No-Moat Wayfair's Cost-Cutting Initiatives Pave the Road to Improving Profitability 

Senior Equity Analyst

Jaime M. Katz

Active Customers

Revenue is the money generated from normal business operations. Gross Profit is revenue minus cost of goods sold. Operating Income is revenue minus cost of goods sold and other operating expenses.

Revenue

Gross Profit

Operating Income

Revenue & Operating Income

Net Income, also called net earnings, is calculated as revenue minus cost of goods sold, operating expenses, depreciation, interest, taxes, and other expenses.

Net Income

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Gross Margin

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Customer service and merchant fees

Advertising

Selling, operations, technology, general and administrative

Customer service center impairment and other charges

Restructuring charges

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

Wayfair should be able to support market share growth in the fragmented home goods market when housing spend normalizes, increasing its relevance in the more than $800 billion global opportunity between North America and Europe. Wayfair’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than many of its peers. Faster delivery is a function of fewer touch points, reducing damage and improving Wayfair’s brand equity with each positive delivery experience. However, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base with a customer age 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair's inventory-light model benefits inventory turns, a strategy that has freed up capital to spend on customer acquisition and retention, leading to 21.7 million active users as of March 2023 who spend more than $550 per year (versus 1.3 million users who spent $300 in 2012). This implies its product mix and marketing resonate with end users. The pandemic pulled forward the capture of positive free cash flow to the firm to 2020-21, and scale should allow Wayfair to return to positive metrics again within the next five years, as management actively right sizes the business for evolving consumer demand.

Given Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains, we expect ROICs to be volatile. We think Wayfair can hit some of its long-term goals, but the timeline to achievement is trickier. While it should exceed its prior 25%-27% gross margin target longer term (we forecast reaching 30% due to higher private-label mix), we don't see operating expenses in management's targeted range of 15%-19% of sales until 2032. We plan to watch customer acquisition cost trends to determine whether Wayfair could develop a network effect.

Business Strategy & Outlook

We do not believe that Wayfair has established an economic moat, given the limited pricing power of the brand, nonexistent consumer switching costs, and lack of cost advantages. The company competes in a largely commoditized retail category with ample domestic brick-and-mortar and online rivals, and we believe the lack of a moat and the lack of progress toward a moat are conveyed through customer acquisition costs that remained inflated prior to COVID-19 (with costs beginning to flatten in the first quarter of 2023, after rising in 2022). Direct retail advertising spending had also grown in line with sales in the two years prior to the pandemic (with advertising requirement lower in 2020 due to work-from-home demands), an expense that should remain robust. Customer acquisition costs rose to around $90 in 2019 (prior to the COVID-19-related uptick in demand, and versus $66 in 2016), while direct retail advertising spending growth had also increased to support sales increases. Although these costs fell dramatically during the pandemic given the customer's high focus on the home environment as a result of stay-at-home orders, customer acquisition costs have jumped above $100 over the past eight quarters, by our math.

Wayfair continues to outspend versus its peers as a percentage of sales on advertising, confirming that it has to outpace its peers in order to steal share. Over the last five years, Wayfair has spent an average of 11% of sales on advertising, while Williams-Sonoma has averaged 7%, RH 5%, and Bed Bath & Beyond 3% (in their most recently reported fiscal years). We expect this ratio will be 12.3% in 2023, indicating Wayfair will continue to outspend its peer group. The firm consistently spends on perpetual improvement in technology, which elevates selling, operations, general, administrative and technology expenses, but the $1.4 billion costs savings plan underway should allow for modest deleverage over time (as more than half flows through the line item). 

The target market for Wayfair is wide. The company pursues 20- to 64-year-old consumers with annual household incomes of $25,000-$250,000. With the sizable millennial cohort encompassed in the company’s targeted age range, we believe demographic tailwinds exist that will drive further top-line gains. In our opinion, the Wayfair brand is likely to gain some traction, competing for mass-market consumers against companies like Target, Walmart, Bed Bath & Beyond, and others, as we think the Wayfair brand is better perceived than some of its big-box retail counterparts for furniture products. We think taking share in the high-end market with consumers who earn more than $250,000 annually with brands AllModern, Perigold, Birch Lane, and Joss & Main could be a bit more difficult as the willingness to spend on big-ticket products sight unseen could be a bit lower. Wayfair has more recently been targeting growth in the B2B marketplace, which represents a $200 billion total addressable market across the U.S. and Europe.

The company’s spending on building awareness has helped increase sales penetration, expanding the total number of consumers who have purchased from Wayfair. The number of active customers in the direct retail business had risen to 22 million in 2022 from 1.3 million in 2012, printing more than 35% average annual growth through year-end. Last 12-month revenue per active customer also ticked up to more than $550 in December 2022 from $300 in 2012, posting 6% average growth over the last 10 fiscal years. Outlays from Wayfair are helping improve the economics of the business (on a per customer basis) from prior levels, and we expect the network effect to improve as the ecosystem grows. 

As more people use the service with a positive experience, repeat customers have stayed above 75% of the mix starting in mid-2021 from 37% in 2012. Admittedly, this percentage of repeat users could be larger due to the consumer base shrinking in recent periods, implying new customers have been harder to come by. We believe the stickiness of these consumers is helped by the company’s access to more than 20,000 suppliers and 40 million products, offering the endless aisle to consumers who might be looking for something specific.

While the brand intangible asset would traditionally be the obvious place the company could garner a moat longer term, we believe the supply chain and underlying cost structure are differentiating factors for this company. Wayfair is focused on an inventory-light model, neither designing nor carrying the inventory that it sells (including private-label brands where Wayfair puts supplier products into one of its more than 100 in-house brands, and which reached more than 72% of U.S. revenue in 2021, the last period reported). For example, Wayfair sold $12 billion in merchandise and carried $90 million in inventory on its balance sheet at year-end (2022). Products are shipped to customers directly from suppliers or through the CastleGate fulfillment network. This has led to inventory turns that have handily lapped peer set inventory turns (Bed Bath, Williams-Sonoma, RH, Pier 1, Ethan Allen), which averaged a low-single-digit rate in their most recent fiscal years. For Wayfair, inventory turns escalated from around 60 times in 2013 to around 100 times in 2022.

The robust distribution network Wayfair has built out, with more than 90% of large parcel shipments routed through the Wayfair middle mile and more than 40 Wayfair-controlled last-mile facilities operating, covers about 75% of Wayfair's U.S. and nearly half of Canadian large parcel home deliveries. While the last mile tends to be the most expensive, the Wayfair process reduces the number of touches between order and delivery, decreasing delivery time and reducing damage risk offsetting other potential expenses. Although Wayfair may be a bit faster on deliveries at the current time, we expect this is an effort all competitors are focused on, going head to head with Amazon for speed to end user, and we don’t think Wayfair will be differentiated by the shortened delivery times it can currently offer over the long term. 

While our model shows adjusted returns on invested capital that are widely volatile relative to our 9.4% cost of capital assumption, we believe this is a function of the asset-light model and the working capital structure. We expect this metric will normalize as the company’s penetration reaches critical mass and top-line growth begins to slow from a startup cadence, while the increasing magnitude of negative working capital skews the metric, making it less relevant than for other home furnishing retailers.

We don’t think the company has enough of a competitive advantage in its brand intangible asset, cost structure, or network to warrant a narrow or wide moat. With few barriers to entry, we believe online retailing is a relatively unprotected operating space. As industry behemoths like Amazon continue to invest in strategic categories, including furniture and home furnishings, pricing is likely to remain promotional--and while this might not be by way of sale or clearance merchandise, it may be by sweeteners to facilitate the transaction (for example, a certain dollar amount off the next purchase). We don’t believe that customer loyalty is ultimately aided by a no-fee credit card or loyalty but that awareness is increased and there is a natural introduction to consumers who may not be prior Wayfair customers, an activity that nearly all competitors are undertaking as well. 

We do think Wayfair has a unique business model that allows vendors to deliver inventory faster to consumers with the CastleGate network, but again, we think competing against Amazon as well as other peers that are attempting to speed up delivery times (Williams-Sonoma, RH) puts this competitive edge at risk. There is a brick-and-mortar expansion underway, which could increase visibility making the brand more relevant in certain circumstances. Given the competitive nature of the industry and the lack of pricing power, we don’t believe Wayfair has an economic moat.

None

Economic Moat

Wayfair

Wayfair, Inc. engages in an online home furnishing store. It operates through the U.S. and International segments. The U.S. segment 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. The International segment is composed of earnings through product sales in international sites. The company was founded by Steven K. Conine and Niraj S. Shah in May 2002 and is headquartered in Boston, MA.

Earnings data Q2 2023

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

The August CPI report was bad news for the home-furnishings retailer.

Why Wayfair Stock Was Sinking Today

BOSTON--(BUSINESS WIRE)--Perigold, the leading destination for access to the design world's best home brands, today marks its fifth anniversary. Launched in 2017, Perigold has built a first-of-its kind retail platform that provides insider access to the largest-ever collection of extraordinary home furnishings across every style and category. Today, Perigold carries more than 1,000 premium home brands spanning modern designs from Emeco and Heller, bedding from Coyuchi, fabrics and wallpaper fro

Perigold Marks Five-Year Anniversary, Expands Selection of Premium Luxury Products for the Home

In a fresh press release today, Wayfair (NYSE: W ) disclosed its intention to proceed with a new convertible note offering. Certain details about the debt issuance aren't known yet, but investors are evidently interpreting this as bearish, as they're sending W stock lower.

Wayfair (W) Stock Falls on Convertible Note Offering

Netflix

Peloton

Shopify

Zoom Video

Few companies flourished more amid the pandemic's economic upheaval than Peloton.

Layoffs. Losses. Plunging share prices.

Wayfair, the online home goods retailer, announced today it was laying off close to 900 employees as a way to reprioritize investment needs and meet the company's current needs. This comes after the company announced a hiring freeze back in May.

Wayfair to layoff 5% of its workforce, or nearly 900 employees

Source: rafapress / Shutterstock.com Online furniture and home goods retailer Wayfair (NYSE: W ) is taking a hit amid a sea of red ink for the major equity indices. Right now, W stock is hemorrhaging about 20% after management announced plans to cut hundreds of employees.

Why Is Wayfair (W) Stock Down 20% Today?

A pandemic surge in growth that unexpectedly sputtered post-COVID prompted online home goods retailer Wayfair to lay off 5% of its global staff, affecting 870 employees. Niraj Shah, CEO, co-founder and co-chairman of Wayfair, said in a memo sent to staff on Friday (Aug.

Wayfair Clips 5% of Global Workforce After Growth Sputters

"The first half of this year has admittedly been less robust than expected."

Wayfair to cut 870 jobs, 5% of workforce, as CEO cites inflation pressures

Wayfair is cutting nearly 900 jobs, or about 5% of the once-hot online retailer's global workforce, as it looks to regain its financial footing in a post-pandemic future.

Wayfair is cutting 5% of its global workforce

A lot of surprising companies are paring back their payrolls lately. Some of them should bounce back soon.

3 Layoff Stocks That You Might Not Want to Lay Off From Buying Right Now

Forbes is tracking the biggest layoffs as companies react to fears of a looming recession.

Wayfair Laying Off 870 Employees—Here Are The Major U.S. Job Cuts Amid Growing Recession Fears

Furniture giant Wayfair is slashing 870 jobs in order to become more profitable after its quarterly results released earlier this month missed expectations.

Wayfair cutting 5% of global workforce

Online furniture retailer Wayfair Inc. plans to lay off about 870 employees as it looks to cut back its expenses.

Wayfair to lay off 5% of employees, stock falls

(Reuters) -Online furniture retailer Wayfair Inc said on Friday it would cut about 870 jobs, or 5% of its global workforce, as it looks to cut back operating expenses and realign investment priorities.

Furniture retailer Wayfair to cut 870 jobs

Torrid Holdings

Nordstrom

Children's Place

Stitch Fix

Walmart

Walmart set the tone for the rest of the retail sector.

Why Retail Stocks Were Soaring Today

BOSTON--(BUSINESS WIRE)--AllModern announces a limited edition collection designed by global fashion talent Jason Wu

AllModern and Jason Wu Collaborate on Limited Edition Collection

Wayfair's (W) second-quarter results reflect weakening momentum across the United States, as well as the international region.

Wayfair (W) Q2 Loss Wider Than Expected, Revenues Fall Y/Y

E-commerce company Wayfair Inc. reported on Thursday a second-quarter sales decline of 14.9% year-on-year to $3.28 billion.

Wayfair sales dip in second quarter, loses customers

Early in the pandemic, people realized they were going to be spending a lot more time at home. So they decided to upgrade.

Is anyone buying couches and beds from Wayfair anymore?

Wayfair (W) delivered earnings and revenue surprises of -2.65% and 2.42%, respectively, for the quarter ended June 2022. Do the numbers hold clues to what lies ahead for the stock?

Wayfair (W) Reports Q2 Loss, Tops Revenue Estimates

Home goods eCommerce marketplace Wayfair lost about 25% of its customers in the past year and saw its deliveries drop almost 30% in the second quarter compared to the same time a year earlier, a reflection that people are thinking twice about home-based updates. According to a company earnings release Thursday (Aug.

Wayfair Customer Numbers, Deliveries Fall Sharply

Wayfair Inc. (NYSE:W ) Q2 2022 Earnings Conference Call August 4, 2022 8:00 AM ET Company Participants Jane Gelfand - Head of Investor Relations, Treasury & Corporate Development Niraj Shah - Co-Founder, Chief Executive Officer & Co-Chairman Michael Fleisher - Chief Financial Officer Kate Gulliver - Incoming Chief Financial Officer & Chief Administrative Officer Conference Call Participants Steve Forbes - Guggenheim Securities Peter Keith - Piper Sandler John Blackledge - Cowen Oliver Wintermantel - Evercore ISI Anna Andreeva - Needham Operator Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today.

Wayfair Inc. (W) CEO Niraj Shah on Q2 2022 Results - Earnings Call Transcript

Wayfair stock dropped Thursday morning after it reported second-quarter results that fell short of views as active customers declined. The post Wayfair Quarterly Earnings Fall Short As Active Customers Decline appeared first on Investor's Business Daily.

Wayfair Quarterly Earnings Fall Short As Active Customers Decline

The furnishing company posts a loss of $1.94 for the second quarter, wider than estimates that called for a loss of $1.90.

Wayfair Posts Another Disappointing Quarter. The Stock Slips.

The company posts a loss of $1.94 for the second quarter, wider than estimates that called for a loss of $1.90.

News for Wayfair Stock (W)