Competitors stepped up their game in recent months, but so did e-commerce specialist Wayfair (NYSE:W). The home furnishings seller recently announced first-quarter results that beat its own sales forecast and maintained the impressive growth momentum it posted over the holiday season.
CEO Niraj Shah and his executive team held a conference call with analysts to put those gains in perspective while explaining how continued losses fit into their long-term plan to achieve market dominance. Below are a few highlights from that discussion.
The growth strategy is working
We're taking a large number of steps across our business to bring customers the best possible offering in our category online and we're being rewarded with the outsized growth in market share that we're seeing in our business.
The quarter's 48% sales spike beat management's forecast of between 40% and 43% gains. It also represented no real slowdown from the seasonally strong holiday quarter period. Executives credited three major factors with helping deliver that market share growth. First, Wayfair's robust delivery network is improving the customer experience by reducing shipping time and making bulky furnishings easier to purchase online. Second, the international business nearly doubled, thanks mainly to strength in Canada, the U.K., and Germany. And third, Wayfair is making progress at expanding into new categories. Its bathroom vanity niche, for example, has doubled over the last year.
Staying ahead of the competition
Our gross profit for the quarter was $324 million, or 23.1% of net revenue, consistent with our near-term expectation for gross margins in the 23% to 24% range.
-- CFO Michael Fleisher
Gross profit margin was near the low end of management's forecast, which counts as a win considering the robust competition it faced in the period. Rival Overstock (NASDAQ:OSTK) reduced its prices while threatening to end Wayfair's positive momentum. Instead, Wayfair grew U.S. sales by 42%, compared to Overstock's 3% uptick. It achieved this outperformance despite the fact that Overstock doubled its marketing and advertising spending in a bid to capture more customers. Notably, Wayfair's own advertising spending held steady at about 11% of sales.
We added 1,002 net new employees for a total of 8,753 employees as of March 31, 2018. We're excited to be adding great people to teams across our business as we continue to improve our customer offering in the U.S. and internationally and win outsized market share.
Net losses ballooned in the period as operating expenses jumped to 12% of sales from 10% in the prior quarter. That shift was the main reason why overall adjusted losses worsened to 4% of sales this quarter from 1% in fiscal 2017.
Executives believe these investments, which are mainly composed of adding employees in areas like marketing, merchandising, and technology, will easily pay off over the long term. "We are very bullish on the opportunities we are seeing to hire talented people in the key [growth] areas" of logistics, international markets, and new product categories, Fleisher explained.
A conservative outlook
We forecast ... a growth rate of approximately 40% to 43% year-over-year [for the second quarter]. Within that, we expect U.S. growth in the range of 35% to 37% and international growth in the range of 80% to 90%.
Wayfair chose to take a conservative approach to forecasting for the current quarter. The period includes its highly successful "Way Day" promotion that has already passed and produced the company's biggest single sales day yet. But since this is management's first experience with the promotional event, they don't have much confidence on projecting how it might dampen demand later in the quarter.
Thus, the team believes revenue gains will slow slightly in both the U.S. and international markets. Consistent with prior quarters, Wayfair is predicting the U.S. segment will end up just below breakeven while the international division generates more significant losses as the company builds scale in those attractive new markets like Canada and Germany.