Retail

Wayfair Keeps On Growing Strong – But Will It Ever Be Profitable?

By most accounts it has been a better than good week for the team at Wayfair. The Boston-based furniture and home goods retailers saw it stock price shoot up 20 percent to an all time high as earnings reports clocked in stronger than expected.

And Wayfair’s good day was a very bad day for short sellers, who have been attaching themselves to the stock all year.  Tuesday (May 9th) was a bad day as those in short positions more or less got wrecked on the rocks of the e-tailers better than expected results. Wayfair short sellers lost roughly $160 million by midday – assuming the investors didn’t exit their positions.

“This is what happens when short sellers gang up on one stock. They get completely annihilated when they are wrong,” Active Alts’ Brad Lamensdorf, portfolio manager of the SQZZ ETF, said in a phone interview with CNBC.
And how did Wayfair catch the naysayers so flat-footed – and why are some of those naysayers still unconvinced they were wrong?
By The Numbers 

Wayfair’s biggest trick this week was blowing away analyst expectations for revenue during the Q1 2017 quarter that ended in March. Wayfair’s net revenue hit $960.8 million, up 28.6 percent and above analyst’s projections of $935 million. Net revenue from direct retail sales through Wayfair’s websites up 32.1 percent YoY to $940 million, as opposed to the 25 percent increase to $937.3 million analysts were expecting.

“A rebound in consumer spending energized Wayfair’s sales momentum,” noted Niraj Shah, Wayfair’s CEO, co-founder and co-chairman. “We continue to gain significant traction across our key strategic initiatives and steadily increase our market share in the $600 billion dollar home category across North America and Europe.”

The online home goods retailer also beat out earnings per share estimates by $0.10, posting a loss of $0.48 eps for the Q1 2017 quarter.

Wayfair also continued to show continued strong growth in its user base – the firm ended Q1 2017 with 8.9 million active customers, a 46 percent year-on-year pick-up. Orders per customer were also on the increase – and have hit 1.73.  Orders delivered were also up, growing b6 40.6 percent YoY to 4.2 million.  Repeat customers placed 60.4 percent of all orders (or 2.5 million orders) this time around compared to 55.4 percent in Q1 2016.

However, Wayfair did report that the average order size decreased overall, hitting $223 in Q1 2017, down 6.3 percent from $238 in the same period last year.

There was some negative growth to contend with however – average order value was $223, down from an average of $238 in the first quarter of 2016.

“We continue to increase sales conversion through faster delivery and greater customer satisfaction,” said Shah of the firm’s Q1 2017 results.“We feel confident that we have built a category-leading retail brand that is exceptionally well positioned for long term growth.”

Investors seem to share his confidence – Wayfair shares popped up to  $64.48 Tuesday afternoon, the highest point since the price reached $53.58 in August 2015. The stock closed at $61.73, up about 21 percent.

That Lingering Profit Problem

Even in the wake of the big earnings boost – and the subsequent “annihilation” some short seller like Andrew Left at Citron Research are continuing to short Wayfair for a simple reason – Wayfair isn’t profitable, burns a lot of cash – and doesn’t seem to have any clear path to changing that reality.

“I’m still short Wayfair … The company still loses more money. I think their cash burn was the second highest ever. They are showing no path toward profitability whatsoever,” Left said.

And Wayfair does spend a fair amount of money to make money – it costs the firm $38 to acquire a customer and they pay about 88 cents for ever visitor to their site.  Their advertising budget is just south of $500 million – and their returning customer rate of 60 percent still trails their competitor at Overstock.com 71 percent despite the fact that Overstock spends far less on marketing.

Wayfair, went public in late 2014 and has 5,700 employees. It has never turned a profit, and net losses were up – not down, in Q1 2017 – clocking in at  $56.5 million, up from $41.2 million during the same period a year ago.

There is also some speculation emerging that much of Wayfair’s recent stock strength is based on a rumor that Walmart is considering Wayfair as a takeover target. The basis for that rumor is a memo by Kelly Halsor of The Buckingham Research Group Inc., who noted Wayfair as a firm that would fit nicely inline with Walmart’s recent string of e-commerce companies due to its experienced management team,  supply chain and its fast delivery times.

Niether Walmart or Wayfair have offered any comment on the rumor.

Instead, Wayfair’s CEO continues talking up the firms readiness for long-term growth – and the unique expertise they bring to the marketplace.

“[In home decor] the visual merchandising you would need and the way a customer discovers what they want is different, and then the fulfillment and delivery is different. There’s all kinds of things that you need to handle … differently than perhaps if you’re, again, selling batteries, and books and the like,” Shah said.

 

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