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Wayfair (NYSE:W) Exceeds Q3 Expectations But Usage Drops


Full Report / November 03, 2022
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Online home goods retailer Wayfair (NYSE: W) announced better-than-expected results in the Q3 FY2022 quarter, with revenue down 9% year on year to $2.84 billion. Wayfair made a GAAP loss of $283 million, down on its loss of $78 million, in the same quarter last year.

Wayfair (W) Q3 FY2022 Highlights:

  • Revenue: $2.84 billion vs analyst estimates of $2.8 billion (1.07% beat)
  • EPS (non-GAAP): -$2.11 vs analyst estimates of -$2.17
  • Free cash flow was negative $538 million, compared to negative free cash flow of $244 million in previous quarter
  • Gross Margin (GAAP): 29%, up from 28.2% same quarter last year
  • Trailing 12 Months Active Customers: 22.6 million, down 6.6 million year on year

Launched in 2002 by founder Niraj Shah, Wayfair (NYSE: W) is a leading online retailer for mass market home goods in the US, UK, Canada, and Germany.

Wayfair operates an ecommerce platform that operates through 5 brands: its flagship Wayfair.com, Joss & Main, Birch Lane, AllModern, and Perigold, who collectively offer over 20 million products from over 16K suppliers in the largely unbranded furniture manufacturing industry. The company offers the widest array of home furnishing options online, and because of the unbranded nature, is often relatively low priced, due to its lack of brick and mortar infrastructure, allowing consumers to personalize home stylings that mimic designer fashions at a fraction of the price.

Wayfair’s business model differentiation is threefold: a combination of scale-driven online marketing investments and expertise in converting customers, along with holding minimal inventory, instead orchestrating a logistics network where the majority of its products are shipped directly to customers from its suppliers, while also offering an Amazon-like ability for its suppliers to house inventory in Wayfair warehouses to speed delivery (for a fee).

Consumers ever rising demand for convenience, selection, and speed are secular engines underpinning ecommerce adoption. For years prior to Covid, ecommerce penetration as a percentage of overall retail would grow 1-2% annually, but in 2020 adoption accelerated by 5%, reaching 25%, as increased emphasis on convenience drove consumers to structurally buy more online. The surge in buying caused many online retailers to rapidly grow their logistics infrastructures, preparing them for further growth in the years ahead as consumer shopping habits continue to shift online.

Wayfair (NYSE: W) competes with Amazon (NASDAQ:AMZN), Overstock (NASDAQ: OSTK), Bed Bath and Beyond (NYSE:BBBY), RH (NYSE:RH), Williams Sonoma (NYSE:WSM), Target (NYSE:TGT), Macy’s (NYSE:M), and privately held Ikea.

Sales Growth

Wayfair's revenue growth over the last three years has been mediocre, averaging 17.6% annually. Unfortunately, the pandemic had a negative impact on Wayfair's revenue growth.

Wayfair Total Revenue

This quarter, Wayfair reported a rather lacklustre 9% year on year revenue decline, in line with analyst estimates.

Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline 0.12% over the next twelve months.

Usage Growth

As an online retailer, Wayfair generates revenue growth by growing both the number of buyers, and the average order size.

Over the last two years the number of Wayfair's active buyers, a key usage metric for the company, grew 6.16% annually to 22.6 million users. This is an ok growth for a consumer internet company.

Wayfair Trailing 12 Months Active Customers

Unfortunately, in Q3 the number of active buyers decreased by 6.6 million, a 22.6% drop year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Wayfair it measures how much customers spend per order.Wayfair ARPU

Wayfair’s ARPU has declined over the last two years, averaging 1.53% annually. While the number of users has been still growing, it is not great to see the company losing pricing power. This quarter, ARPU grew 17.5% year on year, reaching $125.66 for each of the active buyers.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Wayfair grow by a combination of product virality, paid advertisement or incentives.

It is expensive for Wayfair to acquire new users, with the company spending 55% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Wayfair is not highly differentiated and points to Wayfair likely having to continue to invest to maintain growth.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Wayfair's EBITDA was negative $124 million this quarter, which translates to a -4.37% margin. Over the last twelve months Wayfair has shown a rather mediocre profitability for a consumer internet business with LTM EBITDA margins of -2.89%.

Wayfair Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Wayfair burned through $538 million in Q3, increasing the cash burn by 164% year on year.

Wayfair Free Cash Flow

Wayfair has burned through $1.09 billion in cash over the last twelve months, an uninspiring -8.88% free cash flow margin. This low FCF margin is a result of Wayfair's capital intensive business model.

Key Takeaways from Wayfair's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Wayfair’s balance sheet, but we note that with a market capitalization of $3.78 billion and more than $1.28 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

Wayfair topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, there was a decline in number of users and the revenue growth was quite weak. Overall, it seems to us that this was a complicated quarter for Wayfair. The company is flat on the results and currently trades at $35.92 per share.

Is Now The Time?

When considering Wayfair, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Wayfair we will be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. And on top of that, unfortunately its ARPU has been declining, and its sales and marketing efficiency is sub-average.

Wayfair's price/gross profit ratio based on the next twelve months is 1.1x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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