2017
ANN UA L
REPORT
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 001-36666
Wayfair Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4 Copley Place, 7th Floor, Boston, MA
(Address of principal executive offices)
36-4791999
(I.R.S. Employer
Identification Number)
02116
(Zip Code)
(617) 532-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $0.001 par value
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in
Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2017 computed by reference to
the closing sale price of $76.88 per share as reported on the New York Stock Exchange on that date was $2.9 billion.
Class
Outstanding at February 16, 2018
Class A Common Stock, $0.001 par value per share
Class B Common Stock, $0.001 par value per share
57,762,425
30,741,306
Table of Contents
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's definitive Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Rule 14A not later than 120 days after end of this fiscal year covered by this Form 10-K are incorporated by
reference into Part III of this Form 10-K.
Table of Contents
Wayfair Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 13.
Item 14.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
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SPECIAL NOTE REGARDING 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 Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact contained in this Annual Report on Form 10-K, including
statements regarding our future results of operations and financial position, business strategy and plans and objectives of
management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by
terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "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 the Company’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, currency exchange fluctuations and changes in customer spending;
• world events, natural disasters, public health emergencies, 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.
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Item 1. Business
Overview
PART I
Wayfair is one of the world's largest online destinations for the home. Through our e-commerce business model, we offer
customers visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over ten
million products from over 10,000 suppliers.
We are focused on bringing our customers an experience that is at the forefront of shopping for the home online. Our
primary target customer is a 35- to 65-year-old woman with an annual household income of $50,000 to $250,000, who we
believe is underserved by traditional brick and mortar and other retailers of home goods. Because each of our customers has a
different taste, style, purchasing goal, and budget when shopping for her home, we have built one of the largest online selections
of furniture, décor, decorative accents, housewares, seasonal decor, and other home goods. We are able to offer this vast selection
of products because we hold minimal inventory. We specialize in the home category and this has enabled us to build a shopping
experience and logistics infrastructure that is tailored to the unique characteristics of our market.
The delivery experience and overall customer service we offer our shoppers are central to our business. The majority of our
products are shipped to customers directly from our suppliers with an increasing proportion flowing through our own logistics
network. We have invested considerably in our logistics network and increasingly leverage these capabilities to improve the
experience for both customers and suppliers. This network is comprised of CastleGate and the Wayfair Delivery Network
("WDN"). Our CastleGate facilities enable suppliers to forward-position their inventory in our warehouses, allowing us to offer
faster delivery. Through WDN, we can directly manage large parcel deliveries via consolidation centers, cross docks and last
mile delivery facilities, which, alongside CastleGate, enables us to speed up deliveries, reduce damage and decrease our reliance
on third parties. We believe these investments in logistics capabilities result in an enhanced experience for our customers and
suppliers. We also believe providing superior customer service is key to delighting our customers. Our customer service
locations are staffed with approximately 2,000 highly-trained sales and service employees located in the United States ("U.S.")
and Europe.
Our co-founders are lifetime tech innovators who have worked together in the commercial Internet sector since 1995. As
engineers themselves, they have created a company culture deeply rooted in technology and data. Their significant equity
ownership in Wayfair has informed their leadership and allowed them to take a long-term view when building our company.
The U.S. is currently our largest market, and we continue to scale our international business in Canada, the United
Kingdom, and Germany by building our supplier networks, logistics infrastructure and brand presence in those countries.
Segments
Our operating and reportable segments are U.S. and International. See Note 11 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. Net revenue of the U.S. segment represented 88% of consolidated net revenue for the year ended
December 31, 2017.
Our Industry
The home goods market is large and characterized by specific consumer trends, structural challenges and market dynamics
that are shaping the future of our industry.
Addressable Market Size and Growth
We believe the annual U.S. market for home goods is approximately $275 billion, of which approximately 10% is sold
online. According to data released by the U.S. Census Bureau, there are approximately 67 million households in the U.S. with
annual incomes between $50,000 and $250,000. Moreover, we believe there are approximately 70 million millennials (which we
define as individuals currently between the ages of 22 to 35) in the U.S., many of whom are accustomed to purchasing goods
online. As millennials age, start new families and move into new homes, we expect online sales of home goods to increase. In
addition, we believe the online home goods market will further grow as older generations of consumers become increasingly
comfortable purchasing online. With our presence in Canada and western Europe, we believe we have more than doubled the
size of our total addressable market.
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Why Home is Different
Home is shopped differently than other retail verticals. Homes are personal expressions of self and identity, which is why
many consumers seek uniqueness, crave originality and enjoy the feeling created by home design, furniture and décor.
Consumers shopping for home goods often cannot articulate exactly what they are looking for and they rarely know the names of
the manufacturer brands they like, as the category is largely unbranded. We believe search-based websites have difficulty
serving customers shopping for home products in this more emotional, visual and inspirational manner.
When shopping for the home, consumers desire uniqueness, which requires vast selection. In the market for home goods,
consumers with different tastes, styles, purchasing goals and budgets require a broad selection of products and choices. Brick
and mortar home goods retailers must balance scale of selection with the challenges of high inventory carrying costs and limited
showroom and storage space. To browse a vast selection of products across highly-fragmented brick and mortar retailers,
consumers must shop multiple stores. We believe the lack of an easy-to-browse, one-stop shopping experience with massive
selection has led to dissatisfaction with brick and mortar home goods shopping.
Logistics, fulfillment and customer service for home goods products are challenging given the variety of categories and
price points and the mix of heavy and bulky items. Home goods often have a low dollar value to weight ratio compared to other
categories of retail, therefore requiring a logistics network that is optimized for items with those characteristics. Many consumers
also seek first-rate customer service so they are not burdened with managing delivery, shipping and return logistics on their own.
However, we believe big box retailers that serve the mass market for home goods are often unable or unwilling to provide this
level of service.
Our Solution - Key Benefits for Our Customers
We offer broad selection and choice. We have one of the largest online selections of furniture, décor, decorative accents,
housewares, seasonal décor and other home goods with over ten million products from over 10,000 suppliers. We have built a
portfolio of over 70 house brands, which offer a curated brand experience, making it easier for customers to discover styles,
products and price points that appeal to them.
Convenience and value are central to our offering. We are a one-stop shop for consumers in the home goods category, with
pricing designed to be on par with big box retailers and a merchandising experience designed to be on par with specialty
retailers. For items shipped from our CastleGate warehouses, we are able to deliver many products to a majority of the U.S.
population in 2 days or less.
We give customers inspirational content and an engaging shopping experience. To inspire customers, we produce beautiful
imagery and highly-tailored editorial content both in house and through third parties. We use personalization to create a more
engaging consumer experience, and we allow customers to create looks they love with tools such as our Idea Boards. More than
half of the traffic coming to Wayfair.com is from mobile devices and our investment in mobile allows us to deliver value,
convenience and inspiration to consumers anytime and anywhere. Our mobile app also offers customers a powerful way to shop
for their home from their home using our "View in Room 3D" augmented reality tool.
Superior customer service is a core part of the experience we offer shoppers. Our customer service organization has
approximately 2,000 employees who help consumers navigate our sites, answer questions and complete orders. This team helps
us build trust with consumers, build our brand awareness, enhance our reputation and drive sales.
Our Solution - Key Benefits for Our Suppliers
We give suppliers cost-effective access to our large customer base. We sell products from over 10,000 suppliers, many of
which are small, family-run operations without well-known product brands and without easy retail access to a large customer
base. We provide our suppliers with access to our customer base of 11.0 million active customers, enabling them to increase their
sales and access the growing e-commerce market.
Suppliers can leverage our technological expertise to drive sales. Our technology platform is designed to allow suppliers to
easily provide us with their full product selection. We offer our suppliers a view of our demand and inventory needs via powerful
data and analytics. Through our technology platform, we believe many of our suppliers have increased their sales, which has
strengthened their loyalty to us.
Our logistics infrastructure allows us to ship directly to our customers from our suppliers or from our CastleGate
warehouses. This fulfillment network is a key component of our custom-built and seamlessly integrated technology and
operational platform.
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Sites and Brands
Each of our customers has a different taste, style, purchasing goal and budget when shopping for her home. To help her
find the right products for her home, we offer five distinct sites, each with a unique brand identity that offers a tailored shopping
experience and rich product selection to a different target audience.
Wayfair: an online destination for all things home
Joss & Main: where beautiful furniture and finds meet irresistible savings
AllModern: your home for affordable modern design
Birch Lane: a collection of classic furnishings and timeless home décor
Perigold: unparalleled access to the finest home décor and furnishing
Wayfair represents a significant majority of our revenue and is the only one of our sites that also operates internationally,
operating as Wayfair.ca in Canada, Wayfair.co.uk in the United Kingdom and Wayfair.de in Germany.
On our sites, we also feature certain products under our house brands, such as Three PostsTM and Mercury RowTM. Through
these house brands, we help our customers navigate our sites to find items quickly that match her particular style and price point.
"Direct Retail" sales include net revenue generated through the five distinct sites described above. In additional to Direct
Retail, we also generate "Other" net revenue through two sources, namely Retail Partners and Wayfair Media Solutions. Retail
Partners net revenue is generated from sites operated by third parties. These relationships allow consumers to purchase Wayfair
products through the retail partners' websites . We made the strategic decision starting in 2014 to deemphasize this part of our
business. Wayfair Media Solutions is a smaller portion of our net revenue that is generated through third-party advertisers that
pay for advertisements placed on our sites. Wayfair helps manufacturers, retailers and other advertisers market to our large
consumer audience.
Technology
We have custom-built our proprietary technology and operational platform to deliver the best experience for both our
customers and suppliers. Our success has been built on a culture of data-driven decision-making, operational discipline and an
unwavering focus on the customer. We believe that control of our technology systems and the ability to update them often is a
competitive advantage.
Our team of over 1,300 engineers and data scientists has built a full set of technology solutions specific to the home goods
market. Our storefront consists of a large set of tools and systems with which our customers directly interact, that are specifically
tuned for shopping the home goods category by mixing lifestyle imagery with easy-to-use navigation tools and personalization
features designed to increase customer conversion. We have designed operations software to deliver the reliable and consistent
experience consumers desire, with proprietary software enhancing our performance in areas such as integration with our
suppliers, our warehouse and logistics network and our customer service centers. Much of our advertising technology was
internally developed, including campaign management and bidding algorithms for online advertising. This allows us to leverage
our internal data and target customers efficiently across various channels. We also partner selectively with marketing partners
where we find solutions that meet our marketing objectives and deliver strong return on investment.
Much of the underlying infrastructure for storefront, operations and advertising technology is common across all of our
sites and countries. Our systems are managed in geographically distributed, highly secure data centers that are engineered for
high availability. These systems are monitored 24x7 by our network operations center for performance and security.
Marketing
Our marketing efforts bring new and repeat customers to our sites and help us acquire their email addresses through
various paid and non-paid advertising methods. Our paid advertising efforts consist primarily of online channels, including
search engine marketing, display advertising, and paid social media, and to a lesser extent direct mail and television
advertisements. Our non-paid advertising efforts include search engine optimization, non-paid social media, mobile "push"
notifications and email. Upon acquiring a customer or a potential customer's email address, we seek to increase their engagement
with our sites and drive repeat purchases. This effort to increase engagement and repeat purchasing is driven by all of our
marketing tools, including email marketing efforts and customer retargeting. We rigorously manage our paid marketing efforts
towards the goal that each new spending initiative is cost-effective with a measurable return on investment within a short period
of time.
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Logistics
Our logistics network was built specifically for the home category, where items can be bulky, heavy and prone to damage.
Historically, our primary method of fulfillment was a drop-ship network where integration into our suppliers' back-end
technology infrastructure allowed us to process an order and send it directly to a supplier's warehouse. We would then arrange
for shipment from the loading dock of the supplier's warehouse to the customer's home. Depending on the size of the package,
the delivery would be made either through carriers such as FedEx, UPS, the U.S. Postal Service or third party line haul trucking
companies and third party last mile home delivery agents. An increasing proportion of customer orders are being shipped from
our CastleGate warehouses and delivered through our WDN, which includes consolidation centers, cross docks, and last mile
delivery facilities. We believe that our proprietary logistics network will help drive incremental sales by delighting our customers
with faster delivery times and a better home delivery experience. Over time we believe this network will also lower our costs per
order by reducing damage rates and leveraging economies of scale in transportation.
Customer Service
Our customer service team consists of approximately 2,000 Wayfair sales and service consultants and employees located
across the U.S. and Europe who are available to help our customers with sales and service via phone, email or online chat.
Because we view superior customer service as one of our key values, our sales and service employees receive extensive training
as well as competitive compensation and benefit packages. The team consists of generalists as well as specialists who have
deeper expertise and training in select areas of our catalog, such as lighting, flooring and upholstery.
Our Growth Strategy
Our goal is to further improve our leadership in the home goods market by pursuing the following key strategies:
continue building our brands by delighting our customers;
acquire new customers and increase repeat purchases from existing customers;
invest in technology to further improve our customer and supplier experiences;
grow certain categories where we under index the broader home goods market today, such as home improvement
(e.g. plumbing, lighting and flooring), housewares, seasonal decor and decorative accents;
increase delivery speed and lower damage rates through the continued build-out of our proprietary logistics
network;
continue to expand internationally; and
opportunistically pursue strategic acquisitions.
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Competition
The market for online home goods and furniture is highly competitive, fragmented and rapidly changing. While we are
primarily focused on the mass market, we compete across all segments of the home goods market. Our competition includes
furniture stores, big box retailers, department stores, specialty retailers and online retailers and marketplaces in the U.S., Canada,
the United Kingdom and Germany, including:
• Furniture Stores: Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan, Rooms To Go;
• Big Box Retailers: Bed Bath & Beyond, Home Depot, IKEA, Lowe's, Target and Walmart;
• Department Stores: JCPenney and Macy's;
•
Specialty Retailers: Crate and Barrel, Ethan Allen, TJX, At Home, Williams Sonoma, Restoration Hardware,
Arhaus, Horchow, Room & Board, Mitchell Gold + Bob Williams;
• Online Retailers and Marketplaces: Amazon, Houzz and eBay; and
•
International: Leon's, Canadian Tire, John Lewis, Argos, Otto and Home24, in addition to several of the
companies listed above who also compete with us internationally.
We believe that the primary competitive factors in the mass market are vast selection, visually inspiring browsing,
compelling merchandising, ease of product discovery, price, convenience, reliability, speed of fulfillment and customer service.
We believe our technological and operational expertise allows us to provide our customers with a vast selection of goods,
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attractive price points, reliable and timely fulfillment, plus superior customer service, and that the combination of these
capabilities is what provides us with a sustainable competitive advantage.
Employees
As of December 31, 2017, we had 7,751 full-time equivalent employees. Additionally, we rely on independent contractors
and temporary personnel to supplement our workforce, primarily in our logistics network. None of our employees are
represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees
to be good.
Seasonality
Our business is affected by seasonality, which historically has resulted in higher sales volume during our fourth quarter,
which ends December 31.
Intellectual Property
Our intellectual property, including any trademarks, service marks, copyrights, domain names, patents, trade dress, trade
secrets and proprietary technologies, is an important part of our business. To protect our intellectual property, we rely on a
combination of laws and regulations, as well as contractual restrictions. We pursue the registration of our trademarks, including
"Wayfair" and certain variations thereon, copyrights and domain names in the U.S. and certain foreign locations. We also rely on
the protection of laws regarding unregistered copyrights for our proprietary software and certain other content we create. We will
continue to evaluate the merits of applying for copyright registrations in the future. We have an issued patent regarding our
proprietary technology and we are evaluating additional patent applications. We expect to consider filing patent applications for
future technology inventions. We also rely on trade secret laws to protect our proprietary technology and other intellectual
property. To further protect our intellectual property, we enter into confidentiality and assignment of invention assignment
agreements with employees and certain contractors and confidentiality agreements with other third parties, such as suppliers.
Company Information
We began operating as Smart Tech Toys, Inc., a Massachusetts corporation, in May 2002 and changed our name to CSN
Stores, Inc. in February 2003. From 2002 through 2011, the Company was bootstrapped by our co-founders and operated as
hundreds of niche websites, such as bedroomfurniture.com and allbarstools.com. In March 2008, we formed, and contributed all
of the assets and liabilities of CSN Stores, Inc. to a subsidiary, CSN Stores LLC, and we continued operating our business
through this Delaware limited liability company. In late 2011, we made the strategic decision to close and permanently redirect
over 240 of our niche websites into Wayfair.com. As part of that shift, we changed the name of CSN Stores, Inc. to SK
Retail, Inc. and changed our name from CSN Stores LLC to Wayfair LLC. In connection with our initial public offering, we
completed a corporate reorganization, as a result of which Wayfair Inc. was formed to be a holding company with no material
assets other than 100% of the equity interests in Wayfair LLC and SK Retail, Inc.
Our executive offices are located at 4 Copley Place, 7th Floor, Boston, MA 02116, and our telephone number is
(617) 532-6100. Our corporate website address is www.wayfair.com. The information contained in, or accessible through, our
website does not constitute part of this Annual Report on Form 10-K.
Available Information
We encourage investors to use our investor relations website, investor.wayfair.com, to find information about us. We
promptly make available on this website, free of charge, the reports that we file or furnish with the Securities and Exchange
Commission ("SEC"), and corporate governance information (including our Code of Business Conduct and Ethics). We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements
and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Exchange Act. All material we file
with the SEC is publicly available at the SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549. You may
obtain information on the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information
regarding Wayfair and other issuers that file electronically with the SEC. Our website and the information contained therein or
connected thereto are not a part of, or incorporated into, this Annual Report on Form 10-K. Further, our references to website
URLs are intended to be inactive textual references only.
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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below. We
caution you that the following important factors, among others, could cause our actual results to differ materially from those
expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking statements in this Annual Report on Form 10-K and in any other
public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those
anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
Risks Related to Our Business and Industry
Our recent growth rates may not be sustainable or indicative of our future growth.
Our historical growth rates may not be sustainable or indicative of future growth. We believe that our continued revenue
growth will depend upon, among other factors, our ability to:
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•
build our brands and launch new brands;
acquire more customers and retain existing customers;
develop new features to enhance the consumer experience on our sites, mobile-optimized sites and mobile
applications;
increase the frequency with which new and repeat customers purchase products on our sites through merchandising,
data, analytics and technology;
add new suppliers and deepen our relationships with our existing suppliers;
grow certain categories where we under index the broader home goods market today, such as home improvement,
housewares, seasonal decor and decorative accents;
enhance the systems our consumers use to interact with our sites and invest in our infrastructure platform;
expand internationally; and
opportunistically pursue strategic acquisitions.
We cannot assure you we will be able to achieve any of the foregoing. Our customer base may not continue to grow or may
decline as a result of increased competition and the maturation of our business. Failure to continue our revenue growth rates could
have a material adverse effect on our financial condition and results of operations. You should not rely on our historical rate of
revenue growth as an indication of our future performance.
If we fail to manage our growth effectively, our business, financial condition and operating results could be harmed.
To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand
our infrastructure of people and information systems and expand, train and manage our employee base. We have rapidly increased
employee headcount since our inception to support the growth in our business. To support continued growth, we must effectively
integrate, develop and motivate a large number of new employees. We face significant competition for personnel, particularly in
the Boston, Massachusetts area where our headquarters are located. Failure to manage our hiring needs effectively or successfully
integrate our new hires may have a material adverse effect on our business, financial condition and operating results.
Additionally, the growth of our business places significant demands on our management and other employees. For example,
we typically launch hundreds of promotional events across thousands of products each month on our sites via emails, "push"
notifications and personalized displays. These events require us to produce updates of our sites and emails to our customers on a
daily basis with different products, photos and text. The growth of our business may require significant additional resources to
meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of our sites and
customer experience. We are also required to manage relationships with a growing number of suppliers, customers and other third
parties. Our information technology systems and our internal controls and procedures may not be adequate to support future
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growth of our supplier and employee base. If we are unable to manage the growth of our organization effectively, our business,
financial condition and operating results may be materially adversely affected.
If we fail to acquire new customers or retain existing customers, or fail to do so in a cost-effective manner, we may not be
able to achieve profitability.
Our success depends on our ability to acquire and retain customers in a cost-effective manner. In order to expand our
customer base, we must appeal to and acquire customers who have historically used other means of commerce to purchase home
goods and may prefer alternatives to our offerings, such as traditional brick and mortar retailers, the websites of our competitors
or our suppliers' own websites. We have made significant investments related to customer acquisition and expect to continue to
spend significant amounts to acquire additional customers. Our paid advertising efforts consist primarily of online channels,
including search engine marketing, display advertising, and paid social media, and to a lesser extent direct mail and television
advertisements. These efforts are expensive and may not result in the cost-effective acquisition of customers. We cannot assure
you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to
deliver a quality shopping experience, or if consumers do not perceive the products we offer to be of high value and quality, we
may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in numbers
sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network effects with our
suppliers, our net revenue may decrease, and our business, financial condition and operating results may be materially adversely
affected.
We believe that many of our new customers originate from word-of- mouth and other non-paid referrals from existing
customers. Therefore, we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals.
If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient
numbers to continue to grow our business, or we may be required to incur significantly higher marketing expenses in order to
acquire new customers.
We also utilize non-paid advertising. Our non-paid advertising efforts include search engine optimization, non-paid social
media, mobile "push" notifications and email. We obtain a significant amount of traffic via search engines and, therefore, rely on
search engines such as Google, Bing and Yahoo!. Search engines frequently update and change the logic that determines the
placement and display of results of a user's search, such that the purchased or algorithmic placement of links to our sites can be
negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results,
causing our sites to place lower in search query results. A major search engine could change its algorithms in a manner that
negatively affects our paid or non-paid search ranking, and competitive dynamics could impact the effectiveness of search engine
marketing or search engine optimization. We also obtain a significant amount of traffic via social networking websites or other
channels used by our current and prospective customers. As e-commerce and social networking continue to rapidly evolve, we
must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on
acceptable terms. If we are unable to cost-effectively drive traffic to our sites, our ability to acquire new customers and our
financial condition would suffer.
Our success depends in part on our ability to increase our net revenue per active customer. If our efforts to increase
customer loyalty and repeat purchasing as well as maintain high levels of customer engagement are not successful, our growth
prospects and revenue will be materially adversely affected.
Our ability to grow our business depends on our ability to retain our existing customer base and generate increased revenue
and repeat purchases from this customer base, and maintain high levels of customer engagement. To do this, we must continue to
provide our customers and potential customers with a unified, convenient, efficient and differentiated shopping experience by:
•
providing imagery, tools and technology that attract customers who historically would have bought elsewhere;
• maintaining a high-quality and diverse portfolio of products;
•
delivering products on time and without damage; and
• maintaining and further developing our mobile platforms.
If we fail to increase net revenue per active customer, generate repeat purchases or maintain high levels of customer
engagement, our growth prospects, operating results and financial condition could be materially adversely affected.
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Our business depends on our ability to build and maintain strong brands. We may not be able to maintain and enhance
our brands if we receive unfavorable customer complaints, negative publicity or otherwise fail to live up to consumers'
expectations, which could materially adversely affect our business, results of operations and growth prospects.
Maintaining and enhancing our brands is critical to expanding our base of customers and suppliers. However, a significant
portion of our customers' brand experience depends on third parties outside of our control, including suppliers and logistics
providers such as FedEx, UPS, the U.S. Postal Service and other third-party delivery agents. If these third parties do not meet our
or our customers' expectations, our brands may suffer irreparable damage. In addition, maintaining and enhancing these brands
may require us to make substantial investments, and these investments may not be successful. If we fail to promote and maintain
our brands, or if we incur excessive expenses in this effort, our business, operating results and financial condition may be
materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our
brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability
to provide high quality products to our customers and a reliable, trustworthy and profitable sales channel to our suppliers, which
we may not be able to do successfully.
Customer complaints or negative publicity about our sites, products, delivery times, customer data handling and security
practices or customer support, especially on blogs, social media websites and our sites, could rapidly and severely diminish
consumer use of our sites and consumer and supplier confidence in us and result in harm to our brands.
Our efforts to expand our business into new brands, products, services, technologies, and geographic regions will subject
us to additional business, legal, financial, and competitive risks and may not be successful.
Our business success depends to some extent on our ability to expand our customer offerings by launching new brands and
services and by expanding our existing offerings into new geographies. For example, in 2017 we launched Perigold, and a number
of new house brands, and in 2016 we launched Wayfair.ca in Canada as well as Wayfair Registry, our wedding registry service.
Launching new brands and services or expanding internationally requires significant upfront investments, including investments
in marketing, information technology, and additional personnel. Expanding our brands internationally is particularly challenging
because it requires us to gain country-specific knowledge about consumers, regional competitors and local laws, construct
catalogs specific to the country, build local logistics capabilities and customize portions of our technology for local markets. We
may not be able to generate satisfactory revenue from these efforts to offset these costs. Any lack of market acceptance of our
efforts to launch new brands and services or to expand our existing offerings could have a material adverse effect on our business,
prospects, financial condition and results of operations. Further, as we continue to expand our fulfillment capability or add new
businesses with different requirements, our logistics networks become increasingly complex and operating them becomes more
challenging. There can be no assurance that we will be able to operate our networks effectively.
We have also entered and may continue to enter into new markets in which we have limited or no experience, which may
not be successful or appealing to our customers. These activities may present new and difficult technological and logistical
challenges, and resulting service disruptions, failures or other quality issues may cause customer dissatisfaction and harm our
reputation and brand. Further, our current and potential competitors in new market segments may have greater brand recognition,
financial resources, longer operating histories and larger customer bases than we do in these areas. As a result, we may not be
successful enough in these newer areas to recoup our investments in them. If this occurs, our business, financial condition and
operating results may be materially adversely affected.
Expansion of our international operations will require management attention and resources, involves additional risks,
and may be unsuccessful, which could harm our future business development and existing domestic operations.
We believe international expansion represents a significant growth opportunity for us. Today, we deliver products to
customers in a number of countries, and plan to expand into other international markets in order to grow our business, which will
require significant management attention and resources. For example, we have made and will continue to make significant
investments in information technology, logistics, supplier relationships, merchandising and marketing in the foreign jurisdictions
in which we operate or plan to operate. We have limited experience in selling our products to conform to different local cultures,
standards and regulations, and the products we offer may not appeal to customers in the same manner, if at all, in other
geographies. We may have to compete with local companies which understand the local market better than we do and/or may
have greater brand recognition than we do. In addition, to deliver satisfactory performance for customers in international
locations, it may be necessary to locate physical facilities, such as consolidation centers and warehouses, in foreign markets, and
we may have to invest in these facilities before we can determine whether or not our foreign operations are successful. We have
limited experience establishing such facilities internationally and therefore may decide not to continue with the expansion of
international operations. We may not be successful in expanding into additional international markets or in generating net revenue
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from foreign operations. Furthermore, different privacy, censorship, liability, intellectual property and other laws and regulations
in foreign countries may cause our business, financial condition and operating results to be materially adversely affected.
Our future results could be materially adversely affected by a number of factors inherent in international operations,
including:
•
•
•
localization of our product offerings, including translation into foreign languages and adaptation for local practices,
standards and regulations;
the need to vary our practices in ways with which we have limited or no experience or which are less profitable or
carry more risk to us;
unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade
restrictions;
•
differing labor regulations where labor laws may be more advantageous to employees as compared to the U.S.;
• more stringent regulations relating to data privacy and security, including the use of commercial and personal
information, particularly in the European Union;
•
•
•
•
•
•
•
•
•
changes in a specific country's or region's political or economic conditions;
the rising cost of labor in the foreign countries in which our suppliers operate, resulting in increases in our costs of
doing business internationally;
challenges inherent in efficiently managing an increased number of employees over large geographic distances,
including the need to implement appropriate systems, policies, benefits and compliance programs and maintain our
corporate culture across geographies;
risks resulting from changes in currency exchange rates;
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our
operations in other countries;
different or lesser intellectual property protection;
exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt
Practices Act and similar laws and regulations in other jurisdictions;
import/export controls; and
logistics and sourcing.
Operating internationally requires significant management attention and financial resources. We cannot be certain that the
investment and additional resources required to establish and expand our international operations will produce desired levels of
net revenue or profitability. If we invest substantial time and resources to establish and expand our international operations and
are unable to do so successfully and in a timely manner, our business, financial condition and operating results may be materially
adversely affected.
We have a history of losses and expect to have operating losses and negative cash flow as we continue to expand our
business.
We have a history of losses, and we accumulated $306.2 million in common members' deficit as Wayfair LLC and an
additional $583.3 million loss as Wayfair Inc. through December 31, 2017. Because the market for purchasing home goods online
is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. As a
result, our losses may be larger than anticipated, and we may never achieve profitability. Also, we expect our operating expenses
to increase over the next several years as we expand internationally, grow our proprietary logistics network, hire more employees
and continue to develop new brands, features and services. Furthermore, if our future growth and operating performance fail to
meet investor or analyst expectations, or if we have future negative cash flow or losses resulting from our investment in acquiring
new customers, our financial condition and stock price could be materially adversely affected.
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System interruptions that impair customer access to our sites or other performance failures in our technology
infrastructure or that of our critical technology partners could damage our business, reputation and brand and substantially
harm our business and results of operations.
The satisfactory performance, reliability and availability of our sites, transaction processing systems and technology
infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as maintain adequate customer
service levels.
For example, if one of our data centers fails or suffers an interruption or degradation of services, we could lose customer
data and miss order fulfillment deadlines, which could harm our business. Our systems and operations are also vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, data loss, acts of
war, break-ins, earthquake and similar events. In the event of a data center failure, the failover to a back-up could take substantial
time, during which time our sites could be completely shut down. Further, our back-up services may not effectively process spikes
in demand, may process transactions more slowly and may not support all of our sites' functionality.
We use complex proprietary software in our technology infrastructure, which we seek to continually update and improve.
We may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject
to failure. In particular, we have in the past and may in the future experience slowdowns or interruptions in some or all of our sites
when we are updating them, and new technologies or infrastructures may not be fully integrated with existing systems on a timely
basis, or at all. Additionally, if we expand our use of third-party services, including cloud-based services, our technology
infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or
failures by such third-parties, which are out of our control. Our net revenue depends on the number of visitors who shop on our
sites and the volume of orders we can handle. Unavailability of our sites or reduced order fulfillment performance would reduce
the volume of goods sold and could also materially adversely affect consumer perception of our brand.
We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction
volume, as well as surges in online traffic and orders associated with promotional activities or seasonal trends in our business,
place additional demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a
substantial increase in the volume of traffic on our sites or the number of orders placed by customers, we will be required to
further expand and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurance
that we will be able to accurately project the rate or timing of increases, if any, in the use of our sites or expand and upgrade our
systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to
enhance and improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid
rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the e-
commerce industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may
experience instability and performance issues as a result of these changes.
Any slowdown or failure of our sites and the underlying technology infrastructure could harm our business, reputation and
our ability to acquire, retain and serve our customers, which could materially adversely affect our results of operations. Our
disaster recovery plan may be inadequate, and our business interruption insurance may not be sufficient to compensate us for the
losses that could occur.
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Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
Our business is rapidly evolving and intensely competitive, and we have many competitors in different industries. Our
competition includes furniture stores, big box retailers, department stores, specialty retailers, and online retailers and marketplaces
in the U.S., Canada, the United Kingdom and Germany, including:
• Furniture Stores: Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanagan, Rooms To Go;
• Big Box Retailers: Bed Bath & Beyond, Home Depot, IKEA, Lowe's, Target and Walmart;
• Department Stores: JCPenney and Macy's;
•
Specialty Retailers: Crate and Barrel, Ethan Allen, TJX, At Home, Williams Sonoma, Restoration Hardware,
Arhaus, Horchow, Room & Board, Mitchell Gold + Bob Williams;
• Online Retailers and Online Marketplaces: Amazon, Houzz and eBay; and
•
International: Leon's, Canadian Tire, John Lewis, WorldStores, Otto and Home24, in addition to several of the
companies listed above who also compete with us internationally.
We expect competition in e-commerce generally to continue to increase. We believe that our ability to compete successfully
depends upon many factors both within and beyond our control, including:
•
•
•
•
•
•
•
the size and composition of our customer base;
the number of suppliers and products we feature on our sites;
our selling and marketing efforts;
the quality, price and reliability of products we offer;
the convenience of the shopping experience that we provide;
our ability to distribute our products and manage our operations; and
our reputation and brand strength.
Many of our current competitors have, and potential competitors may have, longer operating histories, greater brand
recognition, larger fulfillment infrastructures, greater technical capabilities, faster and less costly shipping, significantly greater
financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive
greater net revenue and profits from their existing customer base, acquire customers at lower costs or respond more quickly than
we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive
research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies,
which may allow them to build larger customer bases or generate net revenue from their customer bases more effectively than we
do.
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Purchasers of home goods may not choose to shop online, which would prevent us from growing our business.
The online market for home goods in the U.S. is less developed than the online market for apparel, consumer electronics and
other consumer products in the U.S. and, we believe, only accounts for a small portion of the market as a whole. If the online
market for home goods does not gain acceptance, our business may suffer. Our success will depend, in part, on our ability to
attract consumers who have historically purchased home goods through traditional retailers. Furthermore, we may have to incur
significantly higher and more sustained advertising and promotional expenditures in order to attract additional online consumers
to our sites and convert them into purchasing customers. Specific factors that could impact consumers' willingness to purchase
home goods from us include:
•
•
•
•
•
•
concerns about buying products, and in particular larger products, without a physical storefront, face-to-face
interaction with sales personnel and the ability to physically examine products;
delivery time associated with online orders;
actual or perceived lack of security of online transactions and concerns regarding the privacy of personal
information;
delayed shipments or shipments of incorrect or damaged products;
inconvenience associated with returning or exchanging items purchased online; and
usability, functionality and features of our sites.
If the shopping experience we provide does not appeal to consumers or meet the expectations of existing customers, we may
not acquire new customers at rates consistent with historical periods, and existing customers' buying patterns and levels may be
less than historical rates.
We may be subject to product liability claims if people or property are harmed by the products we sell.
Some of the products we sell may expose us to product liability claims and litigation (including class actions) or regulatory
action relating to safety, personal injury, death or environmental or property damage. Some of our agreements with members of
our supply chain may not indemnify us from product liability for a particular product, and some members of our supply chain
may not have sufficient resources or insurance to satisfy their indemnity and defense obligations. Although we maintain liability
insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue
to be available to us on economically reasonable terms, or at all.
Risks associated with the suppliers from whom our products are sourced could materially adversely affect our financial
performance as well as our reputation and brand.
We depend on our ability to provide our customers with a wide range of products from qualified suppliers in a timely and
efficient manner. Political and economic instability, the financial stability of suppliers, suppliers' ability to meet our standards,
labor problems experienced by suppliers, the availability of raw materials, merchandise quality issues, currency exchange rates,
transport availability and cost, transport security, inflation, and other factors relating to our suppliers are beyond our control.
Our agreements with most of our suppliers do not provide for the long-term availability of merchandise or the continuation
of particular pricing practices, nor do they usually restrict such suppliers from selling products to other buyers. There can be no
assurance that our current suppliers will continue to seek to sell us products on current terms or that we will be able to establish
new or otherwise extend current supply relationships to ensure product acquisitions in a timely and efficient manner and on
acceptable commercial terms. Our ability to develop and maintain relationships with reputable suppliers and offer high quality
merchandise to our customers is critical to our success. If we are unable to develop and maintain relationships with suppliers that
would allow us to offer a sufficient amount and variety of quality merchandise on acceptable commercial terms, our ability to
satisfy our customers' needs, and therefore our long-term growth prospects, would be materially adversely affected.
Further, we rely largely on our suppliers’ representations of product quality, safety and compliance with applicable laws and
standards. If our suppliers or other vendors violate applicable laws, regulations or our supplier code of conduct, or implement
practices regarded as unethical, unsafe, or hazardous to the environment, it could damage our reputation and negatively affect our
operating results. Further, concerns regarding the safety and quality of products provided by our suppliers could cause our
customers to avoid purchasing those products from us, or avoid purchasing products from us altogether, even if the basis for the
concern is outside of our control. As such, any issue, or perceived issue, regarding the quality and safety of any items we sell,
regardless of the cause, could adversely affect our brand, reputation, operations and financial results.
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We also are unable to predict whether any of the countries in which our suppliers' products are currently manufactured or
may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the
likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from suppliers with
international manufacturing operations, including the imposition of additional import restrictions, restrictions on the transfer of
funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available to our customers and
materially adversely affect our financial performance as well as our reputation and brand. Furthermore, some or all of our
suppliers' foreign operations may be adversely affected by political and financial instability, resulting in the disruption of trade
from exporting countries, restrictions on the transfer of funds or other trade disruptions.
In addition, our business with foreign suppliers, particularly with respect to our international sites, may be affected by
changes in the value of the U.S. dollar relative to other foreign currencies. For example, any movement by any other foreign
currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency
exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This, in
turn, might cause such foreign suppliers to demand higher prices for merchandise in their effort to offset any lost profits
associated with any currency devaluation, delay merchandise shipments, or discontinue selling to us altogether, any of which
could ultimately reduce our sales or increase our costs.
We may be unable to source new suppliers or strengthen our relationships with current suppliers.
We have relationships with over 10,000 suppliers. Our agreements with suppliers are generally terminable at will by either
party upon short notice. If we do not maintain our existing relationships or build new relationships with suppliers on acceptable
commercial terms, we may not be able to maintain a broad selection of merchandise, and our business and prospects would suffer
severely.
In order to attract quality suppliers to our platform, we must:
•
•
•
demonstrate our ability to help our suppliers increase their sales;
offer suppliers a high quality, cost-effective fulfillment process; and
continue to provide suppliers with a dynamic and real-time view of our demand and inventory needs.
If we are unable to provide our suppliers with a compelling return on investment and an ability to increase their sales, we
may be unable to maintain and/or expand our supplier network, which would negatively impact our business.
We depend on our suppliers to perform certain services regarding the products that we offer.
As part of offering our suppliers' products for sale on our sites, these suppliers are often responsible for conducting a
number of traditional retail operations with respect to their respective products, including maintaining inventory and preparing
merchandise for shipment to our customers. In these instances, we may be unable to ensure that these suppliers will continue to
perform these services to our or our customers' satisfaction in a manner that provides our customer with a unified brand
experience or on commercially reasonable terms. If our customers become dissatisfied with the services provided by our
suppliers, our business, reputation and brands could suffer.
We depend on our relationships with third parties, and changes in our relationships with these parties could adversely
impact our revenue and profits.
Because we rely on FedEx, UPS and the U.S. Postal Service to deliver most of the small parcel products we offer on our
sites, we are subject to shipping delays or disruptions caused by inclement weather, natural disasters, labor activism, health
epidemics or bioterrorism. In addition, because we rely on national, regional and local transportation companies for the delivery
of some of our other products, we are also subject to risks of breakage or other damage during delivery by any of these third
parties. We also use and rely on other services from third parties, such as our telecommunications services, and those services may
be subject to outages and interruptions that are not within our control. For example, failures by our telecommunications providers
have in the past and may in the future interrupt our ability to provide phone support to our customers. If products are not delivered
in a timely fashion or are damaged during the delivery process, or if we are not able to provide adequate customer support, our
customers could become dissatisfied and cease buying products through our sites, which would adversely affect our operating
results.
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We also have relationships with third-party retail partners that allow consumers to purchase products offered by us though
their websites and mobile applications. Because our agreements with our retail partners are generally terminable at will, we may
be unable to maintain these relationships, and our results of operations could fluctuate significantly from period to period
depending on the performance of our retail partners and their willingness to continue to offer and/or promote our products. Our
agreements with our retail partners may also restrict our ability to market certain products, and not all of our suppliers may permit
us to market through all of our retail partners' websites . Because some of our retail partners are competitors or potential
competitors in the home goods market, some or all of our retail partners may in the future determine they no longer wish to do
business with us or may decide to take other actions that could harm our business. We may also determine that we no longer want
to do business with them. Because we do business with a small number of retail partners, if any one of our contracts with our
retailer partners were to terminate, our revenue from our retail partners may decline and our relationships with our suppliers may
be adversely affected.
If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be
able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause
investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
The Sarbanes-Oxley Act of 2002 requires that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation, document our controls and perform
testing of our key control over financial reporting to allow management and our independent public accounting firm to report on
the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over
financial reporting that are deemed to be material weaknesses. If we are not able to comply with the requirements of Section 404
in a timely manner, or if we or our accounting firm identify deficiencies in our internal control over financial reporting that are
deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits,
sanctions or investigations by regulatory authorities, including SEC enforcement actions, and we could be required to restate our
financial results, any of which would require additional financial and management resources.
We continue to invest in more robust technology and in more resources in order to manage those reporting requirements.
Implementing the appropriate changes to our internal controls may distract our officers and employees, result in substantial costs
and require significant time to complete. Any difficulties or delays in implementing these controls could impact our ability to
timely report our financial results. For these reasons, we may encounter difficulties in the timely and accurate reporting of our
financial results, which would impact our ability to provide our investors with information in a timely manner. As a result, our
investors could lose confidence in our reported financial information, and our stock price could decline.
In addition, any such changes do not guarantee that we will be effective in maintaining the adequacy of our internal
controls, and any failure to maintain that adequacy could prevent us from accurately reporting our financial results.
We may be unable to accurately forecast net revenue and appropriately plan our expenses in the future.
Net revenue and operating results are difficult to forecast because they generally depend on the volume, timing, and type of
orders we receive, all of which are uncertain. We base our expense levels and investment plans on our estimates of total net
revenue and gross margins. We cannot be sure the same growth rates, trends, and other key performance metrics are meaningful
predictors of future growth. If our assumptions prove to be wrong, we may spend more than we anticipate acquiring and retaining
customers or may generate less net revenue per active customer than anticipated, any of which could have a negative impact on
our business and results of operations.
Our business is also affected by general economic and business conditions in the U.S., and we anticipate that it will be
increasingly affected by conditions in international markets. In addition, we experience seasonal trends in our business, and our
mix of product offerings is highly variable from day-to-day and quarter-to-quarter. This variability makes it difficult to predict
sales and could result in significant fluctuations in our net revenue from period-to-period. A significant portion of our expenses is
fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in
net revenue. Any failure to accurately predict net revenue or gross margins could cause our operating results to be lower than
expected, which could materially adversely affect our financial condition and stock price.
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Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us
from growing.
In the future, we could be required to or may decide to raise capital through public or private financing or other
arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed or
desired could harm our business. We may sell Class A common stock, convertible securities and other equity securities in one or
more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent
transactions, holders of our Class A common stock, including holders of any Class A common stock issued upon conversion of
our convertible notes, may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and
privileges senior to those of holders of our Class A common stock. Debt financing, if available, may involve restrictive covenants
and could reduce our operational flexibility or profitability. If we cannot raise funds on acceptable terms, we may not be able to
grow our business or respond to competitive pressures.
Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that
is able to respond and adapt to rapid changes in technology.
The number of people who access the Internet through devices other than personal computers, including mobile phones,
smartphones, handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has
increased dramatically in the past few years. We continually upgrade existing technologies and business applications to keep pace
with these rapidly changing and continuously evolving technologies, and we may be required to implement new technologies or
business applications in the future. The implementation of these upgrades and changes requires significant investments and as
new devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for
these alternative devices and platforms. Additionally, we may need to devote significant resources to the support and maintenance
of such applications once created. Our results of operations may be affected by the timing, effectiveness and costs associated with
the successful implementation of any upgrades or changes to our systems and infrastructure to accommodate such alternative
devices and platforms. Further, in the event that it is more difficult or less compelling for our customers to buy products from us
on their mobile or other devices, or if our customers choose not to buy products from us on such devices or to use mobile or other
products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and
operating results may be materially adversely affected.
Significant merchandise returns could harm our business.
We allow our customers to return products, subject to our return policy. If merchandise returns are significant, our business,
prospects, financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from
time to time, which may result in customer dissatisfaction or an increase in the number of product returns. Many of our products
are large and require special handling and delivery. From time to time our products are damaged in transit, which can increase
return rates and harm our brand.
Uncertainties in global economic conditions and their impact on consumer spending patterns, particularly in the home
goods segment, could adversely impact our operating results.
Consumers may view a substantial portion of the products we offer as discretionary items rather than necessities. As a
result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including
discretionary spending. Some of the factors adversely affecting consumer spending include levels of unemployment, consumer
debt levels, changes in net worth based on market changes and uncertainty, home foreclosures and changes in home values,
fluctuating interest rates, credit availability, government actions, fluctuating fuel and other energy costs, fluctuating commodity
prices and general uncertainty regarding the overall future economic environment. Adverse economic changes in any of the
regions in which we sell our products could reduce consumer confidence and could negatively affect net revenue and have a
material adverse effect on our operating results.
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Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or
messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business.
Our business is highly dependent upon email and other messaging services for promoting our sites and products. Daily
promotions offered through emails and other messages sent by us, or on our behalf by our vendors, generate a significant portion
of our revenue. We provide daily emails and "push" communications to customers and other visitors informing them of what is
available for purchase on our sites that day, and we believe these messages are an important part of our customer experience and
help generate a substantial portion of our net revenue. If we are unable to successfully deliver emails or other messages to our
subscribers, or if subscribers decline to open our emails or other messages, our net revenue and profitability would be materially
adversely affected. Changes in how webmail applications organize and prioritize email may reduce the number of subscribers
opening our emails. For example, in 2013 Google Inc.'s Gmail service began offering a feature that organizes incoming emails
into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may
result in our emails being delivered in a less prominent location in a subscriber's inbox or viewed as "spam" by our subscribers
and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose restrictions on or
charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service
providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our
inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations that limit our ability
to send such communications or impose additional requirements upon us in connection with sending such communications would
also materially adversely impact our business. Our use of email and other messaging services to send communications about our
sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might
result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or
other messages. We also rely on social networking messaging services to send communications and to encourage customers to
send communications. Changes to the terms of these social networking services to limit promotional communications, any
restrictions that would limit our ability or our customers' ability to send communications through their services, disruptions or
downtime experienced by these social networking services or decline in the use of or engagement with social networking services
by customers and potential customers could materially adversely affect our business, financial condition and operating results.
We are subject to risks related to online payment methods.
We accept payments using a variety of methods, including credit card, debit card, PayPal, credit accounts (including
promotional financing) and gift cards. As we offer new payment options to consumers, we may be subject to additional
regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay
interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We also offer co-
branded credit card programs, which could adversely affect our operating results if terminated. We are also subject to payment
card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and
rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to
comply. As our business changes, we may also be subject to different rules under existing standards, which may require new
assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of
any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use
payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be
subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit
card payments from consumers or to facilitate other types of online payments. If any of these events were to occur, our business,
financial condition and operating results could be materially adversely affected.
We occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed
with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit
card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our
liability for these transactions could harm our business, financial condition and results of operations.
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Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply
with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet
and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e- commerce or mobile
commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection,
electronic contracts and communications, consumer protection, Internet neutrality and gift cards. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority
of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the
Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-
commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with
other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws
and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to
our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or
action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management,
increase our costs of doing business, decrease the use of our sites by consumers and suppliers and may result in the imposition of
monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or
consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more
countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse
legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole
or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected,
and we may not be able to maintain or grow our net revenue and expand our business as anticipated. Further, as we enter into new
market segments or geographical areas and expand the products and services we offer, we may be subject to additional laws and
regulatory requirements or prohibited from conducting our business, or certain aspects of it, in certain jurisdictions. We will incur
additional costs complying with these additional obligations and any failure or perceived failure to comply would adversely affect
our business and reputation.
Failure to comply with federal, state and international laws and regulations relating to privacy, data protection and
consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data
protection and consumer protection, could adversely affect our business and our financial condition.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing, export and
security of personal information. Laws and regulations relating to privacy, data protection and consumer protection are evolving
and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is
inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not
comply, or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived
failure, by us to comply with our posted privacy policies or with any federal, state or international privacy or consumer
protection- related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory
guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely
affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or
others or other liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding
or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings,
distract our management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the
imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the
costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer
protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
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Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of
proprietary or third-party "cookies" and other methods of online tracking for behavioral advertising and other purposes. U.S. and
foreign governments have enacted, have considered or are considering legislation or regulations that could significantly restrict
the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and
consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such
tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement,
means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could
if widely adopted significantly reduce the effectiveness of such practices and technologies. The regulation of the use of cookies
and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ
such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms
and consequently, materially adversely affect our business, financial condition and operating results.
Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the U.S. The
European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data
protection and consumer protection than the U.S. In May 2018 the European Union's new regulation governing data practices and
privacy called the General Data Protection Regulation ("GDPR") becomes effective and will replace the data protection laws of
the individual member states. The law requires companies to meet new, more stringent requirements regarding the handling of
personal data of individuals in the EU. Engineering efforts to build new capabilities to facilitate compliance with GDPR may
entail substantial expense and the diversion of engineering resources from other projects. The law also increases the penalties for
non-compliance, which may result in monetary penalties of up to 20 million Euros or 4% of a company's worldwide turnover,
whichever is higher. GDPR and other similar regulations require companies to give specific types of notice and in some cases
seek consent from consumers and other data subjects before collecting or using their data for certain purposes, including some
marketing activities. Outside of the European Union, there are many countries with data protection laws, and new countries are
adopting data protection legislation with increasing frequency. Many of these laws may require consent from consumers for the
use of data for various purposes, including marketing, which may reduce our ability to market our products. There is no
harmonized approach to these laws and regulations globally. Consequently, we increase our risk of non-compliance with
applicable foreign data protection laws and regulations as we continue our international expansion. We may need to change and
limit the way we use personal information in operating our business and may have difficulty maintaining a single operating model
that is compliant. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our
business practices and divergent operating models, which may adversely affect our business and financial condition.
In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand
current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and
consumer protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This
could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers
or otherwise harm our business, financial condition and operating results.
Our failure or the failure of third-party service providers to protect our sites, networks and systems against security
breaches, or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm
our business and operating results.
We collect, maintain, transmit and store data about our customers, employees, contractors, suppliers, vendors and others,
including credit card information and personally identifiable information, as well as other confidential and proprietary
information. We also employ third-party service providers that store, process and transmit certain proprietary, personal and
confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an
effort to securely transmit, encrypt, anonymize or pseudonymize certain confidential and sensitive information, including credit
card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or
partial failure of this technology to protect transaction and personal data or other confidential and sensitive information from
being breached or compromised. Our security measures, and those of our third-party service providers, may not detect or prevent
all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social
engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or
transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain, including
payment card systems and human resources management platforms. We and our service providers may not anticipate or prevent
all types of attacks until after they have already been launched, and techniques used to obtain unauthorized access to or sabotage
systems change frequently and may not be known until launched against us or our third-party service providers. In addition,
security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our
employees or by persons with whom we have commercial relationships.
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Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in
unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of personal information,
including consumers' and employees' personally identifiable information, or other confidential or proprietary information of
ourselves or third parties; limited or terminated access to certain payment methods or fines or higher transaction fees to use such
methods; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of
content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to
breach remediation, deployment or training of additional personnel and protection technologies, responses to governmental
investigations and media inquiries and coverage; engagement of third party experts and consultants; litigation, regulatory action
and other potential liabilities. If any of these breaches of security occur, our reputation and brand could be damaged, our business
may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches
and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. In addition, any party who is able to
illicitly obtain a customer's password could access that customer's transaction data or personal information. Any compromise or
breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data security and
other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures,
which could have a material adverse effect on our business, financial condition and operating results. Although we maintain
privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate for
liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. We
may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting
resources from the growth and expansion of our business.
Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and
our financial results.
Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose
additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax
authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies
engaged in e-commerce. New or revised international, federal, state or local tax regulations or court decisions may subject us or
our customers to additional sales, income and other taxes. For example, Congress is considering various approaches to legislation
that would require companies engaged in e-commerce to collect sales tax taxes on Internet revenue and a growing number of U.S.
states and certain foreign jurisdictions have adopted or are considering proposals to impose obligations on remote sellers and
online marketplaces to collect taxes on their behalf. Additionally, we are a defendant in a legal proceeding (South Dakota v.
Wayfair Inc., 17-494) where South Dakota has asked the U.S. Supreme Court to reverse its longstanding precedent holding that
remote sellers are not required to collect state and local sales taxes. We cannot predict the effect of these and other attempts to
impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, VAT and similar taxes
would likely increase the cost of doing business online and decrease the attractiveness of selling products over the Internet. New
taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these
events could have a material adverse effect on our business, financial condition and operating results.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use,
commercial activity, VAT or similar taxes, and we could be subject to liability with respect to past or future sales, which could
adversely affect our operating results.
We do not collect and remit sales and use, commercial activity, VAT or similar taxes in all jurisdictions in which we have
sales, based on our belief that such taxes are not applicable or legally required. Several states and other taxing jurisdictions have
presented or threatened us with assessments, alleging that we are required to collect and remit such taxes there. Other states,
including South Dakota in our legal proceeding currently before the U.S. Supreme Court (South Dakota v. Wayfair Inc., 17-494),
have requested that courts validate new laws that reverse existing constitutional precedent. While we do not believe that we are
subject to such taxes and intend to vigorously defend our position in these cases, we cannot be sure of the outcome of our
discussions and/or appeals with these states or cases that are pending in the courts. In the event of an adverse outcome, we could
face assessments for additional time periods since the last assessments we received, plus any additional interest and penalties. We
also expect additional jurisdictions may make similar assessments or pass similar new laws in the future, and any of the
jurisdictions where we have sales may apply more rigorous enforcement efforts or take more aggressive positions in the future
that could result in greater tax liability allegations. In addition, in the future we may also decide to engage in activities, such as
owning or leasing property, that would require us to pay sales and use, commercial activity, VAT or similar taxes in new
jurisdictions. Such tax assessments, penalties and interest or future requirements may materially adversely affect our business,
financial condition and operating results.
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Our business could suffer if we are unsuccessful in making, integrating and maintaining acquisitions and investments.
As part of our business strategy, we may acquire other companies or businesses. However, we may not be able to find
suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. Acquisitions involve
numerous risks, any of which could harm our business, including: difficulties in integrating the technologies, operations, existing
contracts and personnel of an acquired company; difficulties in supporting and transitioning customers and suppliers, if any, of an
acquired company; diversion of financial and management resources from existing operations or alternative acquisition
opportunities; failure to realize the anticipated benefits or synergies of a transaction; failure to identify all of the problems,
liabilities or other shortcomings or challenges of an acquired company or technology, including issues related to intellectual
property, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues; risks
of entering new markets in which we have limited or no experience; potential loss of key employees, customers and suppliers
from either our current business or an acquired company's business; inability to generate sufficient net revenue to offset
acquisition costs; additional costs or equity dilution associated with funding the acquisition; and possible write-offs or impairment
charges relating to acquired businesses.
In addition, our investments in properties may not be fully realized. We continually review our operations and facilities in
an effort to reduce costs and increase efficiencies. For strategic or other operational reasons, we may decide to consolidate or co-
locate certain aspects of our business operations or dispose of one or more of our properties. If we decide to fully or partially
vacate a leased property, we may incur significant cost, including facility closing costs, employee separation and retention
expenses, lease termination fees, rent expense in excess of sublease income and impairment of leasehold improvements and
accelerated depreciation of assets. Any of these events may materially adversely affect our business, financial condition and
operating results.
We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract,
develop, motivate and retain well-qualified employees, our business could be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of Niraj Shah, one of our co-
founders, co-chairman of the board of directors and our Chief Executive Officer, Steven Conine, one of our co-founders and co-
chairman of the board of directors, and the other members of our senior management team. Our future success depends on our
continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers,
engineers and merchandising and technology personnel. The market for such positions in the Boston area and other cities in which
we operate is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. In
addition, the loss of any of our senior management or key employees or our inability to recruit and develop mid-level managers
could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements.
All of our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment
relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we
do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial
condition and operating results may be materially adversely affected.
We may not be able to adequately protect our intellectual property rights.
We regard our customer lists, trademarks, domain names, copyrights, patents, trade dress, trade secrets, proprietary
technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade
secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be
able to obtain broad protection in the U.S. or internationally for all of our intellectual property, and we might not be able to obtain
effective intellectual property protection in every country in which we sell products or perform services. For example, we are the
registrant of marks for our brands in numerous jurisdictions and of the Internet domain name for the websites of Wayfair.com,
Wayfair.co.uk, Wayfair.de and our other sites, as well as various related domain names. However, we have not registered our
marks or domain names in all major international jurisdictions and may not be able to register or use such domain names in all of
the countries in which we currently or intend to conduct business. Further, we might not be able to prevent third parties from
registering, using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease
the value of our marks, domain names and other proprietary rights.
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The protection of our intellectual property rights may require the expenditure of significant financial, managerial and
operational resources. We may initiate claims or litigation against others for infringement, misappropriation or violation of our
intellectual property rights or proprietary rights or to establish the validity of such rights. Any litigation, whether or not it is
resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel,
which may materially adversely affect our business, financial condition and operating results. Moreover, the steps we take to
protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating
our proprietary rights, and we may not be able to broadly enforce all of our trademarks or patents. Any of our patents, marks or
other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our
patent and trademark applications may never be granted. Additionally, the process of obtaining intellectual property protections is
expensive and time-consuming, and we may not be able to pursue all necessary or desirable actions at a reasonable cost or in a
timely manner. Even if issued, there can be no assurance that these protections will adequately safeguard our intellectual property,
as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights
are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior
technology or intellectual property rights. We may also be exposed to claims from third parties claiming infringement of their
intellectual property rights, or demanding the release or license of open source software or derivative works that we developed
using such software (which could include our proprietary code) or otherwise seeking to enforce the terms of the applicable open
source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the
affected portions of our source code, be limited in or cease using the implicated software unless and until we can re-engineer such
software to avoid infringement or change the use of the implicated open source software.
We have been, and may again be, accused of infringing intellectual property rights of third parties.
The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has
resulted in protracted and expensive litigation for many companies. We are subject to claims and litigation by third parties that we
infringe their intellectual property rights, and we expect additional claims and litigation with respect to infringement to occur in
the future. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable
outcomes will be obtained. As our business expands and the number of competitors in our market increases and overlaps occur,
we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether
meritorious or not, could be time-consuming, result in considerable litigation costs, require significant amounts of management
time or result in the diversion of significant operational resources, any of which could materially adversely affect our business,
financial condition and operating results.
Legal claims regarding intellectual property rights are subject to inherent uncertainties due to the oftentimes complex issues
involved, and we cannot be certain that we will be successful in defending ourselves against such claims. In addition, some of our
larger competitors have extensive portfolios of issued patents. Many potential litigants, including patent holding companies, have
the ability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be
brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or
prevents us from conducting our business as we have historically done or may desire to do in the future. We might also be
required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially
acceptable terms, or at all. Alternatively, we may be required to develop non-infringing technology or intellectual property, which
could require significant effort and expense and may ultimately not be successful.
We have received in the past, and we may receive in the future, communications alleging that certain items posted on or
sold through our sites violate third-party copyrights, designs, marks and trade names or other intellectual property rights or other
proprietary rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights
against online companies, including Wayfair. In addition to litigation from rights owners, we may be subject to regulatory, civil or
criminal proceedings and penalties if governmental authorities believe we have aided and abetted in the sale of counterfeit or
infringing products.
Such claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational
resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege
that we have violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been
amplified by the increase in third parties whose sole or primary business is to assert such claims.
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Our outstanding indebtedness, or additional indebtedness that we may incur, could adversely affect our financial condition.
In September 2017, we issued unsecured 0.375% Convertible Senior Notes in an aggregate principal amount of $431.25
million (the "Notes"), pursuant to which we will pay interest semiannually in arrears at a rate of 0.375% per annum commencing
in 2018. The Notes will mature on September 1, 2022 unless earlier purchased, redeemed or converted, at which time, we will
settle any conversions of the Notes in cash, shares of the Company’s Class A common stock or a combination thereof, at our
election. Under certain circumstances, the holders of the Notes may require us to repay all or a portion of the principal and
interest outstanding under the Notes in cash prior to the maturity date, which could have an adverse effect on our financial results.
In February 2017, we entered into a three-year senior secured revolving credit facility (the "Revolver") under which we may
borrow up to $100 million to fund working capital and general corporate purposes. If we draw down on this facility, our interest
expense and principal repayment requirements will increase, which could have an adverse effect on our financial results and our
ability to make payments on the Notes. Further, the agreements governing the Revolver contain numerous requirements, including
affirmative, negative and financial covenants. Our failure to comply with any of these covenants or to meet any payment
obligations under the Revolver could result in an event of default which, if not cured or waived, would result in any amounts
outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable. We might not have
sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations.
Our business may not be able to generate sufficient cash flow from operations, and we can give no assurance that future
borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness as such indebtedness matures,
including the Notes, and to fund our other liquidity needs. If this occurs, we will need to refinance all or a portion of our
indebtedness on or before maturity, and there can be no assurance that we will be able to refinance any of our indebtedness on
commercially reasonable terms, or at all. We may need to adopt one or more alternatives, such as reducing or delaying planned
expenses and capital expenditures, selling assets, restructuring debt, or obtaining additional equity or debt financing. These
alternative strategies may not be affected on satisfactory terms, if at all. Our ability to refinance our indebtedness or obtain
additional financing, or to do so on commercially reasonable terms, will depend on, among other things, our financial condition at
the time, restrictions in agreements governing our indebtedness, and other factors, including the condition of the financial markets
and the markets in which we compete.
If we do not generate sufficient cash flow from operations, and additional borrowings, refinancings or proceeds from asset
sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations, including our obligations
under the Notes.
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We cannot guarantee that our stock repurchase program will be fully consummated or that it will enhance long-term
shareholder value. Stock repurchases could also increase the volatility of the trading price of our stock and could diminish our
cash reserves.
In February 2018, our board of directors authorized a stock repurchase program of up to $200 million of our Class A
common stock that does not have an expiration date. Although our board of directors has authorized this stock repurchase
program, the program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares.
We cannot guarantee that the program will be fully consummated or that it will enhance long-term stockholder value. The
program could affect the trading price of our Class A common stock and increase volatility, and any announcement of a
termination of this program may result in a decrease in the trading price of our Class A common stock. In addition, this program
could diminish our cash reserves.
Risks Related to Ownership of our Class A Common Stock
The dual class structure of our common stock has the effect of concentrating voting control with our co-founders, which
will limit your ability to influence corporate matters.
Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock that is publicly
traded, has one vote per share. Following our initial public offering (the "IPO"), our Class B common stock was held primarily by
our co-founders, other executive officers, directors and their affiliates. Due to optional conversions of Class B common stock into
Class A common stock following the IPO, our Class B common stock is currently held primarily by our co-founders and their
affiliates. As of December 31, 2017, our co-founders and their affiliates owned shares representing approximately 35.7% of the
economic interest and 84.4% of the voting power of our outstanding capital stock. This concentrated control limits your ability to
influence corporate matters for the foreseeable future. For example, these stockholders are able to control elections of directors,
amendments of our certificate of incorporation or bylaws, increases to the number of shares available for issuance under our
equity incentive plans or adoption of new equity incentive plans and approval of any merger or sale of assets for the foreseeable
future. This control may materially adversely affect the market price of our Class A common stock. Additionally, holders of our
Class B common stock may cause us to make strategic decisions or pursue acquisitions that could involve risks to you or may not
be aligned with your interests. The holders of our Class B common stock are also entitled to a separate vote in the event we seek
to amend our certificate of incorporation to increase or decrease the par value of a class of our common stock or in a manner that
alters or changes the powers, preferences or special rights of the Class B common stock in a manner that affects its holders
adversely.
Future transfers by holders of Class B common stock will generally result in those shares converting on a 1:1 basis to
Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B
common stock who retain their shares in the long-term, which may include our executive officers.
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Our stock price may be volatile or may decline regardless of our operating performance.
The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which
are beyond our control, including the risks described elsewhere in this Part I, Item 1A, Risk Factors, of this Annual Report on
Form 10-K, as well as:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our results of operations;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or
ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations
of investors;
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships,
joint ventures, operating results or capital commitments;
changes in operating performance and stock market valuations of other technology or retail companies generally, or
those in our industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in interest rates;
changes in our board of directors or management;
sales of large blocks of our Class A common stock, including sales by our executive officers, directors and
significant stockholders;
lawsuits threatened or filed against us;
changes in laws or regulations applicable to our business;
changes in our capital structure, such as future issuances of debt or equity securities;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the U.S. and abroad; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many technology companies, including e-commerce companies. Stock prices of many
technology companies, including e-commerce companies, have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. Volatility in our stock price could adversely affect our business and financing
opportunities and expose us to litigation. Securities litigation can subject us to substantial costs, divert resources and the attention
of management from our business and materially adversely affect our business, financial condition and operating results.
Short selling could increase the volatility of our stock price.
We believe our Class A common stock has been the subject of significant short selling efforts by certain market participants.
Short sales are transactions in which a market participant sells a security that it does not own. To complete the transaction, the
market participant must borrow the security to make delivery to the buyer. The market participant is then obligated to replace the
security borrowed by purchasing the security at the market price at the time of required replacement. If the price at the time of
replacement is lower than the price at which the security was originally sold by the market participant, then the market participant
will realize a gain on the transaction. Thus, it is in the market participant’s interest for the market price of the underlying security
to decline as much as possible during the period prior to the time of replacement. Short selling may negatively affect the value of
our stock to the detriment of our stockholders.
In addition, market participants with disclosed short positions in our stock have published, and may in the future continue to
publish, negative information regarding us that we believe is inaccurate and misleading. We believe that the publication of this
negative information may in the future lead to downward pressure on the price of our stock.
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Substantial sales of shares of our Class A common stock could cause the market price of our Class A common stock to
decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales
might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the
sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of
our Class A common stock.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about
our business, our share price and trading volume could decline.
The trading market for our Class A common stock depends in part on the research and reports that securities or industry
analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one
or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely
decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which could cause our share price or trading volume to decline.
Our management has broad discretion over our existing cash resources and might not use such funds in ways that
increase the value of your investment.
Our management generally has broad discretion over the use of our cash resources, and you will be relying on the judgment
of our management regarding the application of these resources. Our management might not apply these resources in ways that
increase the value of your investment.
Although we do not rely on "controlled company" exemptions from certain corporate governance requirements under
the New York Stock Exchange, or NYSE, rules, if we use these exemptions in the future, you will not have the same
protections afforded to stockholders of companies that are subject to such requirements.
Our co-founders control a majority of the voting power of our outstanding common stock. As a result, we qualify as a
"controlled company" within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed
company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled
company" and may elect not to comply with certain corporate governance requirements, including:
•
•
•
•
the requirement that a majority of the board of directors consist of independent directors as defined under the listing
rules of the NYSE;
the requirement that we have a nominating and corporate governance committee that is composed entirely of
independent directors with a written charter addressing the committee's purpose and responsibilities;
the requirement that we have a compensation committee that is composed entirely of independent directors with a
written charter addressing the committee's purpose and responsibilities; and
the requirement for an annual performance evaluation of the nominating and corporate governance and
compensation committees.
To the extent we still qualify, we may choose to take advantage of any of these exemptions in the future. As a result, in the
future, we may not have a majority of independent directors and we may not have independent director oversight of decisions
regarding executive compensation and director nominations.
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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company
more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of
our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control
or changes in our management. Our certificate of incorporation and bylaws include provisions that:
•
permit the board of directors to establish the number of directors and fill any vacancies and newly created
directorships;
• when the outstanding shares of our Class B common stock represent less than 10% of the then outstanding shares of
Class A common stock and Class B common stock, provide that our board of directors will be classified into three
classes with staggered, three year terms and that directors may only be removed for cause;
•
•
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of "blank check" preferred stock that our board of directors could use to implement a
stockholder rights plan;
•
eliminate the ability of our stockholders to call special meetings of stockholders;
• when the outstanding shares of our Class B common stock represent less than 10% of the then outstanding shares of
Class A common stock and Class B common stock, prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our stockholders;
•
•
•
•
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;
restrict the forum for certain litigation against us to Delaware;
reflect the dual class structure of our common stock, as discussed above; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters
that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management
by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the
members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of
a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following
the date on which the stockholder became a 15% stockholder.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters are in Boston, where we occupy approximately 506 thousand square feet of office space
pursuant to a lease that expires in December 2027. We lease additional office space in London and Berlin for our international
operations. We occupy a total of approximately 8 million additional square feet of fulfillment center space in various locations in
the U.S., Canada, Germany and the United Kingdom. We also lease office space in five U.S. locations, one location in Ireland and
one location in Germany for our customer service centers.
Item 3. Legal Proceedings
For information regarding our legal proceedings, see Note 7 to the Consolidated Financial Statements, Commitments and
Contingencies, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K,
which is incorporated into this item by reference.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Certain Information Regarding the Trading of Our Common Stock
Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "W". The following
table sets forth for the indicated periods the high and low per share sale prices of our Class A common stock, as reported by the
NYSE.
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Sales Price
High
Low
$
$
$
$
$
$
$
$
47.68
44.53
49.34
39.79
43.49
78.21
84.19
83.79
$
$
$
$
$
$
$
$
28.85
34.10
35.82
27.60
34.30
39.96
65.30
55.33
Holders of Our Common Stock
As of February 16, 2018, there were 24 holders of record of shares of our Class A common stock and 372 holders of record
of shares of our Class B common stock. The actual number of stockholders is greater than this numbers of record holders, and
includes stockholders who are beneficial owners, whose shares are held of record by banks, brokers, and other financial
institutions.
Dividends
We do not expect to pay any dividends on our Class A common stock or Class B common stock in the foreseeable future.
Any future determination to pay dividends will be at the sole discretion of our board of directors, subject to applicable laws. Our
board of directors may take into account general and economic conditions, our financial condition and operating results, our
available cash and current and anticipated cash needs, our capital requirements, contractual, legal, tax and regulatory restrictions,
and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our
board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans and securities authorized for issuance thereunder is set forth under
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this
Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2017, we issued 165,104 shares of Class B common stock upon the vesting of
outstanding restricted stock units, net of shares withheld to satisfy statutory minimum tax withholding obligations. The issuance
of these securities was pursuant to written compensatory plans or arrangements with our employees, consultants, advisors and
directors in reliance on the exemption provided by Rule 701 promulgated under the Securities Act, relative to transactions by an
issuer not involving any public offering, to the extent an exemption from registration was required.
On September 15, 2017, we issued $431.25 million aggregate principal amount of 0.375% Convertible Senior Notes due
2022 (the "Notes"), which includes the exercise in full of the $56.25 million over-allotment option, to Citigroup Global Markets
Inc. and Goldman Sachs & Co. LLC as the initial purchasers of the Notes (the "Initial Purchasers"). Our offering of the Notes to
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the Initial Purchasers was made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
We relied on this exemption from registration based in part on representations made by the Initial Purchasers, including that the
Initial Purchasers would only offer, sell or deliver the Notes to persons inside the United States whom they reasonably believe to
be qualified institutional buyers within the meaning of Rule 144A under the Securities Act.
For more information regarding our Notes, see Note 14, Convertible Debt, included in Part II, Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K, which is incorporated into this item by reference.
Issuer Purchases of Equity Securities
None.
Item 6.
Selected Consolidated Financial Data
You should read the following selected consolidated financial data below in conjunction with Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
The following consolidated statements of operations data for the fiscal years ended December 31, 2017, 2016, and 2015 and
the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial
statements included in this Annual Report on Form 10-K. The following consolidated balance sheet data as of December 31,
2015, 2014, and 2013 and the consolidated statements of operations data for the fiscal year ended December 31, 2014 and 2013 is
derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Historical
results are not necessarily indicative of the results to be expected in the future.
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Consolidated Statements of Operations:
Net revenue
Cost of goods sold (1)
Gross profit
Operating expenses:
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and
administrative (1) (2)
Total operating expenses
Loss from operations
Interest (expense) income, net
Other (expense) income, net
Loss before income taxes
Provision for income taxes
Net loss
Accretion of convertible redeemable preferred units
2017
Year Ended December 31,
2015
2014
2016
2013
(in thousands, except per share data)
$ 4,720,895
3,602,072
1,118,823
$ 3,380,360
2,572,549
807,811
$ 2,249,885
1,709,161
540,724
$ 1,318,951
1,007,853
311,098
$
915,843
691,602
224,241
169,516
549,959
127,883
409,125
634,801
1,354,276
(235,453)
(9,433)
758
(244,128)
486
(244,614)
—
467,020
1,004,028
(196,217)
694
1,756
(193,767)
608
(194,375)
—
81,230
278,224
262,620
622,074
(81,350)
1,284
2,718
(77,348)
95
(77,443)
—
55,804
191,284
211,794
458,882
(147,784)
350
(489)
(147,923)
175
(148,098)
(2,071)
35,500
108,469
96,291
240,260
(16,019)
245
294
(15,480)
46
(15,526)
(25,388)
(40,914)
(0.99)
Net loss attributable to common stockholders
Net loss per share, basic and diluted
$ (244,614) $ (194,375) $
(2.29) $
$
(2.81) $
(77,443) $ (150,169) $
(2.97) $
(0.92) $
Weighted average number of common stock
outstanding used in computing per share amounts,
basic and diluted
86,983
84,977
83,726
50,642
41,332
(1)
Includes equity based compensation and related taxes as follows (in thousands):
2017
Year Ended December 31,
2015
2014
2016
Cost of goods sold
$
1,091
$
474
$
280
$
369
$
Customer service and merchant fees
2,636
2,108
1,007
2,265
Selling, operations, technology, general and
administrative
68,899
72,626
$
49,371
51,953
$
31,688
32,975
$
60,610
63,244
$
$
2013
—
—
—
—
(2) Prior period expenses recorded as "Merchandising, marketing and sales" and "Operations, technology, general and
administrative" have been combined into "Selling, operations, technology, general and administrative" on the consolidated
statements of operations to conform with current period presentation.
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2017
2016
December 31,
2015
(in thousands)
2014
2013
415,859
254,276
555,523
26,784
$
$
$
$
— $
115,308
18,118
196,300
13,397
241,186
$ (191,178)
305,539
465,954
95,297
694,581
50,884
$
$
$
$
— $
$
242,545
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term and long-
term investments
Working capital
Total assets
Deferred revenue
Convertible redeemable preferred units
Total stockholders' (deficit) equity
641,553
$
$
77,065
$ 1,213,403
$
94,116
$
$
$
$
$
$
— $
(48,329) $
379,550
$
(80,129) $
$
761,683
$
65,892
— $
$
79,384
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those included in
the Special Note Regarding Forward Looking Statements and Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K,
our actual results may differ materially from those anticipated in these forward-looking statements.
The following discussion includes financial information prepared in accordance with generally accepted accounting
principles ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as Adjusted EBITDA, non-GAAP diluted
net loss per share and free cash flow. Generally, a non-GAAP financial measure is a numerical measure of financial performance,
financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. Management believes the use of these non-GAAP
measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of
our business by presenting comparable financial results between periods. For more information on these non-GAAP financial
measures, including reconciliations to the most directly comparable GAAP financial measures, see "Non-GAAP Financial
Measures" below.
Overview
We are 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 ten million products
from over 10,000 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. We plan to grow our net revenue by acquiring new customers as well as stimulating repeat
purchases from our existing customers. Through increasing brand awareness and paid and unpaid advertising, we attract new and
repeat customers to our sites. We then seek to convert that visitor traffic to sales through engaging visual imagery and
merchandising, daily sales promotions, and easy-to-use navigation tools and personalization features that enable better product
discovery. We carefully track and monitor the results of our advertising campaigns so that we can ensure that appropriate return
targets are being met.
Because of the large market opportunity we see in front of us, we are currently investing in several areas across our
business. Over the last few years, we have invested in expanding our international business in Canada, the United Kingdom and
Germany by building our international infrastructure, developing deeper country-specific knowledge, growing our international
supplier networks and establishing our brand presence in select countries. Accordingly, our consolidated net loss of $244.6
million in the year ended December 31, 2017 is primarily driven by our international expansion.
We have also invested considerably in our proprietary logistics network over the last few years, including our CastleGate
warehouses and our Wayfair Delivery Network, which includes consolidation centers, cross docks and last mile delivery
facilities. We believe that our proprietary logistics network will help drive incremental sales by delighting our customers with
faster delivery times and a better home delivery experience. Over time we believe this network will also lower our costs per
order by reducing damage rates and leveraging economies of scale in transportation. We are also currently investing in new
categories, such as home improvement (e.g. plumbing, lighting and flooring), housewares, seasonal decor and decorative
accents, so that we can add more of those products to our sites and capture a higher share of our customers' spend on home
goods.
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Our operating and reportable segments are U.S. and International. The following table presents Direct Retail and Other net
revenues attributable to the Company’s reportable segments for the periods presented (in thousands):
U.S. Direct Retail
U.S. Other
U.S. segment net revenue
International Direct Retail
International Other
International segment net revenue (1)
Total net revenue
Year Ended December 31,
2016
2015
2017
$
$
4,075,405
77,652
4,153,057
567,838
—
567,838
4,720,895
$
$
2,993,365
117,132
3,110,497
265,544
4,319
269,863
3,380,360
$
$
1,945,411
190,081
2,135,492
94,827
19,566
114,393
2,249,885
(1) In the year ended December 31, 2015, International segment net revenue included $5.4 million from our Australian
business, which we sold in July 2015.
For more information on our segments, see Note 11 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.
Full Year 2017 Financial Highlights
• Direct Retail net revenue increased $1.4 billion to $4.6 billion, up 42.5% year over year
• Total net revenue increased $1.3 billion to $4.7 billion, up 39.7% year over year
• GAAP net loss was $244.6 million
• Adjusted EBITDA was $(67.0) million or (1.4)% of total net revenue
U.S. Adjusted EBITDA was $35.9 million
International Adjusted EBITDA was $(102.9) million
• Non-GAAP free cash flow was $(113.2) million
The consolidated financial statements and other disclosures contained in this Annual Report on Form 10-K are those of
Wayfair Inc.
Key Financial and Operating Metrics
We measure our business using both financial and operating metrics. Our free cash flow metric is measured on a
consolidated basis. Our net revenue and Adjusted EBITDA metrics are measured on a consolidated and segment basis. See Note
11 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. All other key financial and operating metrics are
derived and reported from our Direct Retail sales, which includes sales generated primarily through our five distinct sites. These
metrics do not include net revenue derived from the websites operated by our retail partners and our media solutions business.
We do not have access to certain customer level information on net revenue derived through our retail partners and therefore
cannot measure or disclose it.
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We use the following metrics to assess the near-term and longer-term performance of our overall business (in thousands,
except LTM Net Revenue per Active Customer and Average Order Value):
Consolidated Financial Metrics
Net Revenue
Adjusted EBITDA
Free cash flow
Direct Retail Financial and Operating Metrics
Direct Retail Net Revenue
Active Customers
LTM Net Revenue per Active Customer
Orders Delivered
Average Order Value
Non-GAAP Financial Measures
Adjusted EBITDA
Year Ended December 31,
2016
2015
2017
$
$
$
$
$
$
4,720,895
$
(67,033) $
(113,245) $
3,380,360
$
(88,692) $
(65,272) $
2,249,885
(15,929)
72,937
4,643,243
10,990
422
19,411
239
$
$
$
3,258,909
8,250
395
14,064
232
$
$
$
2,040,238
5,360
381
9,170
222
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 loss before depreciation
and amortization, equity-based compensation and related taxes, interest and other income and expense, provision for income
taxes, and non-recurring items. We have provided a reconciliation below of Adjusted EBITDA to net 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 board of directors 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. 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 board of directors.
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 depreciation and interest expenses associated with the lease financing obligation; 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 loss and our other GAAP results.
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The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in
thousands):
Reconciliation of Adjusted EBITDA
Net loss
Depreciation and amortization (1)
Equity based compensation and related taxes
Interest (income), net
Other (income) expense, net
Provision for income taxes
Other (1)
Adjusted EBITDA
Year Ended December 31,
2016
2015
2017
$
$
(244,614) $
87,020
72,626
9,433
(758)
486
8,774
(67,033) $
(194,375) $
55,572
51,953
(694)
(1,756)
608
—
(88,692) $
(77,443)
32,446
32,975
(1,284)
(2,718)
95
—
(15,929)
(1) We recorded $9.6 million of one-time charges in the year ended December 31, 2017 in "Selling, operations, technology,
general and administrative" in the consolidated statements of operations related to a warehouse we vacated in July 2017. Of
the $9.6 million charges, $8.8 million was included in "Other" and related primarily to the excess of our estimated future
remaining lease commitments through 2023 over our expected sublease income over the same period, and $0.8 million was
included in "Depreciation and amortization" related to accelerated depreciation of leasehold improvements in the warehouse.
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 provided by
operating activities less net cash used to purchase property and equipment and site and software development costs. We have
provided a reconciliation below of free cash flow to net cash provided by 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.
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 provided by operating activities, capital expenditures and our
other GAAP results.
The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the
periods indicated (in thousands):
Net cash provided by operating activities
Purchase of property and equipment
Site and software development costs
Free cash flow
Year Ended December 31,
2016
2015
2017
$
$
$
33,634
(100,451)
(46,428)
(113,245) $
$
62,814
(96,707)
(31,379)
(65,272) $
135,121
(44,648)
(17,536)
72,937
35
Table of Contents
Key Operating Metrics (Direct Retail)
Active Customers
As of the last date of each reported period, we determine our number of active customers by counting 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.
LTM Net Revenue Per Active Customer
We define LTM net revenue per active customer as our total net revenue derived from Direct Retail sales 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.
Orders Delivered
We define orders delivered as the total Direct Retail 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.
Average Order Value
We define average order value as total Direct Retail 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.
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.
Components of Our Results of Operations
Net Revenue
Net revenue consists primarily of sales of product from our sites and through the websites of our online retail partners and
includes related shipping fees. We deduct cash discounts, allowances and estimated returns from gross revenue to determine net
revenue. We recognize product revenue upon delivery to our customers. Net revenue is primarily driven by growth of new and
active customers and the frequency with which customers purchase. The products offered on our sites are fulfilled with product
we ship to our customers directly from our suppliers and, increasingly, from our CastleGate warehouses and through our Wayfair
Delivery Network.
We also generate net revenue through third-party advertisers that pay us based on the number of advertisement related
clicks, actions, or impressions for advertisements placed on our sites. Net revenue earned under these arrangements is included in
net revenue and net revenue through our third-party advertisers is recognized in the period in which the click, action or impression
occurs. This revenue has not been material to date.
Cost of Goods Sold
Cost of goods sold consists of the cost of product sold to customers, shipping and handling costs and shipping supplies and
fulfillment costs. Fulfillment costs include costs incurred in operating and staffing fulfillment centers, such as costs attributed to
receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of goods sold also includes direct and
indirect labor costs, including equity-based compensation, for fulfillment center oversight, including payroll and related benefit
costs. The increase in cost of goods sold is primarily driven by growth in orders delivered, the mix of the product available for
sale on our sites and transportation costs related to delivering orders to our customers.
We earn rebates on our incentive programs with our suppliers. These rebates are earned upon shipment of goods. Amounts
due from suppliers as a result of these rebate programs are included as a receivable and are reflected as a reduction of cost of
36
Table of Contents
goods sold on the consolidated statements of operations. We also perform logistics services for suppliers through our CastleGate
and Wayfair Delivery Network solutions, which are earned upon completion of preparing customer orders for shipment and are
reflected as a reduction of cost of goods sold on the consolidated statements of operations.
We expect cost of goods sold expenses to remain relatively stable as a percentage of net revenue but some fluctuations are
expected due to the wide variety of products we sell.
Customer Service and Merchant Fees
Customer service and merchant fees consist of labor-related costs, including equity-based compensation, of our employees
involved in customer service activities and merchant processing fees associated with customer payments made by credit cards and
debit cards. Increases in our customer service and merchant fees are driven by the growth in our revenue and are expected to
remain relatively consistent as a percentage of revenue. We expect customer service and merchant fees to remain relatively stable
as a percentage of net revenue.
Advertising
Advertising consists of direct response performance marketing costs, such as display advertising, paid search advertising,
social media advertising, search engine optimization, comparison shopping engine advertising, television advertising, direct mail,
catalog and print advertising. We expect advertising expense to continue to increase but decrease as a percentage of net revenue
over time due to our increasing base of repeat customers.
Selling, operations, technology, general and administrative
Selling, operations, technology, general and administrative expenses primarily include labor-related costs, including equity-
based compensation, of our operations group which includes our supply chain and logistics team, our technology team, which
builds and supports our sites, category managers, buyers, site merchandisers, merchants, marketers and the team who executes our
advertising strategy, and our corporate general and administrative team, which includes human resources, finance and accounting
personnel. Also included are administrative and professional service fees including audit and legal fees, insurance and other
corporate expenses, including depreciation and rent. We expect selling, operations, technology, general and administrative
expenses will continue to increase as we grow our net revenue and operations.
Interest (Expense) Income, Net
Interest (expense) income, net, in 2017, consists primarily of interest expense in connection with our Notes, which is
payable at the rate of 0.375% semi-annually on March 1 and September 1 of each year, commencing on March 1, 2018, and, in
2016 and 2017, the lease financing obligation, partially offset by interest earned on cash, cash equivalents and short-term and
long-term investments held by us, in 2017, 2016, and 2015.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of foreign currency (losses) gains, and in 2015, a $3.0 million gain related to
the sale of our Australian operations.
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Table of Contents
Results of Consolidated Operations (in thousands)
Consolidated Statements of Operations:
Net revenue
Cost of goods sold (1)
Gross profit
Operating expenses:
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and administrative (1) (2)
Total operating expenses
Loss from operations
Interest (expense) income, net
Other income, net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Year Ended December 31,
2017
2015
2016
(in thousands, except per share data)
$
$
4,720,895
3,602,072
1,118,823
$
3,380,360
2,572,549
807,811
2,249,885
1,709,161
540,724
169,516
549,959
634,801
1,354,276
(235,453)
(9,433)
758
(244,128)
486
(244,614) $
(2.81) $
127,883
409,125
467,020
1,004,028
(196,217)
694
1,756
(193,767)
608
(194,375) $
(2.29) $
$
$
81,230
278,224
262,620
622,074
(81,350)
1,284
2,718
(77,348)
95
(77,443)
(0.92)
Weighted average number of common stock outstanding used in
computing per share amounts, basic and diluted
86,983
84,977
83,726
(1)
Includes equity based compensation and related taxes as follows (in thousands):
Cost of goods sold
Customer service and merchant fees
Selling, operations, technology, general and administrative
Year Ended December 31,
2016
2015
2017
$
$
$
1,091
2,636
68,899
$
474
2,108
49,371
72,626
$
51,953
$
280
1,007
31,688
32,975
(2) Prior period expenses recorded as "Merchandising, marketing and sales" and "Operations, technology, general and
administrative" have been combined into "Selling, operations, technology, general and administrative" on the consolidated
statements of operations to conform with current period presentation.
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Table of Contents
Comparison of the year ended December 31, 2017 and 2016
Net revenue
Direct Retail
Other
Net revenue
Year Ended December 31,
2017
2016
% Change
$
$
4,643,243
77,652
4,720,895
$
$
3,258,909
121,451
3,380,360
42.5 %
(36.1)%
39.7 %
In 2017, net revenue increased by $1.3 billion, or 39.7% compared to 2016, primarily as a result of an increase in Direct
Retail net revenue as our U.S. and International businesses continued to scale. In 2017, Direct Retail net revenue increased by
$1.4 billion, or 42.5% compared to 2016, primarily due to growth in our customer base, with the number of active customers
increasing by 33.2% as of December 31, 2017 compared to December 31, 2016. Additionally, active customers on average spent
more in 2017 than the prior year, with LTM net revenue per active customer increasing 6.8% as of December 31, 2017 compared
to December 31, 2016. The decrease in Other revenue in 2017 compared to 2016 was primarily due to decreased sales through our
retail partners, as we continue to focus more on our Direct Retail business.
Cost of goods sold
Cost of goods sold
As a percentage of net revenue
Year Ended December 31,
2017
2016
% Change
$
3,602,072
$
2,572,549
40.0%
76.3%
76.1%
In 2017, cost of goods sold increased by $1.0 billion, or 40.0%, compared to 2016. Of the increase in cost of goods sold,
$0.8 billion was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs
increased $0.2 billion as a result of the increase in products delivered during the period. Cost of goods sold as a percentage of net
revenue increased in the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily as a result of
changes in the mix of the products sold.
39
Table of Contents
Operating Expenses
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and administrative (1)
Total operating expenses
As a percentage of net revenue
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and administrative (1)
(1) Includes equity-based compensation and related taxes as follows:
Customer service and merchant fees
Selling, operations, technology, general and administrative
Year Ended December 31,
2017
169,516
549,959
634,801
1,354,276
$
$
2016
127,883
409,125
467,020
1,004,028
$
$
% Change
32.6%
34.4%
35.9%
34.9%
3.6%
11.6%
13.5%
28.7%
3.8%
12.1%
13.8%
29.7%
Year Ended December 31,
2017
2016
$
$
2,636
68,899
$
$
2,108
49,371
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation
and related taxes:
Customer service and merchant fees
Selling, operations, technology, general and administrative
Year Ended December 31,
2017
2016
3.5%
12.0%
3.7%
12.4%
Excluding the impact of equity based compensation and related taxes, customer service costs and merchant processing fees
increased by $41.1 million in 2017 compared to 2016, primarily due to the increase in net revenue during 2017.
Our advertising expenses increased by $140.8 million in 2017 compared to 2016, primarily as a result of an increase in
online and television advertising. Advertising decreased as a percentage of net revenue in 2017 compared to 2016, primarily due
to increased leverage from our growing base of repeat customers, and television advertising expense not increasing at the same
rate as revenue growth in the U.S., partially offset by advertising investments in Europe and Canada.
Excluding the impact of equity based compensation and related taxes, selling, operations, technology, general and
administrative expense increased by $148.3 million in 2017 compared to 2016. As our revenue continues to grow, we have
invested in headcount in both operations and technology to continue to deliver a great experience for our customers.
The increase in selling, operations, technology, general and administrative expense was primarily attributable to personnel costs,
rent, information technology, and depreciation and amortization.
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Comparison of the year ended December 31, 2016 and 2015
Net revenue
Direct Retail
Other
Net revenue
Year Ended December 31,
2016
2015
% Change
$
$
3,258,909
121,451
3,380,360
$
$
2,040,238
209,647
2,249,885
59.7 %
(42.1)%
50.2 %
In 2016, net revenue increased by $1.1 billion, or 50.2% compared to 2015, primarily as a result of an increase in Direct
Retail net revenue. In 2016, Direct Retail net revenue increased by $1.2 billion, or 59.7% compared to 2015, primarily due to
sales to a larger customer base, as the number of active customers increased 53.9% as of December 31, 2016 compared
to December 31, 2015. Additionally, LTM net revenue per active customer increased 3.7% as of December 31, 2016 compared
to December 31, 2015. The decrease in Other revenue in 2016 compared to 2015 was primarily due to decreased sales through our
retail partners, as we continue to focus more on our Direct Retail business over time.
Cost of goods sold
Cost of goods sold
As a percentage of net revenue
Year Ended
December 31,
2016
2015
% Change
$
2,572,549
$
1,709,161
50.5%
76.1%
76.0%
In 2016, cost of goods sold increased by $863.4 million, or 50.5%, compared to 2015. Of the increase in cost of goods
sold, $690.8 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment
costs increased $172.6 million as a result of the increase in products sold during the period. Cost of goods sold as a percentage of
net revenue increased in the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily as a result
of changes in the mix of the products sold.
Operating Expenses
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and administrative (1)
Total operating expenses
As a percentage of net revenue
Customer service and merchant fees (1)
Advertising
Selling, operations, technology, general and administrative (1)
(1) Includes equity-based compensation and related taxes as follows:
Customer service and merchant fees
Selling, operations, technology, general and administrative
41
Year Ended
December 31,
2016
2015
% Change
$
$
127,883
$
409,125
467,020
1,004,028
$
81,230
278,224
262,620
622,074
57.4%
47.0%
77.8%
61.4%
3.8%
12.1%
13.8%
29.7%
3.6%
12.4%
11.6%
27.6%
Year Ended December 31,
2016
2015
$
$
2,108
49,371
$
$
1,007
31,688
Table of Contents
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation
and related taxes:
Customer service and merchant fees
Selling, operations, technology, general and administrative
Year Ended December 31,
2016
2015
3.7%
12.4%
3.6%
10.3%
Excluding the impact of equity based compensation and related taxes, customer service costs and merchant processing
fees increased by $45.6 million in 2016 compared to 2015, primarily due to the increase in net revenue during 2016.
Our advertising expenses increased by $130.9 million in 2016 compared to 2015, primarily as a result of an increase in
online and television advertising. Advertising decreased as a percentage of net revenue in 2016 compared to 2015, primarily due
to increased leverage from our growing base of repeat customers, and television advertising expense not increasing at the same
rate as revenue growth in the U.S., partially offset by advertising investments in Europe and Canada.
Excluding the impact of equity based compensation and related taxes, selling, operations, technology, general and
administrative expense increased by $186.7 million in 2016 compared to 2015. As our revenue continues to grow, we have
invested in headcount in both operations and technology to continue to deliver a great experience for our customers.
The increase in selling, operations, technology, general and administrative expense was primarily attributable to personnel costs,
rent, information technology, and depreciation and amortization.
Unaudited Quarterly Results of Operations and Other Financial and Operations Data
The following tables set forth selected unaudited quarterly results of operations and other financial and operations data for
the eight quarters ended December 31, 2017. The information for each of these quarters has been prepared on the same basis as
the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K and in the opinion of
management, reflects all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of our
consolidated results of operations for these periods. This data should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily
indicative of the results to be expected in the future.
42
Table of Contents
Consolidated Statements of Operations:
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
(in thousands, except per share data)
Three months ended
Net revenue
$
747,348
$
786,928
$
861,525
$
984,559
$
960,825
$
1,122,856
$
1,198,198
$
1,439,016
568,292
179,056
598,414
188,514
659,864
201,661
745,979
238,580
723,942
236,883
853,390
269,466
917,889
280,309
1,106,851
332,165
Cost of goods sold (1)
Gross profit
Operating expenses:
Customer service and
merchant fees (1)
Advertising
Selling, operations,
technology, general and
administrative (1) (2)
Total operating expenses
Loss from operations
Interest income (expense),
net
Other income (expense), net
27,350
97,677
96,138
221,165
(42,109)
552
669
30,064
94,426
112,754
237,244
(48,730)
531
246
33,872
101,333
128,076
263,281
(61,620)
(292)
889
36,597
115,689
130,052
282,338
35,058
118,265
139,766
293,089
(43,758)
(56,206)
(97)
(48)
(299)
176
39,125
124,241
143,652
307,018
(37,552)
(1,550)
451
(38,651)
42,949
141,714
169,603
354,266
(73,957)
(2,008)
(227)
(76,192)
52,384
165,739
181,780
399,903
(67,738)
(5,576)
358
(72,956)
Loss before income taxes
(40,888)
(47,953)
(61,023)
(43,903)
(56,329)
Provision for (benefit from)
income taxes
Net loss
Net loss per share, basic and
diluted
Weighted average number of
common stock outstanding
used in computing per share
amounts, basic and diluted
$
$
317
321
(83)
53
210
224
237
(185)
(41,205)
$
(48,274)
$
(60,940)
$
(43,956)
$
(56,539)
$
(38,875)
$
(76,429)
$
(72,771)
(0.49)
$
(0.57)
$
(0.72)
$
(0.51)
$
(0.66)
$
(0.45)
$
(0.88)
$
(0.83)
84,445
84,786
85,105
85,567
86,036
86,714
87,283
87,893
(1)
Includes equity based compensation and related taxes as follows:
Cost of goods sold
$
58
$
87
$
212
$
117
$
145
$
205
$
282
$
Customer service and merchant
fees
Selling, operations, technology,
general and administrative
333
528
627
620
644
586
636
10,271
10,680
14,469
13,951
14,169
15,192
18,680
$
10,662
$
11,295
$
15,308
$
14,688
$
14,958
$
15,983
$
19,598
$
459
770
20,858
22,087
(2)
Prior period expenses recorded as "Merchandising, marketing and sales" and "Operations, technology, general and administrative" have been combined
into "Selling, operations, technology, general and administrative" on the consolidated statements of operations to conform with current period
presentation.
43
Table of Contents
Quarterly Financial Metrics
The following tables set forth selected financial quarterly metrics and other financial and operations data for the eight
quarters ended December 31, 2017. The information for each of these quarters should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in the Annual Report on Form 10-K. Historical results are
not necessarily indicative of the results to be expected in the future.
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
(in thousands, except Average Order Value and LTM Net Revenue Per Active Customer)
Three months ended
Consolidated Financial
Metrics
Net Revenue
Adjusted EBITDA
Free Cash Flow
Segment Financial Metrics
U.S. Direct Retail Net
Revenue
U.S. Other Net Revenue
U.S. Adjusted EBITDA
International Direct Retail
Net Revenue
International Other Net
Revenue
International Adjusted
EBITDA
Direct Retail Financial and
Operating Metrics
Direct Retail Net Revenue
Active Customers
LTM Net Revenue Per Active
Customer
Orders Delivered
Average Order Value
$
$
$
$
$
$
$
$
$
$
$
$
747,348
(20,960)
(80,582)
672,700
33,221
(1,039)
39,146
2,281
(19,921)
$
$
$
$
$
$
$
$
$
786,928
(24,857)
(19,418)
702,408
30,265
(2,920)
53,249
1,006
(21,937)
$
$
$
$
$
$
$
$
$
861,525
(30,849)
(13,968)
759,674
28,127
(7,857)
72,724
1,000
(22,992)
$
$
$
$
$
$
$
$
$
984,559
(12,026)
48,696
858,583
25,519
11,992
100,425
32
(24,018)
$
$
$
$
$
$
$
$
$
960,825
(20,896)
(68,970)
837,556
20,473
3,728
102,796
$
$
$
$
$
$
$
1,122,856
(2,246)
(27,225)
976,673
20,395
20,425
125,788
$
$
$
$
$
$
$
1,198,198
(22,672)
(18,463)
1,033,669
16,975
4,531
147,554
$
$
$
$
$
$
$
1,439,016
(21,219)
1,413
1,227,507
19,809
7,204
191,700
— $
— $
— $
—
(24,624)
$
(22,671)
$
(27,203)
$
(28,423)
711,846
$
755,657
$
832,398
$
959,008
$
940,352
$
1,102,461
$
1,181,223
$
1,419,207
6,074
392
2,996
238
$
$
6,672
404
2,930
258
$
$
7,362
406
3,417
244
$
$
8,250
395
4,722
203
$
$
8,855
394
4,213
223
$
$
9,547
402
4,278
258
$
$
10,250
10,990
408
4,719
250
$
$
422
6,202
229
The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in
thousands):
Net loss
$
(41,205)
$
(48,274)
$
(60,940)
$
(43,956)
$
(56,539)
$
(38,875)
$
(76,429)
$
(72,771)
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Three months ended
Depreciation and
amortization (1)
Equity based compensation
and related taxes
Interest (income) expense,
net
Other (income) expense,
net
Provision for (benefit from)
income taxes
Other (1)
10,487
12,578
10,662
11,295
(552)
(669)
317
—
(531)
(246)
321
—
15,463
15,308
292
(889)
(83)
—
17,044
20,352
19,323
14,688
14,958
15,983
97
48
53
—
299
(176)
210
—
1,550
(451)
224
—
22,913
19,598
2,008
227
237
8,774
24,432
22,087
5,576
(358)
(185)
—
Adjusted EBITDA
$
(20,960)
$
(24,857)
$
(30,849)
$
(12,026)
$
(20,896)
$
(2,246)
$
(22,672)
$
(21,219)
(1) We recorded $9.6 million of one-time charges in the three months ended September 30, 2017 in "Selling, operations,
technology, general and administrative" in the unaudited consolidated and condensed statements of operations related to a
warehouse we vacated in July 2017. Of the $9.6 million charges, $8.8 million was included in "Other" and related primarily to the
excess of our estimated future remaining lease commitments through 2023 over our expected sublease income over the same
period, and $0.8 million was included in "Depreciation and amortization" related to accelerated depreciation of leasehold
improvements in the warehouse.
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The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the
periods indicated (in thousands):
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Three months ended
$
(51,204)
$
24,903
$
15,621
$
73,494
$
(46,098)
$
18,101
$
24,752
$
36,879
(23,927)
(37,509)
(20,408)
(14,863)
(11,952)
(33,596)
(30,980)
(23,923)
Net cash (used in) provided by
operating activities
Purchase of property,
equipment, and leasehold
improvements
Site and software development
costs
(11,543)
1,413
(5,451)
(6,812)
(9,181)
(9,935)
(10,920)
(11,730)
(12,235)
Free cash flow
$
(80,582)
$
(19,418)
$
(13,968)
$
48,696
$
(68,970)
$
(27,225)
$
(18,463)
$
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Liquidity and Capital Resources
Sources of Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Long-term investments
Working capital
Historical Cash Flows
Net loss
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
December 31,
2017
2016
(in thousands)
$
$
$
$
$
558,960
61,032
37,948
21,561
77,065
$
$
$
$
$
279,840
68,743
19,113
30,967
(80,129)
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
$
$
(244,614) $
33,634
$
(130,335) $
$
374,971
(194,375)
62,814
(95,880)
(20,883)
$
$
$
$
(77,443)
135,121
(137,728)
(18,616)
At December 31, 2017, our principal source of liquidity was cash and cash equivalents and short- and long-term investments
totaling $641.6 million, which includes $420.4 million of net proceeds from the issuance of our Notes in September 2017,
partially offset by $44.2 million in premiums paid at the same time for separate capped call transactions. We believe that our
existing cash and cash equivalents and investments, together with cash generated from operations and the cash available under our
revolving credit facility, 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.
Capital expenditures were 3.1% of net revenue for the year ended December 31, 2017 and related primarily to our ongoing
investments in our technology infrastructure, and equipment purchases and improvements for leased warehouses within our
expanding supply chain network. We expect capital expenditures to be approximately 4% of net revenue for the first quarter of
2018, as we continue to build out our technology infrastructure and logistics network.
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 under in Part I, Item 1A, Risk Factors, of this Annual
Report on Form 10-K. We may not be able to secure additional financing to meet our operating requirements on acceptable terms,
or at all.
Operating Activities
Cash provided by operating activities consisted of net 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 loss.
Cash provided by operating activities in the year ended December 31, 2017 was $33.6 million and was driven primarily by
cash provided by operating assets and liabilities of $116.4 million, certain non-cash items including depreciation and amortization
expense of $87.0 million, equity based compensation of $67.8 million, amortization of discount and issuance costs related to our
Notes of $5.8 million and other non-cash items of $1.2 million, partially offset by net loss of $244.6 million.
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Cash provided by operating activities in the year ended December 31, 2016 was $62.8 million and was driven primarily by
cash provided by operating assets and liabilities of $151.9 million, certain non-cash items including depreciation and amortization
expense of $55.6 million, equity based compensation of $49.4 million, and other non-cash items of $0.3 million, partially offset
by net loss of $194.4 million.
Cash provided by operating activities in the year ended December 31, 2015 was $135.1 million and was driven primarily by
cash provided by operating assets and liabilities of $149.1 million, certain non-cash items including depreciation and amortization
expense of $32.4 million, equity based compensation of $31.0 million, and other non-cash items of $3.0 million, partially offset
by net loss of $77.4 million and gain on sale of our Australian business of $3.0 million.
Investing Activities
Our primary investing activities consisted of purchases of property and equipment, particularly purchases of servers and
networking equipment, investment in our sites and software development, purchases and disposal of short-term and long-term
investments, and leasehold improvements for our facilities.
Cash used in investing activities in the year ended December 31, 2017 was $130.3 million and was primarily driven by
purchases of property and equipment of $100.5 million, purchases of short-term and long-term investments of $54.5 million, and
site and software development costs of $46.4 million, partially offset by sale and maturities of short-term investments of $71.1
million.
Cash used in investing activities in the year ended December 31, 2016 was $95.9 million and was primarily driven by
purchases of property and equipment of $96.7 million, purchases of short-term and long-term investments of $88.1 million, site
and software development costs of $31.4 million, and other net investing activities of $1.0 million, partially offset by sale and
maturities of short-term investments of $119.8 million and cash received from the sale of a business (net of cash sold) of $1.5
million.
Cash used in investing activities in the year ended December 31, 2015 was $137.7 million and was primarily driven by
purchases of short-term and long-term investments of $207.3 million, property and equipment of purchases of property and
equipment of $44.6 million, site and software development costs of $17.5 million, other net investing activities of $4.8 million,
partially offset by sale and maturities of short-term investments of $133.6 million and cash received from the sale of a business
(net of cash sold) of $2.9 million.
Financing Activities
Cash provided by financing activities in the year ended December 31, 2017 was $375.0 million and was primarily due to
$420.4 million of net proceeds from the issuance of our Notes and $0.2 million net proceeds from the exercise of stock options,
partially offset by $44.2 million in premiums paid for separate capped call transactions, and $1.4 million statutory minimum taxes
paid related to net share settlements of equity awards. As expected, our sell-to-cover policy, which began in the second half of
2016 and requires employees to sell a portion of the shares they receive upon vesting of RSUs in order to cover any required
withholding taxes, materially reduced cash used in financing activities related to taxes paid for net share settlement of equity
awards. For additional information on the Notes, see Note 14, Convertible Debt, 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.
Cash used in financing activities in the year ended December 31, 2016 was $20.9 million and was primarily due to statutory
minimum taxes paid related to net share settlement of equity awards of $21.1 million, partially offset by net proceeds from
exercise of stock options of $0.2 million. During 2016, we began requiring employees to sell a portion of the shares that they
receive upon the vesting of RSUs in order to cover any required withholding taxes, rather than our policy of allowing employees
to forfeit shares to us to settle the withholding taxes. This sell-to-cover policy was phased in over the course of 2017.
Cash used in financing activities in the year ended December 31, 2015 was $18.6 million and was primarily due to statutory
minimum taxes paid related to net share settlement of equity awards of $19.1 million, partially offset by net proceeds from
exercise of stock options of $0.5 million.
Stock Repurchase Program
On February 22, 2018, we announced that our board of directors authorized the repurchase of up to $200 million of our
Class A common stock. This repurchase program has no expiration but may be suspended or terminated by the board of directors
at any time. Under the repurchase program, we are authorized to repurchase, from time to time, outstanding shares of Class A
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common stock in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1
plan.
The actual timing, number and value of shares repurchased will be determined by the Company 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. We have no obligation to repurchase any amount of Class A common stock under the program.
Credit Agreement and Convertible Notes
For information regarding our credit agreement and Notes, see Note 13, Credit Agreement, and Note 14, Convertible Debt,
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.
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, 2017:
Payment Due by Period
Less than
1 year
1 - 3
Years
3 - 5
Years
More than
5 Years
Total
Lease Obligations
$
70,800
$
176,069
$
164,704
$
372,127
$
783,700
We lease office space under non-cancelable leases. These leases expire at various dates through 2029 and include
discounted rental periods and fixed escalation clauses, which are amortized straight-line over the terms of the lease. We recognize
rent expense on a straight-line basis over the lease periods. For information regarding our lease 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.
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 2, 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.
Revenue Recognition
We generate net revenue through product sales generated primarily through our five distinct sites and through websites
operated by third parties.
We recognize revenue for product sales generated through our five distinct sites and through websites operated by third
parties only when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. We recognize net revenue from sales of
our products upon delivery to the customer. 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 record product revenue at the
gross amount as we are the primary obligor with the customer and provide the primary customer service for all products sold,
have latitude in establishing price and selecting products sold, have discretion in selecting suppliers of products sold, maintain
inventory risk from shipment through delivery date and upon accepting returns, and have credit risk. Net revenue includes
shipping costs charged to the customer and are recorded net of taxes collected from customers, which are remitted to
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Table of Contents
governmental authorities. Cash discounts, returns and rebates are deducted from gross revenue in determining net revenue. In
addition, we defer revenue when cash is collected from our customer prior to the satisfaction of the revenue recognition criteria.
We maintain a membership rewards program for purchases made with our private label credit card, a Wayfair-branded credit
card that can only be used at our five U.S. sites. 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.
We also earn revenue through third-party advertisers that pay based on the number of advertisement related clicks, actions,
or impressions for ads placed on our sites. Revenue earned under these arrangements is included in net revenue and is recognized
in the period in which the click, action, or impression occurs.
Site and Software Development Costs
We capitalize certain external costs and internal labor-related costs, including equity based compensation, associated with
the development of our sites and internal-use software products after the preliminary project stage is complete and until the
software is ready for its intended use. Costs incurred after the software is ready for use are charged to operating expenses as
incurred. Abandoned projects previously capitalized are charged to operating expenses in the period of abandonment. The
Company expenses costs to manage, monitor, and operate the Company's sites, except upgrade and enhancements that provide
additional functionality, which are capitalized. Capitalized software costs are included in "Property and equipment, net" in our
consolidated balance sheets and are amortized over a two-year period.
Leases
We generally lease office and warehouse facilities under non-cancelable, operating lease agreements. We establish assets
and liabilities for the estimated construction costs incurred under certain lease arrangements where we are considered the owner
for accounting purposes only, or build-to-suit leases, to the extent we are involved in the construction of structural improvements
or take construction risk prior to commencement of a lease. Upon occupancy of facilities under build-to-suit leases, we assess
whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If we continue to be the
deemed owner, the facilities are accounted for as financing leases.
If we do not meet the sale-leaseback criteria for derecognition of the building asset and liability, the financing obligation
and corresponding building asset are recorded in "Lease financing obligation, net of current portion" and "Property and
equipment, net," respectively, within our consolidated balance sheets. The monthly rent payments made to the lessor under the
lease agreement are recorded in our financial statements as land lease expense and principal and interest on the financing
obligation. Interest expense on the lease financing obligation reflects the portion of the Company's monthly lease payments that is
allocated to interest expense and is recorded in Interest (expense) income, net in our consolidated statements of operations. The
building asset is depreciated over its useful life during the lease period.
Stock-Based Compensation
We account for equity-based compensation awards in accordance with Accounting Standards Codification ("ASC")
Topic 718, Compensation—Stock Compensation ("ASC 718"). ASC 718 requires all equity-based payments to employees to be
recognized as expense in the statements of operations based on their grant date fair values. The Company has granted stock
options, restricted shares and restricted stock units. The Company only granted restricted stock units to employees in the year
ended December 31, 2017. Restricted stock unit values are determined based on the quoted market price of our Class A common
stock on the date of grant. The Company accounts for equity awards to non-employees in accordance with Financial Accounting
Standards Board ("FASB") ASC Topic 505-50, Equity-Based Payments to Non-Employees, which requires the fair value of an
award to non-employees be remeasured at fair value as the award vests.
Inventory
Inventories consisting of finished goods are stated at the lower of cost or market, determined by the first-in, first-out (FIFO)
method, and consist of merchandise for resale. This valuation requires us to make judgments based on currently-available
information about the likely method of disposition, such as through sales to individual customers, liquidations, and expected
recoverable values of each disposition category.
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Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We have operations both within the U.S. and internationally, and we are exposed to market risks in the ordinary course of
our business, including the effects of foreign currency fluctuations, interest rate changes and inflation. Information relating to
quantitative and qualitative disclosures about these market risks is set forth below.
Interest Rate Sensitivity
Cash and cash equivalents and short-term and long-term investments were held primarily in cash deposits, certificates of
deposit, money market funds, and corporate debt. The fair value of our cash, cash equivalents and short-term and long-term
investments would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term
nature of these instruments.
Our Notes, which were issued in September 2017, carry a fixed interest rate of 0.375% per year. Since the Notes bear
interest at a fixed rate, we have no direct financial statement risk associated with changes in interest rates.
Interest on the revolving line of credit incurred pursuant to the credit agreement described herein would accrue at a floating
rate based on a formula tied to certain market rates at the time of incurrence; however, we do not expect that any change in
prevailing interest rates will have a material impact on our results of operations.
Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our revenue is not currently subject to significant foreign
currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located or in
which net revenue is generated, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly
changes in the British Pound, Euro, and Canadian Dollar. Fluctuations in foreign currency exchange rates may cause us to
recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have
not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We
continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements
and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset
such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results
of operations.
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Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Audited consolidated financial statements of Wayfair Inc.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
52
53
54
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56
57
58
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Wayfair Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Wayfair Inc. (the Company) as of December 31, 2017 and 2016,
the related consolidated statements of operations, comprehensive loss, shareholders’ equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and
our report dated February 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Boston, Massachusetts
February 26, 2018
52
Table of Contents
Assets
Current assets
WAYFAIR INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance of $7,000 and $3,115 at December 31, 2017 and
December 31, 2016, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill and intangible assets, net
Long-term investments
Other noncurrent assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Accrued expenses
Deferred revenue
Other current liabilities
Total current liabilities
Lease financing obligation, net of current portion
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies (Note 7)
Convertible preferred stock, $0.001 par value per share: 10,000,000 shares authorized and
none issued at December 31, 2017 and December 31, 2016
Stockholders’ equity:
Class A common stock, par value $0.001 per share, 500,000,000 shares authorized,
57,398,983 and 49,945,202 shares issued and outstanding at December 31, 2017 and
December 31, 2016, respectively
Class B common stock, par value $0.001 per share, 164,000,000 shares authorized,
30,809,627 and 35,885,692 shares issued and outstanding at December 31, 2017 and
December 31, 2016, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) gain
Total stockholders' (deficit) equity
Total liabilities and stockholders' equity
December 31,
2017
2016
$
$
558,960
61,032
37,948
28,042
130,838
816,820
361,141
3,105
21,561
10,776
279,840
68,743
19,113
18,550
90,845
477,091
239,354
4,230
30,967
10,041
$
$
$
1,213,403
$
761,683
$
440,366
120,247
94,116
85,026
739,755
82,580
332,905
106,492
1,261,732
—
57
379,493
67,807
65,892
44,028
557,220
28,900
—
96,179
682,299
—
50
31
537,212
(583,266)
(2,363)
(48,329)
1,213,403
$
36
409,225
(329,940)
13
79,384
761,683
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Table of Contents
Net revenue
Cost of goods sold
Gross profit
Operating expenses:
Customer service and merchant fees
Advertising
Selling, operations, technology, general and administrative
Total operating expenses
Loss from operations
Interest (expense) income, net
Other income, net
Loss before income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Weighted average number of common stock outstanding used in
computing per share amounts, basic and diluted
$
$
$
Year Ended December 31,
2016
2017
$
4,720,895
3,602,072
1,118,823
$
3,380,360
2,572,549
807,811
2015
2,249,885
1,709,161
540,724
169,516
549,959
634,801
1,354,276
(235,453)
(9,433)
758
(244,128)
486
(244,614) $
(2.81) $
127,883
409,125
467,020
1,004,028
(196,217)
694
1,756
(193,767)
608
(194,375) $
(2.29) $
81,230
278,224
262,620
622,074
(81,350)
1,284
2,718
(77,348)
95
(77,443)
(0.92)
86,983
84,977
83,726
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Net loss
Other comprehensive loss:
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year Ended December 31,
2016
2015
2017
$
(244,614) $
(194,375) $
(77,443)
Foreign currency translation adjustments
Net unrealized (loss) gain on available-for-sale investments
Comprehensive loss
(2,196)
(180)
(246,990) $
(102)
251
(194,226) $
$
532
(302)
(77,213)
The accompanying notes are an integral part of these Consolidated Financial Statements.
55
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5
Table of Contents
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
Equity based compensation
Gain on sale of a business
Amortization of discount and issuance costs on convertible notes
Other non-cash adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Deferred revenue and other liabilities
Other assets
Net cash provided by operating activities
Cash flows from investing activities
Purchase of short-term and long-term investments
Sale and maturities of short-term investments
Purchase of property and equipment
Site and software development costs
Cash received from the sale of a business (net of cash sold)
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of convertible notes, net of issuance costs
Premiums paid for capped call confirmations
Taxes paid related to net share settlement of equity awards
Net proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
Supplemental disclosure of non-cash investing activities
Purchase of property and equipment included in accounts payable and accrued expenses and in
other liabilities
Construction costs capitalized under finance lease obligation and other leases
Year Ended December 31,
2017
2016
2015
$
(244,614) $
(194,375) $
(77,443)
87,020
67,840
—
5,830
1,198
(18,172)
(9,454)
(39,124)
104,184
81,354
(2,428)
33,634
(54,551)
71,095
(100,451)
(46,428)
—
—
(130,335)
420,449
(44,160)
(1,562)
244
374,971
850
279,120
55,572
49,402
—
—
331
(9,217)
1,351
(16,179)
126,013
51,914
(1,998)
62,814
(88,112)
119,810
(96,707)
(31,379)
1,508
(1,000)
(95,880)
—
—
(21,092)
209
(20,883)
(387)
(54,336)
279,840
558,960
$
334,176
279,840
$
32,446
31,015
(2,997)
—
3,027
(4,033)
(131)
(29,513)
135,855
47,031
(136)
135,121
(207,303)
133,596
(44,648)
(17,536)
2,860
(4,697)
(137,728)
—
—
(19,111)
495
(18,616)
(460)
(21,683)
355,859
334,176
8,533
47,276
$
$
1,336
53,894
$
$
5,258
27,295
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
57
Table of Contents
1. Basis of Presentation
Notes to Consolidated Financial Statements
Wayfair Inc. (the "Company") is one of the world's largest online destinations for the home. Through its e-commerce
business model, the Company offers visually inspired browsing, compelling merchandising, easy product discovery and attractive
prices for over ten million products from over 10,000 suppliers.
The consolidated financial statements and other disclosures contained in this Annual Report on Form 10-K are those of the
Company. Prior period expenses recorded in "Merchandising, marketing and sales" and "Operations, technology, general and
administrative" have been combined into "Selling, operations, technology, general and administrative" on the consolidated
statements of operations to conform with current presentation.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of Wayfair Inc. include its wholly owned subsidiaries including the
accounts of Wayfair LLC and its wholly owned subsidiaries (collectively the "Company" or "Wayfair"). All intercompany
accounts and transactions have been eliminated. Below is a summary of the wholly-owned subsidiaries of the Company with
operations:
Subsidiary
Wayfair LLC
Wayfair Securities Corporation
SK Retail, Inc.
CastleGate Logistics Inc.
Wayfair Maine LLC
Wayfair Stores Limited
Wayfair (UK) Limited
Wayfair GmbH
Wayfair (BVI) Ltd.
CastleGate Logistics Canada Inc.
Use of Estimates
Location
U.S.
U.S.
U.S.
U.S.
U.S.
Republic of Ireland
United Kingdom
Germany
British Virgin Islands
Canada
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP")
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure
of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenue and expenses
during the reported period. On an ongoing basis, management evaluates these estimates and judgments, including those related to
revenue recognition, capitalization of site and software development costs, stock-based compensation, and inventory. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity (at the date of purchase) of three
months or less to be the equivalent of cash for the purpose of consolidated balance sheets and statements of cash flows
presentation. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates market
value.
Restricted Cash
As of December 31, 2017 and 2016, there was $5.0 million, of cash that was restricted from withdrawal and held by banks
to guarantee the Company's letters of credit issued principally for certain vendor arrangements.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful accounts, which is based on historical losses, existing
economic conditions, and other information available at the consolidated balance sheets dates. Uncollectible amounts are written
off against the allowance after all collection efforts have been exhausted.
58
Table of Contents
Notes to Consolidated Financial Statements (Continued)
Short-Term Investments and Marketable Securities
Short-term investments consist of certificates of deposits and marketable securities with original maturities of greater than
three months and maturing in less than twelve months from the balance sheet date.
The Company classifies its marketable securities as "available-for-sale" securities. Available-for-sale securities are classified
as short-term investments and long-term investments on the consolidated balance sheets and are carried at fair value. Unrealized
gains and losses on available-for-sale securities that are considered temporary are recorded, net of taxes, in the "Accumulated
other comprehensive loss" caption of the Company’s consolidated balance sheets. Unrealized losses, excluding losses related to
the credit rating of the security (credit losses), on available-for-sale securities that are considered other-than-temporary but relate
to securities that the Company (i) does not intend to sell and (ii) will not be required to sell below cost are also recorded, net of
taxes, in "Accumulated other comprehensive loss." Further, the Company does not believe it will be required to sell such
securities below cost. Therefore, the only other-than-temporary losses the Company records in "Other income, net" in its
consolidated statements of operations are related to credit losses. As of December 31, 2017 and 2016, the Company’s available-
for-sale securities consisted of investment securities. The maturities of the Company’s long-term marketable securities generally
range from one to three years. As of December 31, 2017 and 2016, the Company's available-for-sale securities primarily consisted
of corporate bonds and other government obligations that are priced at fair value. The cost basis of a marketable security sold is
determined by the Company using the specific identification method.
Fair Value of Financial Instruments
The Company's financial assets and liabilities are measured at fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price). The three levels of inputs used to measure fair value are as follows:
• Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for
identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are
observable or can be corroborated by observable market data for substantially the full-term of the asset or liability
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the asset or liability
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value. The Company measures its cash equivalents and short-term and long-term
investments at fair value. The Company classifies its cash equivalents and restricted cash within Level 1 because the Company
values these investments using quoted market prices. The fair value of the Company's Level 1 financial assets is based on quoted
market prices of the identical underlying security. The Company classifies short-term and long-term investments within Level 2
because unadjusted quoted prices for identical or similar assets in markets are not active. The Company does not have any assets
or liabilities classified as Level 3 financial assets. Refer to Note 3, Fair Value Measurements, for additional detail.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, short-term and long-term
investments, and accounts receivable. The risk with respect to cash and cash equivalents and short-term and long-term
investments is minimized by the Company's policy of investing in financial instruments (i.e., cash equivalents) with near-term
maturities issued by highly rated financial institutions. At times, these balances may exceed federally insured limits; however, to
date, the Company has not incurred any losses on these investments. As of December 31, 2017 and 2016, the Company had $63.4
million and $7.0 million, respectively, in banks located outside the U.S. The risk with respect to accounts receivable is managed
by the Company through its policy of monitoring the creditworthiness of its customers to which it grants credit terms in the
normal course of business.
59
Table of Contents
Leases
Notes to Consolidated Financial Statements (Continued)
The Company leases office space in several countries around the world under non-cancelable lease agreements. The
Company generally leases its office facilities under operating lease agreements. Office facilities subject to an operating lease and
the related lease payments are not recorded on the balance sheet. The terms of certain lease agreements provide for rental
payments on a graduated basis, however, the Company recognizes rent expense on a straight-line basis over the lease period in
accordance with authoritative accounting guidance. Any lease incentives are recognized as reductions of rental expense on a
straight-line basis over the term of the lease. The lease term begins on the date the Company becomes legally obligated for the
rent payments or when it takes possession of the office space, whichever is earlier.
The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements where
the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is involved
in the construction of structural improvements or take construction risk prior to commencement of a lease. Upon occupancy of
facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the
sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are accounted for as
financing leases. Refer to Note 7, Commitments and Contingencies, for additional detail.
Foreign Currency Translation
The functional currency of the Company is the U.S. dollar, while the functional currency of certain wholly-owned
subsidiaries outside of the U.S. is as follows:
Subsidiary
Wayfair Stores Limited
Wayfair (UK) Limited
Wayfair GmbH
Wayfair (BVI) Ltd.
CastleGate Logistics Canada Inc.
Currency
Euro
Pound sterling
Euro
Euro
Canadian dollar
The financial statements of the Company are translated to U.S. dollars using year-end exchange rates as to assets and
liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates
when the capital transaction occurred. The effects of foreign currency translation are included in other comprehensive loss in the
consolidated statements of comprehensive loss. Transaction gains and losses are included in the Company's consolidated
statements of operations. Translation adjustments arising from the use of differing exchange rates from period to period are
included in accumulated other comprehensive loss within total stockholders' equity (deficit).
Inventories
Inventories consisting of finished goods are stated at the lower of cost or net realizable value, determined by the first-in,
first-out (FIFO) method, and consist of product for resale. Inventory costs consist of cost of product and inbound shipping and
handling costs. Inventory costs also include direct and indirect labor costs, rents and depreciation expenses associated with the
Company's fulfillment centers. Inventory valuation requires the Company to make judgments, based on currently available
information, about the likely method of disposition, such as through sales to individual customers, liquidations, and expected
recoverable values of each disposition category.
Goods In-Transit
Goods in-transit directly from suppliers to customers are recorded in prepaid expenses and other current assets. Risk of loss
and the transfer of title from the supplier to the Company occur at freight on board shipping point. As of December 31, 2017 and
2016, goods in-transit amounted to $54.5 million and $34.3 million, respectively.
60
Table of Contents
Property and Equipment
Notes to Consolidated Financial Statements (Continued)
Property and equipment are stated at cost, net of depreciation and amortization. Depreciation and amortization on property
and equipment is calculated on the straight-line method over the estimated useful lives of the assets as follows:
Class
Furniture and computer equipment
Site and software development costs
Leasehold improvements
Building (leased - Note 7)
Site and Software Development Costs
Range of Life
(In Years)
3 to 7
2
The lesser of useful life or lease term
30
The Company capitalizes certain costs associated with the development of its sites and internal-use software products after
the preliminary project stage is complete and until the software is ready for its intended use. The capitalized costs are amortized
over a two-year period. Costs incurred in the preliminary stages of development, after the software is ready for its intended use
and for maintenance of internal-use software are expensed as incurred. Upgrade and enhancements are capitalized to the extent
they will result in added functionality.
Total costs capitalized, net of accumulated amortization, totaled $45.4 million and $30.0 million as of December 31, 2017
and 2016, respectively, and are included in property and equipment, net in the accompanying consolidated balance sheets.
Amortization expense for the years ended December 31, 2017, 2016, and 2015 were $34.5 million, $21.6 million, and $15.3
million, respectively.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances, such as service
discontinuance or technological obsolescence, indicate that the carrying amount of the long-lived asset may not be recoverable.
When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows
related to the 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 asset. If a readily determinable market price does
not exist, fair value is estimated using discounted expected cash flows attributable to the asset. For the years ended December 31,
2017, 2016 and 2015, no impairment of long-lived assets or identifiable intangibles had been indicated.
Contingent Liabilities
The Company has certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues
for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range
and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company
does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable; however, it
discloses the range of such reasonably possible losses.
Revenue Recognition
The Company generates net revenue through product sales generated primarily through the Company's five distinct sites
and through websites operated by third parties.
The Company recognizes revenue for product sales generated through the Company's five distinct sites and through
websites operated by third parties only when the following four criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. The
Company recognizes net revenue from sales of its products upon delivery to the customer. As the Company ships a large volume
of packages through multiple carriers, actual delivery dates may not always be available and as such the Company estimates
delivery dates based on historical data. The Company records product revenue at the gross amount as the Company is the primary
obligor with the customer and provides the primary customer service for all products sold, has latitude in establishing price and
selecting products sold, has discretion in selecting suppliers of products sold, maintains inventory risk from shipment through
delivery date and upon accepting returns, and has credit risk. Net revenue includes shipping costs charged to the customer and is
recorded net of taxes collected from customers, which are remitted to governmental authorities. Cash discounts, returns and
61
Table of Contents
Notes to Consolidated Financial Statements (Continued)
rebates are deducted from gross revenue in determining net revenue. In addition, the Company defers revenue when cash is
collected from its customer prior to the satisfaction of the revenue recognition criteria.
The Company maintains a membership rewards program for purchases made with the Company's private label credit card, a
Wayfair-branded credit card that can only be used at the Company's five U.S. sites. Enrolled customers earn points that may be
redeemed for future purchases. The Company defers a portion of its revenue associated with rewards that are ultimately expected
to be redeemed.
The Company also earns revenue through third-party advertisers that pay based on the number of advertisement related
clicks, actions, or impressions for advertisements placed on the Company's sites. Revenue earned under these arrangements is
included in net revenue and is recognized in the period in which the click, action, or impression occurs.
Vendor Rebates
The Company earns rebates on incentive programs with its suppliers. These rebates are earned upon shipment of goods.
Amounts earned and due from suppliers under these rebate programs are included in other current assets on the consolidated
balance sheets and are reflected as a reduction of cost of goods sold on the consolidated statements of operations. Vendor
allowances received by the Company reduce the carrying cost of inventory and are recognized in cost of goods sold when the
related inventory is sold.
Costs of Goods Sold
Cost of goods sold consists of the cost of product sold to customers, shipping and handling costs and shipping supplies and
fulfillment costs. Fulfillment costs include costs incurred in operating and staffing the fulfillment centers, such as costs attributed
to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of goods sold also includes direct
and indirect labor costs, including equity-based compensation, for fulfillment center oversight, including payroll and related
benefit costs. The Company also performs logistics services for suppliers through its CastleGate and Wayfair Delivery Network
solutions, which are earned upon completion of preparing customer orders for shipment and are reflected as a reduction of cost of
goods sold on the consolidated statements of operations.
Advertising Costs
Advertising consists of direct response performance marketing costs, such as display advertising, paid search advertising,
social media advertising, search engine optimization, comparison shopping engine advertising, television advertising, direct mail,
catalog and print advertising. Expenditures for advertising are expensed in the period that the advertising first takes place.
Advertising expense amounted to approximately $550.0 million, $409.1 million, and $278.2 million in the years ended
December 31, 2017, 2016, and 2015, respectively. Included in prepaid expenses at December 31, 2017 and 2016 are
approximately $0.6 million and $0.9 million, respectively, of prepaid advertising costs.
Merchant Processing Fees
Merchant processing fees totaling $88.7 million, $66.0 million, and $46.9 million in the years ended December 31, 2017,
2016, and 2015, respectively, are included in customer service and merchant fees expense in the consolidated statements of
operations. These fees are charged by third parties that provide merchant processing services for customer payments made by
credit cards and debit cards.
Retail Partner Fees
The Company sells its products through websites owned and operated by third-party online retailers, or retail partners. The
Company pays a fee for sales generated through these websites and records them as merchant processing fees and advertising
costs. Retail partner fees included in merchant processing fees are $1.5 million, $1.9 million, and $3.5 million for the years ended
December 31, 2017, 2016, and 2015, respectively. Retail partner fees included in advertising costs are $7.0 million, $11.0 million,
and $20.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.
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Equity-Based Compensation
Notes to Consolidated Financial Statements (Continued)
The Company accounts for its equity-based compensation awards in accordance with ASC Topic 718, Compensation—
Stock Compensation ("ASC 718"). ASC 718 requires all equity-based payments to employees to be recognized as expense in the
statements of operations based on their grant date fair values. The Company has granted stock options, restricted shares and
restricted stock units. The Company has primarily granted restricted stock units, and to a lesser extent, restricted stock. The
Company granted only restricted stock units to employees in the year ended December 31, 2017, 2016, and 2015. Restricted stock
values are determined based on the quoted market price of our Class A common stock on the date of grant. The Company
accounts for equity awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-
Employees, which requires the fair value of an award to non-employees be remeasured at fair value as the award vests.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. The Company records valuation
allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. At December 31, 2017,
we maintain a full valuation allowance against our net U.S. deferred tax asset as well as the net deferred tax asset of our Irish
subsidiary.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is
not more likely than not that a position will be sustained, no amount of benefit attributable to the position is recognized. The tax
benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest
amount that is more than 50% likely of being realized upon resolution of the contingency.
We evaluate at the end of each reporting period whether some or all of the undistributed earnings of our foreign subsidiaries
are permanently reinvested. Our position is based upon several factors including management's evaluation of the Company and
its subsidiaries' financial requirements, the short term and long term operational and fiscal objectives of the Company, and the tax
consequences associated with the repatriation of earnings.
Net Loss Per Share
The Company follows the two-class method when computing net loss per share for its two issued classes of common stock
—Class A and Class B. Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average
number of common stock outstanding for the period. For periods in which the Company has reported net losses, diluted net loss
per share is the same as basic net loss per share, since dilutive common stock are not assumed to have been issued if their effect is
anti-dilutive.
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2017, but
prior to the filing of the financial statements with the U.S. Securities and Exchange Commission, to provide additional evidence
relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been
evaluated through the filing of these financial statements. Refer to Note 16, Subsequent Events, for additional detail.
Recent Accounting Pronouncements
Stock Compensation
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-09, "Compensation - Stock Compensation" ("ASU 2016-09"). This ASU revises the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and an option to
recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on
the statement of cash flows.
The Company adopted ASU 2016-09 as of January 1, 2017 using a modified retrospective approach with the option to
recognize gross stock compensation expense with actual forfeitures recognized as they occur, with a cumulative-effect adjustment
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Notes to Consolidated Financial Statements (Continued)
to retained earnings recognized as of January 1, 2017 of $8.7 million. The adoption of ASU 2016-09 also requires all income tax
adjustments to be recorded in the consolidated and condensed statements of operations.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). This ASU
is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.
ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
year.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers - Principal versus Agent
Considerations" ("ASU 2016-08"). This ASU clarifies the implementation guidance for principal versus agent considerations in
ASU 2014-09. This ASU is effective at the same period as ASU 2014-09.
The Company expects to adopt the new revenue standard as of January 1, 2018 using the modified retrospective approach,
with an immaterial cumulative-effect adjustment to retained earnings recognized as of January 1, 2018. The immaterial
adjustment is primarily related to recognizing gift card and store credit breakage, to the extent there is no requirement for
remitting balances to governmental agencies under unclaimed property laws. Other changes identified relate to the presentation of
revenue, where certain third-party advertising arrangements will be classified as net revenue rather than a reduction in cost of
goods sold.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). This ASU revises the accounting related
to leases by requiring lessees to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also
simplifies the accounting for sale and leaseback transactions. This ASU is effective for annual reporting periods beginning after
December 15, 2018 and early adoption is permitted. Management expects to adopt ASU 2016-02 for annual reporting periods
beginning after December 15, 2018. Management is currently evaluating the impact of the adoption of this ASU on the
Company’s consolidated financial statements, and expects it will have a material impact on our consolidated financial statements,
primarily the consolidated balance sheets and related disclosures.
3. Marketable Securities and Fair Value Measurements
Marketable Securities
As of December 31, 2017 and 2016, all of the Company’s marketable securities were classified as available-for-sale and
their estimated fair values were $82.6 million and $99.7 million, respectively. The Company periodically reviews its available-
for-sale securities for other-than-temporary impairment. The Company considers factors such as the duration, severity and the
reason for the decline in value, the potential recovery period, and its intent to sell. As of December 31, 2017 and 2016, the
Company’s available-for-sale securities primarily consisted of corporate bonds and other government obligations that are priced at
fair value. During the years ended December 31, 2017, 2016, and 2015, the Company did not recognize any other-than-temporary
impairment loss. The maturities of the Company’s long-term marketable securities generally range from one to three years. The
cost basis of a marketable security sold is determined by the Company using the specific identification method. During the years
ended December 31, 2017, 2016, and 2015, the Company did not have any realized gains or losses.
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Notes to Consolidated Financial Statements (Continued)
The following tables present details of the Company’s marketable securities as of December 31, 2017 and 2016 (in
thousands):
Short-term:
Investment securities
Long-term:
Investment securities
Total
Short-term:
Investment securities
Commercial paper
Long-term:
Investment securities
Total
Fair Value Measurements
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
61,129
$
— $
(97) $
61,032
21,695
82,824
$
—
— $
(134)
(231) $
21,561
82,593
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
63,135
$
5,641
30,985
99,761
$
7
1
16
24
$
$
(39) $
(2)
(34)
(75) $
63,103
5,640
30,967
99,710
$
$
$
$
The following tables set forth the fair value of the Company's financial assets measured at fair value on a recurring basis as
of December 31, 2017 and 2016 based on the three-tier value hierarchy described in Note 2, Summary of Significant Accounting
Policies (in thousands):
Cash equivalents:
Money market funds and other funds
$
488,029
$
— $
— $
488,029
Level 1
Level 2
Level 3
Total
December 31, 2017
Short-term investments:
Investment securities
Restricted cash:
Certificate of deposit
Long-term:
Investment securities
Total
—
61,032
5,000
—
—
21,561
—
—
—
$
493,029
$
82,593
$
— $
61,032
5,000
21,561
575,622
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Cash equivalents:
Money market funds
Short-term investments:
Investment securities
Commercial paper
Restricted cash:
Certificate of deposit
Long-term:
Investment securities
Total
Notes to Consolidated Financial Statements (Continued)
Level 1
Level 2
Level 3
Total
December 31, 2016
$
200,867
$
— $
— $
200,867
—
—
63,103
5,640
5,000
—
—
—
—
63,103
5,640
5,000
—
205,867
$
$
30,967
99,710
$
—
— $
30,967
305,577
4. Intangible assets and Goodwill
The following table summarizes intangible assets as of December 31, 2017 and 2016 (in thousands):
Trademarks
Technology
Customer relationships
Total
Trademarks
Technology
Customer relationships
Total
Weighted-Average
Amortization
Period (Years)
Gross Carrying
Amount
December 31, 2017
Accumulated
Amortization Net Book Value
5
3
5
$
$
1,900
1,453
1,300
4,653
$
$
(1,678) $
(646)
(1,148)
(3,472) $
222
807
152
1,181
Weighted-Average
Amortization
Period (Years)
Gross Carrying
Amount
December 31, 2016
Accumulated
Amortization Net Book Value
5
3
5
$
$
1,900
$
1,453
1,300
4,653
$
(1,298) $
(161)
(888)
(2,347) $
602
1,292
412
2,306
Amortization expense related to intangible assets was $1.1 million, $0.9 million, and $0.9 million for the years ended
December 31, 2017, 2016, and 2015, respectively. The estimated future amortization expense of purchased intangible assets as of
December 31, 2017, is as follows (in thousands):
2018
2019
Thereafter
Total
Goodwill as of December 31, 2017 was $1.9 million, unchanged from December 31, 2016.
Total
858
323
—
1,181
$
$
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5. Property and Equipment, net
Notes to Consolidated Financial Statements (Continued)
The following table summarizes property and equipment, net as of December 31, 2017 and 2016 (in thousands):
Furniture and computer equipment
Site and software development costs
Leasehold improvements
Construction in progress
Building (leased - see Note 7)
Less accumulated depreciation and amortization
Property and equipment, net
December 31,
2017
2016
213,790
118,356
82,614
46,826
83,681
545,267
(184,126)
361,141
$
$
133,297
77,429
62,090
47,013
29,856
349,685
(110,331)
239,354
$
$
Property and equipment depreciation and amortization expense was $85.9 million, $54.6 million, and $31.6 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
6. Prepaid Expenses and Other Current Assets, Accrued Expenses, Other Current Liabilities, and Other Liabilities
The following table presents the components of selected balance sheet items as of December 31, 2017 and 2016 (in
thousands):
Prepaid expenses and other current assets:
Deferred costs in transit
Supplier receivable
Supplier credits receivable
Other prepaid and other current assets
Total prepaid expenses and other current assets
Accrued expenses:
Employee compensation and related benefits
Advertising
Accrued property, plant and equipment
Credit card
Audit, legal and professional fees
Other accrued expenses
Total accrued expenses
Other current liabilities:
Sales tax payable
Sales return reserve
Other current liabilities
Total current other liabilities
67
December 31,
2017
2016
$
$
54,483
29,941
12,936
33,478
$
130,838
$
34,325
21,828
13,215
21,477
90,845
December 31,
2017
2016
55,142
38,888
8,592
4,573
1,749
11,303
120,247
$
$
37,767
8,379
3,630
7,405
1,333
9,293
67,807
December 31,
2017
2016
35,726
$
21,243
28,057
85,026
$
15,731
12,384
15,913
44,028
$
$
$
$
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Notes to Consolidated Financial Statements (Continued)
Other liabilities:
Deferred rent
Construction costs under build-to-suit leases
Other liabilities
Total other liabilities
7. Commitments and Contingencies
Leases
December 31,
2017
2016
$
$
59,811
37,545
9,136
106,492
$
$
55,267
39,949
963
96,179
The Company leases office and warehouse spaces under non-cancelable leases. These leases expire at various dates
through 2029 and include discounted rental periods and fixed escalation clauses, which are amortized straight-line over the terms
of the lease. Future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one
year at December 31, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
Amount
70,800
89,972
86,097
83,160
81,544
372,127
783,700
$
$
Rent expense under operating leases was $45.2 million, $33.6 million, and $16.3 million in the years ended December 31,
2017, 2016 and 2015, respectively. The Company has issued letters of credit for approximately $15.3 million and $10.6 million
as security for these lease agreements as of December 31, 2017 and 2016, respectively.
Future lease payments have not been reduced by minimum sublease rentals of $6.5 million due to the Company in the
future under non-cancelable subleases through 2020.
The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements
where the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is
involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. Upon
occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales
recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are
accounted for as financing leases.
The construction of one warehouse lease arrangement was completed during the year ended December 31, 2016, and
because the Company concluded it had a letter of credit of $1.2 million, the Company did not meet the sale-leaseback criteria for
derecognition of the building asset and liability. The construction of two additional warehouse lease arrangements were
completed in the year ended December 31, 2017, and because the Company concluded it had letters of credit of $0.8 million and
$1.0 million, the Company did not meet the sale-leaseback criteria for derecognition of the building assets and liabilities.
Accordingly, these leases were accounted for as financing obligations. The financing obligations and corresponding building
assets of $28.9 million, $12.6 million, and $41.2 million were recorded in "Lease financing obligation, net of current portion"
and "Property and equipment, net," respectively, in the Company’s consolidated balance sheets as of June 30, 2016, March 31,
2017, and June 30, 2017, respectively, their respective quarters of completion.
The monthly rent payments made to the lessor under the lease agreement are recorded in the Company’s financial
statements as land lease expense and principal and interest on the financing obligation. Interest expense on the lease financing
obligation reflects the portion of the Company's monthly lease payments that is allocated to interest expense. For the years ended
December 31, 2017 and 2016, land lease expense was $0.9 million and $0.1 million, respectively, and interest expense on lease
financing obligations was $6.9 million and $1.4 million, respectively. As of December 31, 2017, future minimum commitments
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related to the financing obligations were $38.8 million and $7.5 million for principal and interest, respectively, through
December 31, 2022.
Notes to Consolidated Financial Statements (Continued)
Restricted Cash
The Company has deposited $5.0 million as collateral for letters of credit and has classified these amounts as "Other
noncurrent assets" on its consolidated balance sheets at December 31, 2017 and 2016.
Collection of Sales or Other Similar Taxes
The Company does not collect and remit sales and use, commercial activity, VAT or similar taxes in all jurisdictions in
which it has sales, based on the Company's belief that such taxes are not applicable or legally required. Several states and other
taxing jurisdictions have presented or threatened the Company with assessments, alleging that the Company is required to collect
and remit such taxes there. Other states, including South Dakota in a legal proceeding currently before the U.S. Supreme Court
in which the Company is a defendant (South Dakota v. Wayfair Inc., 17-494), have requested that courts validate new laws that
reverse existing constitutional precedent. The Company does not believe that it is subject to such taxes, and intends to
vigorously defend its position. Pursuant to the South Dakota statute, the Company would not be required to withhold and remit
sales tax until there was a verdict in favor of South Dakota which was then upheld by U.S. Supreme Court. The statute also
would not require the Company to pay sales tax retroactively if the Company were to lose. At this time, the Company believes
any losses that may arise from these assessments and claims would be immaterial; however, no assurance can be given as to the
outcomes and the Company could be subject to significant additional tax liabilities.
Legal Matters
In September 2016, a putative class action complaint was filed against the Company in the Superior Court of the province
of Quebec (Naomi Zouzout v. Wayfair LLC, Case No. PQ 500-06-000809-166) by an individual on behalf of herself and on
behalf of all other similarly situated individuals alleging violations of various Canadian consumer protection statutes. Among
other remedies, this lawsuit seeks compensatory and punitive money damages, costs, and various fees. In June 2017, the
Company entered into a settlement of the litigation, subject to judicial approval. The settlement was approved by the court in
February 2018 and is not expected to have a material adverse effect on the Company's results of operation or financial condition.
On January 12, 2018, the U.S. Supreme Court granted certiorari in South Dakota v Wayfair Inc., 17-494. See Collection of
Sales or Other Similar Taxes above.
From time to time the Company is involved in claims that arise during the ordinary course of business. Although the results
of litigation and claims cannot be predicted with certainty, the Company does not currently believe that the outcome of any of
these other legal matters will have a material adverse effect on the Company's results of operation or financial condition.
Regardless of the outcome, litigation can be costly and time consuming, as it can divert management's attention from important
business matters and initiatives, negatively impacting the Company's overall operations. In addition, the Company may also find
itself at greater risk to outside party claims as it increases its operations in jurisdictions where the laws with respect to the
potential liability of online retailers are uncertain, unfavorable, or unclear.
8. Employee Benefit Plans
The Company has a defined-contribution, incentive savings plan pursuant to Section 401(k) of the Internal Revenue Code.
The plan covers all full-time employees who have reached the age of 21 years. Employees may elect to defer compensation up to
a dollar limit (as allowable by the Internal Revenue Code), of which up to 4% of an employee's salary will be matched by the
Company. The amounts deferred by the employee and the matching amounts contributed by the Company both vest immediately.
The amount expensed under the plan totaled approximately $9.0 million, $6.3 million, and $3.3 million in the years ended
December 31, 2017, 2016 and 2015, respectively.
9. Equity-Based Compensation
The board of directors of the Company (the "Board") adopted the 2014 Incentive Award Plan ("2014 Plan") to grant cash
and equity incentive awards to eligible participants in order to attract, motivate and retain talent. The 2014 Plan is administered by
the Board with respect to awards to non-employee directors and by the compensation committee of the Board with respect to
other participants and provides for the issuance of stock options, SARs, restricted stock, restricted stock units ("RSUs"),
performance shares, stock payments, cash payments, dividend awards and other incentives. Prior to the adoption of the 2014 Plan,
Wayfair LLC issued certain equity awards pursuant to the Wayfair LLC Amended and Restated Common Unit Plan (the "2010
Plan"), which was administered by the board of directors of Wayfair LLC. Awards issued under the 2010 Plan that remain
outstanding currently represent Class A or Class B common stock of the Company.
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Notes to Consolidated Financial Statements (Continued)
8,603,066 shares of Class A common stock were initially available for issuance under awards granted pursuant to the 2014
Plan. The 2014 Plan also contains an evergreen provision whereby the shares available for future grant are increased on the first
day of each calendar year beginning January 1, 2016 and ending on and including January 1, 2024. As of January 1, 2018,
8,016,850 shares of Class A common stock were available for future grant under the 2014 Plan. Shares or RSUs forfeited,
withheld for minimum statutory tax obligations, and unexercised stock option lapses from the 2010 and 2014 Plans are available
for future grant under the 2014 Plan.
The Company adopted ASU 2016-09 as of January 1, 2017. For additional information, refer to Note 2, Summary of
Significant Accounting Policies.
The following table presents activity relating to stock options for the year ended December 31, 2017:
Outstanding at December 31, 2016
Options exercised
Options forfeited/canceled
Outstanding and exercisable at December 31, 2017
Shares
$
209,759
(82,776) $
(600) $
$
126,383
Weighted-
Average
Exercise Price
2.98
2.92
2.89
3.02
Weighted-
Average
Remaining
Contractual
Term
(Years)
4.5
3.5
Intrinsic value of stock options exercised was $4.8 million and $2.5 million for the years ended December 31, 2017 and
2016, respectively. Aggregate intrinsic value of stock options outstanding and currently exercisable is $9.8 million as of
December 31, 2017. All stock options were fully vested at December 31, 2017.
The following table presents activity relating to restricted common stock for the year ended December 31, 2017:
Unvested at December 31, 2016
Restricted stock vested
Unvested and expected to vest in the future as of December 31, 2017
Weighted-
Average Grant
Date
Fair Value
44.34
44.34
44.34
Shares
60,000
$
(20,000) $
$
40,000
The intrinsic value of restricted common stock vested and repurchased was $1.6 million and less than $0.1 million for the
years ended December 31, 2017 and 2016, respectively. Aggregate intrinsic value of restricted common stock unvested is $3.2
million as of December 31, 2017. Unrecognized equity based compensation expense related to restricted common stock expected
to vest over time is $2.8 million with a weighted average remaining vesting term of 1.5 years as of December 31, 2017.
The following table presents activity relating to RSUs for the year ended December 31, 2017:
Unvested at December 31, 2016
RSUs granted
RSUs vested
RSUs forfeited/canceled
Outstanding and expected to vest as of December 31, 2017
70
Weighted-
Average
Grant Date
Fair Value
34.21
57.37
32.47
37.84
46.28
Shares
$
6,986,776
3,521,415
$
(2,304,044) $
(1,350,541) $
$
6,853,606
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Notes to Consolidated Financial Statements (Continued)
The intrinsic value of RSUs vested was $137.2 million and $76.1 million for the years ended December 31, 2017 and 2016,
respectively. Aggregate intrinsic value of RSUs unvested is $550.1 million as of December 31, 2017. Unrecognized equity based
compensation expense related to RSUs expected to vest over time is $281.3 million with a weighted average remaining vesting
term of 1.7 years as of December 31, 2017.
10. Stockholders' Equity (Deficit)
Preferred Stock
The Company authorized 10,000,000 shares of undesignated preferred stock, $0.001 par value per share, for future
issuance. As of December 31, 2017, the Company had no shares of undesignated preferred stock issued or outstanding.
Common Stock
The Company authorized 500,000,000 shares of Class A common stock, $0.001 par value per share, and 164,000,000 shares
of Class B common stock, $0.001 par value per share, of which 57,398,983 and 49,945,202 shares of Class A common stock and
30,809,627 and 35,885,692 shares of Class B common stock were outstanding as of December 31, 2017 and 2016, respectively.
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and
conversion rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock
is entitled to ten votes per share. Each share of Class B common stock may be converted into one share of Class A common stock
at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer thereof,
subject to certain exceptions. In addition, upon the date on which the outstanding shares of Class B common stock represent less
than 10% of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock, or in the
event of the affirmative vote or written consent of holders of at least 66 2/3% of the outstanding shares of Class B common stock,
all outstanding shares of Class B common stock shall convert automatically into Class A common stock. Subject to preferences
that may apply to any shares of preferred stock outstanding at the time, the holders of common stock are entitled to receive
dividends out of funds legally available if the Board, in its discretion, determines to issue dividends and then only at the times and
in the amounts that the Board may determine. Since the Company's initial public offering through December 31, 2017, 48,161,343
shares of Class B common stock were converted to Class A common stock.
11. Segment and Geographic Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is
evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an
individual segment and in assessing performance. The Company’s CODM is its Chief Executive Officer.
The Company's operating and reportable segments are U.S. and International. These segments reflect the way the CODM
allocates resources and evaluates financial performance, which is based upon each segment's Adjusted EBITDA. Adjusted
EBITDA is defined as loss before depreciation and amortization, equity-based compensation and related taxes, interest and other
income and expense, provision for income taxes, and non-recurring items. These charges are excluded from evaluation of
segment performance because it facilitates reportable segment performance comparisons on a period-to-period basis. The
accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies.
The Company allocates certain operating expenses to the operating and reportable segments, including "Customer service
and merchant fees" and "Selling, operations, technology, general and administrative" based on the usage and relative
contribution provided to the segments. It excludes from the allocations certain operating expense lines, including "Depreciation
and amortization, "Equity based compensation and related taxes," "Interest (expense) income, net," "Other income, net," and
"Provision for income taxes." There are no revenue transactions between the Company's reportable segments.
U.S.
The U.S. segment primarily consists of amounts earned through product sales through the Company's five distinct sites in
the U.S. and through websites operated by third parties in the U.S.
International
The International segment primarily consists of amounts earned through product sales through the Company's international
sites.
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Revenue from external customers for each group of similar products and services are not reported to the CODM. Separate
Notes to Consolidated Financial Statements (Continued)
identification of this information for purposes of segment disclosure is impractical, as it is not readily available and the cost to
develop it would be excessive. No individual country outside of the U.S. provided greater than 10% of total revenue.
The following tables present Direct Retail and Other net revenues and Adjusted EBITDA attributable to the Company’s
reportable segments for the periods presented (in thousands):
U.S. Direct Retail
U.S. Other
U.S. segment net revenue
International Direct Retail
International Other
International segment net revenue (1)
Total
Year Ended December 31,
2016
2015
2017
$
$
4,075,405
77,652
4,153,057
567,838
—
567,838
4,720,895
$
$
2,993,365
117,132
3,110,497
265,544
4,319
269,863
3,380,360
$
$
1,945,411
190,081
2,135,492
94,827
19,566
114,393
2,249,885
(1) In the year ended December 31, 2015, International segment net revenue included $5.4 million from our Australian
business, which we sold in July 2015.
Adjusted EBITDA:
U.S.
International
Total reportable segments Adjusted EBITDA
Less: reconciling items (1)
Net loss
Year Ended December 31,
2016
2015
2017
$
$
$
35,888
(102,921)
(67,033)
(177,581)
(244,614) $
$
176
(88,868)
(88,692)
(105,683)
(194,375) $
30,985
(46,914)
(15,929)
(61,514)
(77,443)
(1) Adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net loss including the
following (in thousands):
Depreciation and amortization (1)
Equity based compensation and related taxes
Interest (income), net
Other (income) expense, net
Provision for income taxes
Other (1)
Total reconciling items
Year Ended December 31,
2016
2015
2017
$
87,020
$
55,572
$
72,626
9,433
(758)
486
51,953
(694)
(1,756)
608
8,774
177,581
$
—
105,683
$
$
32,446
32,975
(1,284)
(2,718)
95
—
61,514
(1) The Company recorded $9.6 million of one-time charges in the year ended December 31, 2017 in "Selling, operations,
technology, general and administrative" in the consolidated statements of operations related to a warehouse the Company
vacated in July 2017. Of the $9.6 million charges, $8.8 million was included in "Other" and related primarily to the excess of the
Company's estimated future remaining lease commitments through 2023 over its expected sublease income over the same
period, and $0.8 million was included in "Depreciation and amortization" related to accelerated depreciation of leasehold
improvements in the warehouse.
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The following table presents the activity related to the Company’s net revenue from Direct Retail sales derived through the
Notes to Consolidated Financial Statements (Continued)
Company’s sites and Other sales derived through websites operated by third parties and fees from third-party advertising
distribution providers (in thousands):
Net revenue
Direct Retail
Other
Net revenue
Year Ended December 31,
2016
2015
2017
$
$
4,643,243
77,652
4,720,895
$
$
3,258,909
121,451
3,380,360
$
$
2,040,238
209,647
2,249,885
The following table presents long-lived assets by segment (in thousands):
Geographic long-lived assets:
U.S.
International
Total
12. Income Taxes
Year Ended
December 31,
2017
2016
$
$
353,414
7,727
361,141
$
$
233,099
6,255
239,354
Income tax expense (benefit) from continuing operations for the years ended December 31, 2017, 2016 and 2015 is
presented below (in thousands):
Year ended December 31, 2017
Current
Deferred
Total
Federal
State
Foreign
Year ended December 31, 2016
Federal
State
Foreign
Year ended December 31, 2015
Federal
State
Foreign
$
$
$
$
$
— $
540
942
1,482
$
(31) $
8
(973)
(996) $
Current
Deferred
Total
— $
329
285
614
$
32
$
5
(43)
(6) $
Current
Deferred
Total
— $
(202)
331
129
$
54
7
(95)
(34)
(31)
548
(31)
486
32
334
242
608
54
(195)
236
95
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Notes to Consolidated Financial Statements (Continued)
The actual income tax expense (benefit) differs from the expected income tax expense (benefit) computed at the U.S.
Federal statutory tax rate of 35% due to the following (in thousands):
Tax expense (benefit) at federal statutory rate
$
(85,445) $
(67,819) $
(27,072)
Year Ended December 31,
2016
2015
2017
State income tax expense, net of federal benefit
Foreign tax rate differential
Non-deductible equity based compensation expense
Windfall benefits from equity based compensation
Change in valuation allowance
Impact of sale of Australian subsidiary
Change in tax rate
Other
Net income tax expense
(11,432)
23,179
1,080
(24,168)
24,209
—
71,919
1,144
486
$
(5,225)
17,109
2,321
—
53,467
—
—
755
608
$
(1,424)
9,278
1,415
—
12,394
4,248
—
1,256
95
$
We recorded an income tax expense of $0.5 million, representing an effective tax rate of zero. The effective tax rate differs
from the U.S. statutory rate of 35% primarily as a result of the losses generated in the U.S. and certain foreign subsidiaries that
have a valuation allowance and therefore cannot be benefited, as well as excess tax deductions related to equity-based
compensation and the effects of U.S. Tax Reform.
The components of income before income tax expense (benefit) determined by tax jurisdiction, are as follows (in
thousands):
U.S.
Foreign
Total
Year Ended December 31,
2016
2015
2017
$
$
(143,800) $
(100,328)
(244,128) $
(118,851) $
(74,916)
(193,767) $
(38,963)
(38,385)
(77,348)
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Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities for the
periods presented are as follows (in thousands):
Deferred tax assets:
Accounts receivable
Inventories
Operating loss carry-forwards
Equity based compensation expense
Intangibles
Accrued payroll
Accrued expenses and reserves
Charitable contributions
Deferred rent
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Capitalized technology
Property and equipment
Goodwill
Convertible debt
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Non-current net deferred tax assets (liabilities)
December 31
2017
2016
1,814
391
146,666
9,087
13,862
8,582
10,933
284
48,936
240,555
(178,488)
62,067
(1,825)
(11,339)
(34,986)
(110)
(12,580)
(12)
(60,852)
1,215
1,215
$
$
1,153
543
71,558
10,940
22,466
9,379
2,840
331
51,355
170,565
(123,293)
47,272
(1,428)
(11,151)
(34,420)
(133)
—
(166)
(47,298)
(26)
(26)
$
$
The valuation allowance increased by $55.2 million during 2017. The increase in valuation allowance is the result of
establishing a valuation allowance against the current year operating losses of our U.S. and Irish entities, the adoption of ASU
2016-09 which resulted in an increase to the net operating loss and stock compensation deferred tax assets above, partially offset
by a decrease in valuation allowance as a result of the U.S. federal tax rate reduction enacted during the fourth quarter of 2017
and a reduction in valuation allowance associated with the net deferred tax liability recorded related to the Company’s convertible
debt issuance.
In determining the need for a valuation allowance, the Company has given consideration to the cumulative book income and
loss positions of each of its entities as well as its worldwide cumulative loss position. The Company has assessed, on a
jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry-back net operating losses,
the existence of reversing temporary differences, the availability of tax planning strategies and available sources of future taxable
income. At December 31, 2017, we maintain a full valuation allowance against the net deferred tax assets of our U.S. and Irish
entities. We believe we are able to support the deferred tax assets recognized as of the end of the year in other foreign jurisdictions
based on all of the available evidence.
As of December 31, 2017, the Company had federal net operating loss carryforwards available to offset future federal
taxable income of $420.5 million.
In addition, the Company had state net operating loss carryforwards available in the amount of $397.2 million which are
available to offset future state taxable income.
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Notes to Consolidated Financial Statements (Continued)
The federal net operating loss carryforwards begin to expire in the year ending December 31, 2034. The state net operating
loss carryforwards begin to expire in the year ending December 31, 2022.
The Company's ability to utilize these federal and state net operating loss carry-forwards may be limited in the future if the
Company experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when
the ownership percentages of 5% or greater stockholders change by more than 50% over a three-year period.
The Company also had foreign net operating loss carry-forwards available to offset future foreign income of $270.3 million.
The foreign net operating loss carryforwards do not expire.
As of January 1, 2017 the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). In accordance with ASU 2016-09, previously unrecognized excess tax benefits are recognized on a modified
retrospective basis. On January 1, 2017, the Company recorded a $44.1 million deferred tax asset related to unrecognized excess
tax benefits with an offsetting adjustment to valuation allowance. In addition, the Company recorded a $3.3 million increase to its
equity based compensation deferred tax asset with an offsetting adjustment to valuation allowance as a result in the impact of
accounting for forfeitures as incurred.
As of December 31, 2017, the Company has not provided for U.S. deferred income taxes on undistributed earnings of its
foreign subsidiaries of approximately $3.3 million since these earnings are deemed to be indefinitely reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, the Company could be subject to income taxes as well as
withholding taxes. The amount of taxes attributable to the undistributed earnings is not practicably determinable.
The Company establishes reserves for uncertain tax positions based on management's assessment of exposures associated
with tax positions taken on tax return filings. The tax reserves are analyzed periodically and adjustments are made as events occur
to warrant adjustment to the reserve. Reserves for uncertain tax positions as of December 31, 2017 and 2016 are not material and
would not impact the effective tax rate if recognized as a result of the valuation allowance maintained against our net deferred tax
assets.
The Company's policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income
tax expense. Related to the unrecognized tax benefits noted above, the Company did not accrue any penalties and interest during
2017, 2016, and 2015, respectively, because it believes that such additional interest and penalties would be immaterial.
The Company's tax jurisdictions include the U.S., the UK, Germany, Ireland, Canada and the British Virgin Islands. The
statute of limitations with respect to the Company's U.S. federal income taxes has expired for years prior to 2014. The relevant
state statutes vary. The statute of limitations with respect to the Company's foreign income taxes varies, but has expired for years
prior to 2012. However, preceding years remain open to examination by U.S. federal and state and foreign taxing authorities to
the extent of future utilization of net operating losses generated in each preceding year.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Act") was signed into law making significant changes to
the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for
tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a
territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative deferred foreign earnings as
of December 31, 2017. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued which directs
taxpayers to consider the impact of the Act as "provisional" when a registrant does not have the necessary information available,
prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of
the Act. As of December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the Act,
however, as described below, the Company made provisional estimates of the effects of the Act on its existing deferred tax
balances and the one-time transition tax. The Act did not have a significant impact on the Company’s consolidated financial
statements for the year ended December 31, 2017 as a result of the valuation allowance maintained against the Company’s U.S.
deferred tax assets. However, the Company’s provisional estimate associated with the reduction in the U.S. federal corporate tax
rate from 35% to 21% impacted the change in valuation allowance and change in tax rate component of the Company’s effective
tax rate reconciliation as well as its ending deferred tax assets, deferred tax liabilities and valuation allowance in the deferred tax
footnote disclosure. The Company has an accumulated deficit from its foreign operations and does not have a transition tax
associated with deferred foreign earnings related to the Act. The ultimate impact of the Act may differ from these provisional
amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the
Company has made and additional regulatory guidance that may be issued. The Company’s accounting treatment is expected to be
complete in the fourth quarter of 2018.
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13. Credit Agreement
Notes to Consolidated Financial Statements (Continued)
On February 22, 2017, the Company entered into a $40 million credit card program and a credit agreement consisting of a
$100 million secured revolving credit facility (the "Revolver") with Citibank, N.A. ("Citibank"). The Citibank credit facility
replaced the Company's existing credit facility with Bank of America, N.A. ("Bank of America"), which was terminated on
February 22, 2017 as described below. On September 11, 2017, the Citibank credit agreement was amended with a new letter of
credit sublimit ($25 million) and to make clarifying edits to the mandatory prepayment provisions of the credit agreement.
The Citibank Revolver has a $25 million letter of credit sublimit and a $10 million swing line sublimit, and a final maturity
date of February 21, 2020. Wayfair LLC is the borrower (the "Borrower") under the Citibank credit agreement. Subject to certain
conditions, the Borrower has the right to increase the Revolver by $25 million. Borrowings under the Revolver will bear interest
through maturity at a variable rate based upon, at the Borrower’s option, either the Eurodollar rate or the base rate (which is the
highest of (x) Citibank's prime rate, (y) one-half of 1.00% in excess of the federal funds effective rate, and (z) 1.00% in excess of
the one-month Eurodollar rate), plus, in each case an applicable margin. From closing until September 30, 2019, the applicable
margin for Eurodollar rate loans is 1.75% per annum and the applicable margin for base rate loans is 0.75% per annum. After
September 30, 2019, the applicable margin is subject to specified changes depending on the applicable consolidated leverage
ratio. Any amounts outstanding under the Revolver are due at maturity. In addition, subject to the terms and conditions set forth in
the credit agreement, the Borrower is required to make certain mandatory prepayments prior to maturity.
The Citibank credit agreement contains affirmative and negative covenants customarily applicable to senior secured credit
facilities, including covenants that, among other things, will limit or restrict the ability of the Company and its subsidiaries,
subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or
acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into
transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the Citibank credit
agreement requires the Company to maintain certain financial ratios. As of December 31, 2017, the Company was in compliance
with its covenants under the Revolver.
The Company previously had a credit agreement with Bank of America, which was replaced by the Citibank credit
agreement on February 22, 2017. The Bank of America credit agreement provided the Company with a $20 million revolving line
of credit to support direct borrowings and letters of credit, provided that a maximum of $5 million could be applied to direct
borrowings under the revolving line of credit, plus an additional $45 million credit card program (which the Company continued
to utilize on a transitional basis until September 30, 2017), for a maximum aggregate commitment of $65 million. Subject to the
terms and conditions of the Bank of America credit agreement, advances under the line of credit, if any, would bear interest at the
LIBOR rate, plus 1.75%. The Bank of America credit agreement also required the Company to maintain certain covenants,
including debt service coverage, tangible net worth and unencumbered liquid assets.
The Company did not borrow any amounts under the Revolver or the Bank of America credit agreement during the years
ended December 31, 2017 and 2016.
14. Convertible Debt
On September 15, 2017, the Company issued $431.25 million aggregate principal amount of 0.375% Convertible Senior
Notes due 2022 (the "Notes"), which includes the exercise in full of the $56.25 million over-allotment option, to Citigroup Global
Markets Inc. and Goldman Sachs & Co. LLC as the initial purchasers of the Notes (the "Initial Purchasers").
The net proceeds from the sale of the Notes were approximately $420.4 million, after deducting the Initial Purchasers’
discounts and the estimated offering expenses payable by the Company. The Company used approximately $44.2 million of the
net proceeds from the offering to pay the cost of the capped call transactions, as further described below, with three financial
institutions (the "Option Counterparties"). The Company intends to use the remainder of the net proceeds for working capital and
general corporate purposes.
The Notes were issued pursuant to an indenture, dated September 15, 2017 (the "Indenture"), between the Company and
U.S. Bank National Association, as trustee. The Company will pay interest on the Notes semiannually in arrears at a rate
of 0.375% per annum on March 1 and September 1 of each year commencing on March 1, 2018. The Notes are convertible based
upon an initial conversion rate of 9.61 shares of the Company’s Class A common stock per $1,000 principal amount of Notes
(equivalent to a conversion price of approximately $104.06 per share of the Company’s Class A common stock). The conversion
rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to
all or substantially all of the holders of the Company’s Class A common stock, but will not be adjusted for accrued and unpaid
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Notes to Consolidated Financial Statements (Continued)
interest. The Company will settle any conversions of the Notes in cash, shares of the Company’s Class A common stock or a
combination thereof, with the form of consideration determined at the Company’s election.
The Notes will mature on September 1, 2022, unless earlier purchased, redeemed or converted. Prior to June 1, 2022,
holders may convert all or a portion of their Notes only under the following circumstances: (1) during any calendar quarter
commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported
sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period
of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is
greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 business day period after
any 10 consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of
Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the
Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any Notes called for
redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately
preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after June 1, 2022 until the close
of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any
time, regardless of the foregoing circumstances.
The Company may not redeem the Notes prior to September 8, 2020. On or after September 8, 2020, the Company may
redeem for cash all or part of the Notes if the last reported sale price of the Company’s Class A common stock equals or
exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at
least one of the five trading days immediately preceding the date on which the Company provides notice of redemption, during
any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company
provides notice of the redemption. The redemption price will be 100% of the principal amount of the Notes to be redeemed, plus
accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the Indenture), holders may require the Company to repurchase
all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased plus any
accrued but unpaid interest to, but excluding, the fundamental change repurchase date.
Holders of Notes who convert their Notes in connection with a notice of a redemption or a make-whole fundamental change
(each as defined in the Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the Notes.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and
continuing, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may
declare the entire principal amount of all the Notes plus accrued interest, if any, to be immediately due and payable.
The Notes are general unsecured obligations of the Company. The Notes rank senior in right of payment to any of the
Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment to
the Company’s existing and future unsecured indebtedness that is not so subordinated; are effectively subordinated in right of
payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and are
structurally subordinated to all existing and future indebtedness and liabilities of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The
carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an
associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not
meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, was determined by deducting
the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes
and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in
the consolidated and condensed balance sheet and amortized to interest expense using the effective interest method over the term
of the Notes. The equity component of the Notes of approximately $95.8 million is included in additional paid-in capital in the
consolidated and condensed balance sheet and is not remeasured as long as it continues to meet the conditions for equity
classification. The Company allocated transaction costs related to the Notes using the same proportions as the proceeds from the
Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability
in the consolidated and condensed balance sheet and amortized to interest expense over the term of the Notes, and transaction
costs attributable to the equity component were netted with the equity component in shareholders’ equity.
Interest expense related to the Notes for the year ended December 31, 2017 was $5.8 million, which is also comprised of the
amortization of debt discount and debt issuance costs and the contractual coupon interest.
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Notes to Consolidated Financial Statements (Continued)
The estimated fair value of the Notes was $452.5 million as of December 31, 2017. The estimated fair value of the Notes
was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note
3, Marketable Securities and Fair Value Measurements.
On September 11, 2017, the Company entered into privately negotiated capped call transactions (the "Base Capped Call
Transactions") with the Option Counterparties and, in connection with the exercise in full of the over-allotment option by the
Initial Purchasers, on September 14, 2017 entered into additional capped call transactions (such additional capped call
transactions, the "Additional Capped Call Transactions" and, together with the Base Capped Call Transactions, the "Capped Call
Transactions") with the Option Counterparties. The Capped Call Transactions are expected generally to reduce the potential
dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the Notes upon
conversion of the Notes in the event that the market price per share of the Company’s Class A common stock is greater than the
strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Notes and is subject
to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based
on the cap price of the Capped Call Transactions. The Capped Call Transactions have an initial cap price of $154.16 per share of
the Company’s Class A common stock, which represents a premium of 100% over the last reported sale price of the Company’s
Class A common stock on September 11, 2017, and is subject to certain adjustments under the terms of the Capped Call
Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’s Class A common
stock underlying the Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Notes.
The Capped Call Transactions are separate transactions, in each case, entered into by the Company with the Option
Counterparties, and are not part of the terms of the Notes and will not affect any holder’s rights under the Notes. Holders of the
Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the
criteria for separate accounting as a derivative as they are indexed to the Company's stock. The premiums paid for the Capped
Call Transactions have been included as a net reduction to additional paid-in capital within shareholders’ equity.
15. Net Loss per Share
Basic and diluted net loss per share is presented using the two-class method required for participating securities: Class A and
Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to
voting and conversion. For more information on the rights of Class A and Class B common stockholders, see Note
10, Stockholders' Equity (Deficit).
Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the
period. Diluted net loss per share is computed using the weighted-average number of shares of common stock and, if dilutive,
common stock equivalents outstanding during the period. The Company's common stock equivalents consist of shares issuable
upon the release of restricted stock units, and to a lesser extent, the incremental shares of common stock issuable upon the
exercise of stock options and unvested restricted stock. The dilutive effect of these common stock equivalents is reflected in
diluted earnings per share by application of the treasury stock method. The Company's basic and diluted net loss per share are the
same because the Company has generated net loss and common stock equivalents are excluded from diluted net loss per share
because they have an antidilutive impact.
The Company allocates undistributed earnings between the classes on a one-to-one basis when computing net loss per
share. As a result, basic and diluted net loss per Class A and Class B shares are equivalent.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Net loss
Weighted average common shares used for basic and diluted net loss per
share computation
Net loss per common share:
Basic and Diluted
$
$
Year Ended December 31,
2016
2015
2017
(244,614) $
(194,375) $
(77,443)
86,983
84,977
83,726
(2.81) $
(2.29) $
(0.92)
Dilutive common stock equivalents, representing potentially dilutive common stock options, restricted stock and restricted
stock units, of 7.0 million, 7.3 million, and 5.9 million for 2017, 2016, and 2015, respectively, were excluded from diluted
earnings per share calculations for these periods because of their anti-dilutive effect. Furthermore, the shares of Class A common
79
Table of Contents
Notes to Consolidated Financial Statements (Continued)
stock that would be issuable if the Company elects to settle the Notes in shares were excluded from the diluted earnings per share
calculation (using the if-converted method) for the year ended December 31, 2017 because their effect would have been anti-
dilutive.
The Company may settle the conversions of the Notes in cash, shares of the Company's Class A common stock or any
combination thereof at its election. The number of shares of the Company's Class A common stock issuable at the conversion
price of $104.06 per share is expected to be 4.1 million shares, however the Capped Call Transactions are expected generally to
reduce the potential dilution of the Company's Class A common stock upon any conversion of Notes and/or offset the cash
payments the Company is required to make in excess of the principal amount of the Notes. Under the Capped Call Transactions,
the number of shares of Class A common stock issuable at the conversion price of $154.16 is expected to be 2.8 million shares.
For more information on the Notes and the Capped Call Transactions, see Note 14, Convertible Debt.
16. Subsequent Events
Stock Repurchase Program
On February 22, 2018, the Company announced that the Board authorized the repurchase of up to $200 million of the
Company’s Class A common stock. This repurchase program has no expiration but may be suspended or terminated by the Board
at any time. Under the repurchase program, the Company is authorized to repurchase, from time to time, outstanding shares of its
Class A common stock in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule
10b5-1 plan.
The actual timing, number and value of shares repurchased will be determined by the Company in its discretion and will
depend on a number of factors, including market conditions, applicable legal requirements, the Company’s capital needs and
whether there is a better alternative use of capital. The Company has no obligation to repurchase any amount of its Class A
common stock under the program.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer ("CEO") and chief financial officer ("CFO"),
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2017. Based on such evaluation, our
CEO and CFO have concluded that, as of December 31, 2017, our disclosure controls and procedures are effective in ensuring
that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (b) such information is
accumulated and communicated to our management, including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required
by Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2017 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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Table of Contents
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management
concluded that our internal control over financial reporting was effective as of December 31, 2017 to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Management reviewed the results of its assessment with our Audit
Committee. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst
& Young LLP, an independent registered public accounting firm, as stated in its report which is included immediately following
Item 9A. Controls and Procedures, in this Annual Report on Form 10-K.
Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable
assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls
and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no
matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
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Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Wayfair Inc.
Opinion on Internal Control over Financial Reporting
We have audited Wayfair Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). In our opinion, Wayfair Inc. (the Company) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations,
comprehensive loss, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017,
and the related notes and our report dated February 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 26, 2018
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Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the code may be found at the Investor Relations section of our website, located at
investor.wayfair.com under the link for "Corporate Governance." We intend to make all required disclosures regarding any
amendments to, or waivers from, any provisions of the code at the same location of our website.
The other information required by this item is incorporated by reference from our proxy statement for our 2018 annual
meeting of stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31,
2017.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2018 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from our proxy statement for our 2018 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2017.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from our proxy statement for our 2018 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2017.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference from our proxy statement for our 2018 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2017.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements:
The financial statements are filed as part of this Annual Report on Form 10-K under "Item 8. Financial Statements and
Supplementary Data."
(2) Financial Statement Schedules:
The financial statement schedules are omitted because they are either not applicable or the information required is presented
in the financial statements and notes thereto under "Item 8. Financial Statements and Supplementary Data."
(3) Exhibits:
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K, which is incorporated
herein by reference.
83
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
WAYFAIR INC.
By:
/s/ NIRAJ SHAH
Niraj Shah
Chief Executive Officer and President
Date: February 26, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ NIRAJ SHAH
Niraj Shah
/s/ MICHAEL FLEISHER
Michael Fleisher
/s/ STEVEN CONINE
Steven Conine
Chief Executive Officer and President, Co-Founder
and Director (Principal Executive Officer)
February 26, 2018
Chief Financial Officer (Principal Financial and
Accounting Officer)
February 26, 2018
Co-Founder and Director
February 26, 2018
/s/ JULIE BRADLEY
Julie Bradley
Director
/s/ ROBERT GAMGORT
Director
Robert Gamgort
/s/ MICHAEL KUMIN
Michael Kumin
/s/ IAN LANE
Ian Lane
/s/ JAMES MILLER
James Miller
Director
Director
Director
/s/ JEFFREY NAYLOR
Director
Jeffrey Naylor
/s/ ROMERO RODRIGUES
Director
Romero Rodrigues
84
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
Table of Contents
EXHIBIT INDEX
Incorporated by Reference
Filed
Herewith
Form
8-K
File No.
001-36666
Filing Date
10/8/2014
Exhibit
Number
3.1
8-K
S-1
8-K
S-1
S-1
S-1
S-1
S-1
S-1
001-36666
333-198171
10/8/2014
9/19/2014
001-36666
9/15/2017
333-198171
333-198171
8/15/2014
8/15/2014
333-198171
333-198171
9/19/2014
9/19/2014
3.2
4.1
4.1
10.1
10.2
10.3
10.4
333-198171
9/19/2014
10.5
333-198171
9/19/2014
10.6
10-K
001-36666
3/19/2015
10.7
8-K
001-36666
1/8/2018
10.1
10-K
001-36666
2/29/2016
10.9
10-Q
001-36666
11/8/2016
10.2
10-Q
001-36666
11/8/2016
10.3
10-Q
001-36666
5/9/2017
10.2
10-Q
001-36666
11/2/2017
10.9
Exhibit
Number
Exhibit Description
3.1 Restated Certificate of Incorporation of the
Company
3.2 Amended and Restated Bylaws of the Company
4.1 Specimen stock certificate evidencing the shares of
4.2
Class A common stock of the Company
Indenture, dated as of September 15, 2017, by and
between Wayfair Inc. and U.S. Bank National
Association, as trustee
10.1+ Second Amended and Restated 2010 Incentive Plan
10.2+ Form of Deferred Unit Agreement under the
Second Amended and Restated 2010 Incentive Plan
10.3+ 2014 Incentive Award Plan
10.4+ Form of Option Agreement under the 2014
Incentive Award Plan
10.5+ Form of Restricted Stock Unit Agreement under
the 2014 Incentive Award Plan
10.6+ Form of Restricted Stock Agreement under the
10.7
2014 Incentive Award Plan
Investors' Rights Agreement, dated August 15,
2014, by and among the Company and the other
parties thereto
10.8+ Form of Indemnification and Advancement
Agreement for Directors and Executive Officers
10.9 Office Lease dated April 18, 2013 between Copley
Place Associates, LLC and the Company, as
amended by the First Amendment to Lease dated
February 11, 2014, as further amended by the
Second Amendment to Lease dated October 24,
2014, as further amended by the Third Amendment
to Lease dated October 8, 2015, and as further
amended by the Fourth Amendment to Lease dated
February 3, 2016 (as amended to date, the "Copley
Lease")
10.10 Fifth Amendment to Copley Lease, dated as of July
29, 2016, by and between Copley Place Associates,
LLC and Wayfair LLC
10.11 Elevator Side Letter to Copley Lease, dated as of
July 28, 2016, by and between Copley Place
Associates, LLC and Wayfair LLC
10.12 Sixth Amendment to Copley Lease, dated as of
February 22, 2017, by and between Copley Place
Associates, LLC and Wayfair LLC
10.13 Seventh Amendment to Copley Lease, dated as of
August 14, 2017, by and between Copley Place
Associates, LLC and Wayfair LLC
85
Table of Contents
Exhibit
Number
Exhibit Description
10.14 Eighth Amendment to Copley Lease, dated as of
November 14, 2017, by and between Copley Place
Associates, LLC and Wayfair LLC
Filed
Herewith
X
10.15+ Wayfair International Assignment Agreement dated
April 1, 2015 between the Company and John
Mulliken
10.16+ Form of Amended and Restated Letter Agreement
dated May 6, 2014 between the Company and each
of Niraj Shah and Steven Conine
10.17+ Letter Agreement dated October 2, 2013 between
the Company and Michael Fleisher, as amended
May 5, 2014
Incorporated by Reference
Form
File No.
Filing Date
Exhibit
Number
10-Q
001-36666
5/14/2015
10.1
S-1
333-198171
8/15/2014
10.11
S-1
333-198171
8/15/2014
10.12
10.18 Loan Agreement dated October 29, 2012 between
10-K
001-36666
2/29/2016
10.13
Bank of America, N.A. and the Company, as
amended by amendments dated October 29, 2013,
June 6, 2014 and July 31, 2015 (as amended to
date, the "Bank of America Loan Agreement")
10.19 Amendment No. 4 to the Bank of America Loan
Agreement, dated as of July 31, 2016, by and
between Bank of America, N.A. and Wayfair LLC
10.20 Credit Agreement dated February 22, 2017 among
Wayfair LLC, Wayfair Inc., each Lender from time
to time party thereto and Citibank, N.A. as
Administrative Agent, Swing Line Lender and L/C
Issuer
10.21 Amendment No. 1 to the Credit Agreement dated
February 22, 2017 among Wayfair LLC, Wayfair
Inc., each Lender from time to time party thereto
and Citibank, N.A. as Administrative Agent, Swing
Line Lender and L/C Issuer dated September 11,
2017
8-K
001-36666
8/4/2016
10.1
10-K
001-36666
2/28/2017
10.18
8-K
001-36666
9/12/2017
10.1
10.22 Purchase Agreement, dated September 11, 2017, by
8-K
001-36666
9/15/2017
10.1
and among Wayfair Inc. and Citigroup Global
Markets Inc. and Goldman Sachs & Co. LLC, as
representatives of the several Initial Purchasers
10.23 Letter Agreement, dated September 11, 2017,
between Citibank, N.A. and Wayfair Inc. regarding
the Base Capped Call Transaction
10.24 Letter Agreement, dated September 11, 2017,
between Goldman Sachs & Co. LLC and Wayfair
Inc. regarding the Base Capped Call Transaction
10.25 Letter Agreement, dated September 11, 2017,
between Bank of America, N.A. and Wayfair Inc.
regarding the Base Capped Call Transaction
10.26 Letter Agreement, dated September 14, 2017,
between Citibank, N.A. and Wayfair Inc. regarding
the Additional Capped Call Transaction
86
8-K
001-36666
9/15/2017
10.2
8-K
001-36666
9/15/2017
10.3
8-K
001-36666
9/15/2017
10.4
8-K
001-36666
9/15/2017
10.5
Table of Contents
Exhibit
Number
Exhibit Description
10.27 Letter Agreement, dated September 14, 2017,
between Goldman Sachs & Co. LLC and Wayfair
Inc. regarding the Additional Capped Call
Transaction
10.28 Letter Agreement, dated September 14, 2017,
between Bank of America, N.A. and Wayfair Inc.
regarding the Additional Capped Call Transaction
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1# Certification of Chief Executive Officer pursuant
to 18 U.S.C. §1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2# Certification of Chief Financial Officer pursuant to
18 U.S.C. §1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Schema Linkbase Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Labels Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase
Document
Incorporated by Reference
Filed
Herewith Form
8-K
File No.
001-36666
Filing Date
9/15/2017
Exhibit
Number
10.6
8-K
001-36666
9/15/2017
10.7
X
X
X
X
X
X
X
X
X
X
X
X
+ Indicates a management contract or compensatory plan
# This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange
Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended or the Exchange Act.
87
Stock Price Performance Graph
The graph set forth below compares cumulative total return on our Class A common stock with the cumulative total return
of the S&P Retail Select Industry Index and the NYSE Composite, resulting from an initial investment of $100 in each and,
assuming the reinvestment of any dividends, based on closing prices. Measurement points are the last trading day of each fiscal
quarter after our initial public offering on October 2, 2014 to the last trading day of our 2017 fiscal year, December 31, 2017.
Note: Stock price performance shown in the Stock Price Performance Graph for our Class A common stock is historical
and not necessarily indicative of future price performance.