Image source: Wayfair.

What happened

Shares of online furniture retailer Wayfair (NYSE:W) slumped on Tuesday despite a positive third-quarter report. The company beat analyst estimates for both revenue and earnings, but rapidly rising costs may have outweighed that news. At 11:45 a.m. EST, the stock was down about 11.5%.

So what

Wayfair reported third-quarter revenue of $861.5 million, up 45% year over year and $12 million higher than the average analyst estimate. Active direct retail customers totaled 7.4 million during the quarter, up 60.4% year over year. Average order value was $244, up from $235 during the same period last year.

Non-GAAP EPS came in at a loss of $0.54, down from a loss of $0.13 in the prior-year period but $0.05 higher than analysts were expecting. All of Wayfair's profitability numbers moved in the wrong direction. GAAP EPS was a loss of $0.72, down from a loss of $0.18. Free cash flow was a loss of $13.97 million, down from a gain of $35.3 million. And adjusted EBITDA was a loss of $30.85 million, down from a loss of $1.45 million.

"We are very pleased to report yet another strong quarter of rapid growth as we continue to gain significant market share," said Wayfair CEO Niraj Shah. "Overall, our business grew Q3 net revenue by 45 percent year over year and our Direct Retail business was up 53 percent year over year. With a core focus on enhancing the retail experience for our customers through technology, innovation, and inspiring merchandising, we are rapidly redefining the way people shop for their homes."

Now what

Despite beating analyst estimates and posting strong revenue growth, the dramatic deterioration in earnings, free cash flow, and EBITDA may be the driving force behind the slumping stock price. GAAP operating expenses soared 64.5% year over year, growing far faster than revenue. Gross margin also declined slightly, dropping about 40 basis points year over year to 23.4%.

Wayfair continues to put up impressive growth numbers, but the company is moving in the wrong direction when it comes to profitability. With the stock down on Tuesday, investors may be questioning whether Wayfair will ever manage to turn a profit.

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