What to Watch When Wayfair Posts Earnings Next Week

These are the trends that could make or break the e-commerce specialist's first-quarter results.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Apr 27, 2018 at 2:00PM
Technology and Telecom

E-commerce specialist Wayfair (NYSE:W) has soaked up market share in the home furnishings industry over the past few years with help from an aggressive growth strategy that prioritizes sales gains over profits. This approach delivered booming order volumes in the key holiday shopping quarter that left rivals like Overstock (NASDAQ:OSTK) far behind.

But competitors are doing everything they can to claw back the market share they've been losing. That battle raises the stakes for Wayfair to show continued progress in its upcoming earnings report.

Let's take a closer look at what investors can expect from the company in its announcement on Wednesday, May 2.

A man types his credit card information into a laptop.

Image source: Getty Images.

Market share battles

Last quarter's 48% sales spike was driven by the combination of two healthy growth trends. Wayfair's active customer base grew 33% to reach 11 million, while average order value improved to $229 from $203 a year ago. Overstock, in contrast, suffered a 13% revenue decline for the quarter. Wayfair even beat Amazon in raw growth, given that the e-tailing titan lifted its product sales by 35% over the holiday period.

Wayfair's forecast predicts a slight slowdown in the first quarter, with direct revenue rising by between 40% and 43% to about $400 million. Executives said in late February that sales gains had surpassed that rate at the start the quarter, but they believed demand trends would moderate in the coming weeks.

In addition to the growth figures, investors should keep an eye on engagement metrics such as repeat order volume. Continued gains here would show that Wayfair is succeeding at building a more loyal user base, which is a key pillar of its long-term expansion strategy.

Profitability struggles

Thanks to elevated spending in areas like advertising and tech development, Wayfair hasn't yet earned a profit from its furnishings sales. Adjusted earnings amounted to negative 1.5% of sales in each of the past two years, which is far from management's long-term profitability goal of between 8% and 10% of sales.

A furnished living room.

Image source: Getty Images.

That target could be getting harder to reach.

Overstock announced in late March that it was determined to win back lost market share by slashing prices if necessary. "We have already turned on the jets," CEO Patrick Byrne told investors at the time. The strategic shift will hurt its profit margins, Byrne warned, but Overstock believes the growth impact will "demonstrate this year that our growth engine is far more efficient."

Wayfair predicted a slightly negative profit outing for its U.S. segment in the first quarter of roughly 1%. It will be interesting to see whether aggressive pricing moves by the competition send that rate any lower.

Growth initiatives

Wayfair has two massive expansion projects in the works that the company hopes will build a foundation for years of strong growth ahead. In the U.S. segment, executives are rolling out a proprietary shipping network that's lowering the cost of delivering bulky furnishing items while reducing delivery times. The retailer is expanding deeper into new markets, too, with gains in Canada and Germany helping the international business more than double in the past year to $568 million of annual sales.

Each of these projects requires resources and significant attention from management, and so investors should look for evidence that they are paying off by producing more actively engaged shoppers and restrained shipping costs. Gains here give Wayfair its best chance at holding onto its newly acquired customers even as rivals turn more aggressive in their own market share targets.