) (129,138) (62,750)
Free Cash Flow $ 1,082,297 $ (597,698) $ (137,094)
Net Revenue Constant Currency Growth
To provide investors with additional information regarding our financial results, we have disclosed in this Annual Report on Form 10-K Net Revenue Constant Currency Growth, a non-GAAP financial measure that we calculate by translating the current period local currency net revenue by the currency exchange rates used to translate our financial statements in the comparable prior-year period.
Net Revenue Constant Currency Growth is included in this Annual Report on Form 10-K because it is an important indicator of our operating results. Accordingly, we believe that Net Revenue Constant Currency Growth provides useful information to investors and others in understanding and evaluating trends in our operating results in the same manner as our management.
Net Revenue Constant Currency Growth has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Net Revenue Constant Currency Growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on net revenue.
Adjusted Diluted Earnings (Loss) per Share
To provide investors with additional information regarding our financial results, we have disclosed in this Annual Report on Form 10-K Adjusted Diluted Earnings (Loss) per Share, a non-GAAP financial measure that we calculate as net income (loss) plus equity-based compensation and related taxes, provision for income taxes, net, non-recurring items, other items not indicative of our ongoing operating performance, and, if dilutive, interest expense associated with convertible debt instruments under the if-converted method divided by the weighted-average number of shares of common stock used in the computation of diluted earnings (loss) per share. Accordingly, we believe that these adjustments to our adjusted diluted net income (loss) before calculating per share amounts for all periods presented provides a more meaningful comparison between our operating results from period to period.
Adjusted Diluted Earnings (Loss) per Share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted Diluted Earnings (Loss) per Share, by their nature, excludes equity-based compensation and related taxes, provision for income taxes, net, non-recurring items, other items not indicative of our ongoing operating performance, and, if dilutive, interest expense associated with convertible debt instruments under the if-converted method.
Because of these limitations, you should consider Adjusted Diluted Earnings (Loss) per Share alongside other financial performance measures.
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A reconciliation of the numerator and denominator for diluted earnings (loss) per share, the most directly comparable GAAP financial measure, and the numerator and denominator for Adjusted Diluted Earnings (Loss) per Share, is as follows:
Year Ended December 31,
2020 2019 2018
(in thousands, except per share data)
Numerator:
Net income (loss) $ 184,996 $ (984,584) $ (504,080)
Effect of dilutive securities:
Interest expense associated with convertible debt instruments — — —
Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities 184,996 (984,584) (504,080)
Adjustments to net income (loss)
Interest expense associated with convertible debt instruments 8,790 — —
Equity-based compensation and related taxes 296,872 240,978 136,415
Provision for income taxes, net 20,323 3,010 2,037
Other 3,956 — (1,664)
Numerator for Adjusted Diluted EPS - Adjusted net income (loss)
$ 514,937 $ (740,596) $ (367,292)
Denominator:
Denominator for basic EPS - weighted-average number of shares of common stock outstanding 95,825 92,200 89,472
Effect of dilutive securities:
Employee stock options 29 — —
Restricted stock units 3,483 — —
Convertible debt instruments — — —
Dilutive potential common shares 3,512 — —
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities 99,337 92,200 89,472
Adjustments to effect of dilutive securities:
Employee stock options — — —
Restricted stock units — — —
Convertible debt instruments 2,913 — —
Denominator for Adjusted Diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities 102,250 92,200 89,472
Diluted Earnings (Loss) per Share $ 1.86 $ (10.68) $ (5.63)
Adjusted Diluted Earnings (Loss) per Share $ 5.04 $ (8.03) $ (4.11)
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, net revenue, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description of our other significant accounting policies.
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Revenue Recognition
We generate net revenue through product sales generated primarily through our family of sites.
We recognize revenue using the gross method for product sales generated through our family of sites only when we have concluded that Wayfair controls the product before it is transferred to the customer. Wayfair controls products when it is the entity responsible for fulfilling the promise to the customer and takes responsibility for the acceptability of the goods, assumes inventory risk from shipment through the delivery date, has discretion in establishing prices and selects the suppliers of products sold. We recognize net revenue when the product has been delivered to the customer.
We ship a large volume of packages through multiple carriers. When delivery dates are not available, we estimate delivery dates based on historical data. N et revenue from product sales includes shipping costs charged to the customer and is recorded net of taxes collected from customers, which are remitted to governmental authorities. Cash discounts and rebates earned by customers at the time of purchase are deducted from gross revenue in determining net revenue. Allowances for sales returns are estimated and recorded based on prior returns history, recent trends and projections for returns on sales in the current period.
We recognize gift cards and site credits in the period they are redeemed. Unredeemed gift cards and site credits not subject to requirements to remit balances to governmental agencies are recognized as net revenue based on historical redemption patterns, which are substantially within twenty-four months of issuance.
We maintain a membership rewards program for purchases made with our private label Wayfair credit card and co-branded Mastercard ("Credit Card Program"). Enrolled customers earn points that may be redeemed for future purchases. We defer a portion of our revenue associated with rewards that are ultimately expected to be redeemed.
As part of the Credit Card Program, in exchange for providing intellectual property, we receive payments based on spending activity and the profitability of the card. Revenue based on the spending activity of the underlying accounts is recognized as the respective card purchases occur and profit share is recognized based on the performance of the underlying portfolio.
Leases
We generally lease office and warehouse facilities under noncancelable agreements. Upon each agreement's commencement date, we determine if the agreement is part of an arrangement that is or that contains a lease, determine the lease classification and recognize ROU assets and lease liabilities for all leases with the exception of leases with terms of 12 months or less. We have arrangements with lease and non-lease components, and we account for lease and non-lease components separately for our warehouse and fulfillment center arrangements. For all other lease arrangements, we account for lease and non-lease components as a single lease component. As of December 31, 2020 and 2019 we did no t have material finance lease arrangements.
Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term at the lease commencement date. As most of our leases do not provide an implicit rate, we use an estimated incremental borrowing rate (“IBR”) based on the information available at the commencement date to determine the present value of future payments. The determination of the IBR requires judgment and is primarily based on publicly-available information for companies within the same industry and with similar credit profiles. We adjust the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The ROU asset also includes any lease payments made prior to the commencement date and excludes lease incentives and initial direct costs incurred.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We review ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the ROU asset may not be recoverable. When such events occur, we compare the carrying amount of the ROU asset to the undiscounted expected future cash flows related to the ROU asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the ROU asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the ROU asset.
For additional information regarding our lease arrangements, see Note 5, Leases , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.
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Convertible Debt
Upon the issuance of convertible debt with debt and equity components, we evaluate the different components and features of the hybrid instrument and determine whether certain elements are embedded derivative instruments that require bifurcation. Components of convertible debt instruments that upon conversion may be settled fully in cash or partly in cash based on a net-share settlement basis are accounted for separately as long-term debt and equity when the conversion feature of the convertible bonds constitute an embedded equity instrument. When an equity instrument is identified, proceeds from issuance are allocated between debt and equity by measuring first the liability component and then determining the equity component as the residual amount. The liability component is measured as the fair value of a similar nonconvertible debt, which results in the recognition of a debt discount. In subsequent periods, we amortize the debt discount to interest (expense), net within the consolidated statements of operations, using the interest method based on the expected maturity of the debt. The equity component is reported in additional paid-in capital within the consolidated statement of stockholders' deficit and is not remeasured as long as it continues to meet the conditions for equity classification.
We allocate transaction costs to issue the convertible debt using the same proportions applied to the proceeds from the convertible debt. Transaction costs attributable to the liability component are recorded as a direct deduction from the related debt liability in the consolidated balance sheets, and they are amortized to interest (expense), net within the consolidated statements of operations over the term of the convertible debt using the effective interest rate method. Transaction costs attributable to the equity component are netted within additional paid-in capital within the consolidated statement of stockholders' deficit.
For additional information regarding our convertible debt, see Note 6, Debt and Other Financing , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 1, Summary of Significant Accounting Policies , in the notes to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data , of this Annual Report on Form 10-K.