E-Commerce Margin Erosion

My hypothesis is that the home goods expansion is the primary driver - impacting both gross margin and fulfillment costs.

The waterfall confirms my hypothesis. Product mix and fulfillment are the two biggest drivers of margin decline - both point to home goods as the culprit.

I'd like to see the gross margin and fulfillment costs broken down by category to quantify the impact.

The diagnosis is that home goods is hurting margin through a three-part mechanism: structurally lower gross margin, structurally higher shipping cost, and a much worse return profile. This is not just one bad quarter.

Sizing the gap: home goods is 25% of $2B, so roughly $500M of revenue. A 23-point gross margin gap versus apparel implies about $115M of gross profit dilution before we even account for the heavier shipping and return burden. So the category is large enough to matter, and the economics are directionally wrong across the full value chain.

I'd recommend a staged decision, not an immediate exit.

First 90 days: raise free-shipping thresholds for bulky home-goods SKUs, cut the worst-returning tail of the assortment, and renegotiate packaging or carrier rules on oversized shipments. In parallel, track contribution margin after fulfillment and returns, not just gross margin.

Decision test: if the bottom-quartile SKUs are removed and the category still cannot get to an acceptable post-fulfillment contribution margin, then it likely does not belong in the portfolio. If economics improve materially after pruning, we keep a narrower home-goods offer rather than treating the whole category as a write-off.

I'd run a cohort analysis separating basket size from retention. The question is not whether home-goods buyers spend more once; it's whether they stay longer, buy apparel more often, or become cheaper to reacquire.

So I'd compare apparel-only cohorts versus apparel-plus-home-goods cohorts on 12-month retention, repeat purchase frequency, and blended contribution margin after returns. If home-goods buyers have bigger baskets but no retention lift, the CEO's LTV argument is overstated and we should shrink or exit. If retention and cross-category frequency are materially higher, we optimize the category instead of exiting it.