Wayfair (NYSE:W) Exceeds Q2 Expectations, Stock Jumps 10.4%

Full Report / August 03, 2023

Online home goods retailer Wayfair (NYSE: W) reported results ahead of analysts' expectations in Q2 FY2023, with revenue down 3.44% year on year to $3.17 billion. Wayfair made a GAAP loss of $46 million, improving from its loss of $378 million in the same quarter last year.

Wayfair (W) Q2 FY2023 Highlights:

  • Revenue: $3.17 billion vs analyst estimates of $3.1 billion (2.38% beat)
  • EPS (non-GAAP): $0.21 vs analyst estimates of -$0.72 ($0.93 beat)
  • Free Cash Flow of $128 million is up from -$234 million in the previous quarter
  • Gross Margin (GAAP): 31.1%, up from 27.3% in the same quarter last year
  • Trailing 12 Months Active Customers: 21.8 million, down 1.8 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 unimpressive, averaging 5.58% annually. This quarter, Wayfair beat analysts' estimates but reported a year on year revenue decline of 3.44%.

Wayfair Total Revenue

Ahead of the earnings results, analysts covering the company were projecting sales to grow 2.59% over the next 12 months.

Usage Growth

As an online retailer, Wayfair generates revenue growth by expanding its number of buyers and the average order size in dollars.

Wayfair has been struggling to grow its active buyers, a key performance metric for the company. Over the last two years, its buyers have declined 15.3% annually to 21.8 million. This is one of the lowest rates of growth in the consumer internet sector.

Wayfair Trailing 12 Months Active Customers

In Q2, Wayfair's active buyers decreased by 1.8 million, a 7.63% drop since last year.

Revenue Per Buyer

Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Wayfair because it measures how much customers spend per order.Wayfair ARPB

Wayfair's ARPB growth has been decent over the last two years, averaging 6.81%. Although its active buyers have shrunk during this time, the company's ability to increase prices demonstrates its platform's value for existing buyers. This quarter, ARPB grew 4.53% year on year to $145.46 per buyer.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Wayfair's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 31.1% this quarter, up 3.8 percentage points year on year.

For online retail (separate from online marketplaces) businesses like Wayfair, these aforementioned costs typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure expenses. After paying for these expenses, Wayfair had $0.31 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Wayfair Gross Margin (GAAP)

Wayfair's gross margins have been trending up over the last 12 months, averaging 29.6%. This is a welcome development, as Wayfair's margins are below the industry average, and rising margins could suggest improved demand and pricing power.

User Acquisition Efficiency

Consumer internet businesses like Wayfair grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It's expensive for Wayfair to acquire new users as the company has spent 54.5% of its gross profit on sales and marketing expenses over the last year. This relative inefficiency indicates that Wayfair's product offering can be easily replicated and that it must continue investing to maintain its growth trajectory.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Wayfair reported EBITDA of $128 million this quarter, resulting in a 4.04% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -0.78%.

Wayfair Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Wayfair's free cash flow came in at $128 million in Q2, turning positive year on year.

Wayfair Free Cash Flow

Wayfair has burned through $663 million of cash over the last 12 months, resulting in a negative 5.99% free cash flow margin. This below-average FCF margin stems from Wayfair's continuous need to reinvest in its business to penetrate the market.

Key Takeaways from Wayfair's Q2 Results

With a market capitalization of $8.18 billion, Wayfair is among smaller companies, but its more than $1.25 billion in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

It was good to see Wayfair beat analysts' revenue expectations this quarter, driven by a nice beat on orders and a slight beat on active customers. It was even better to see Wayfair smash adjusted EBITDA and free cash flow expectations, showing that its focus on profitability is paying off. The CEO stated "For the past few quarters, you've seen us execute against that plan - to lower our costs, focus on the basics and earn more customer and supplier loyalty...I'm pleased to share today that we've passed one
of our key milestones and we are reporting positive adjusted EBITDA and positive free cash flow". On the other hand, despite beating estimates, the decline in its user base was not a great sign. Overall, the results were strong. The stock is up 10.4% after reporting and currently trades at $80.5 per share. Guidance will be given on the call, which could further impact the stock reaction.

Is Now The Time?

Wayfair may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We cheer for everyone who's making the lives of others easier through technology but in the case of Wayfair, we'll be cheering from the sidelines. Its revenue growth has been uninspiring, and analysts expect growth rates to deteriorate from there. And while its ARPU is growing, the downside is that its growth in active buyers has been lackluster and its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses.

At the moment Wayfair trades at 39.2x next 12 months EV/EBITDA. 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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