How Phenomenal Growth Is Compensating for Wayfair's Slim Margins

In this segment from Industry Focus: Consumer Goods, the cast kicks off their discussion of fast-growing home furnishings retailer Wayfair (W -8.36%) with a discussion of two eye-catching trends from the company's most recent quarterly report: slim profits and aggressive growth.

A full transcript follows the video.

This video was recorded on Aug. 7, 2018.

Vincent Shen: Something that comes up a lot in our discussions of various stocks and companies, especially in the consumer retail sector is, "How can companies effectively compete against Amazon (AMZN -1.64%)?" Does this sound familiar?

Asit Sharma: I actually don't think I've ever heard that question posed in this context, Vince. Yeah, man, all the time, which is why I'm so excited to talk about this company that you have for us today.

Shen: Exactly. This discussion tends to lead to debates over what companies could be considered Amazon-proof. This even includes some of my friends and family who aren't that interested in investing. They'll still ask me about this.

Some examples that we've brought up on the show before and described this way before are: Home Depot, Costco, Tractor Supply Company, Dollar General. For one reason or another, these companies have managed to hold their own, if not thrived, even as Amazon disrupts a lot of other parts of the industry.

Today, we have another candidate for this Amazon-proof club. It's a unique one because it's also focused in e-commerce as an online retailer. It's competing right in Amazon's wheelhouse. The company is Wayfair, ticker W. Many of you have likely made purchases with Wayfair, if not browsed the site or even become a shareholder since the company became a Rule Breaker recommendation in August 2015. What sets Wayfair apart in its e-commerce efforts is its primary product category, and that's furniture and home goods, which has its own set of challenges, in terms of the customer shopping experience, order fulfillment, and more.

The company was founded in 2002 by CEO and co-chairman Niraj Shah and co-chairman Steve Conine. The company was originally founded under the name CSN Stores. Over a decade, CSN Stores became this umbrella of over 200 online stores that specialized in selling specific home goods and household items. Think strollers.com, hotplates.com, cookware.com, all these different sites, a big portfolio of them. The founders eventually decided to consolidate all of these sites into Wayfair for a single, unifying brand. Today, wayfair.com is the biggest part of the business, but it also operates four other sites -- Joss & Main, AllModern, Birch Lane, and Perigold -- to further target specific customers and categories.

At its heart, and a theme that will stretch throughout the show, that makes Wayfair stand out is the approach that it takes to the what, who, and how of its retail model. We'll get to more of that further in the discussion. A question I'd like to start out with for you, Asit, big things that jump out to you for this company? What are some of the highlights?

Sharma: This company is in such an interesting area of e-commerce. The smaller-ticket items were the ones that grew in prominence first, if you look at the evolution of the internet commerce -- consumer electronics, small appliances, etc. One of the hardest nuts to crack is this market for bigger-ticket items -- sofas, dining tables, etc. As you mentioned in your intro, the logistics are very hard to master. You have to move inventory to warehouses, which is known as no mile. For middle mile, you get to the region where the customer lives. Then, you have last mile delivery, and that's yet another difficult part of completing the procedure from the shipper's perspective. The margins don't tend to be very strong.

Amazon has participated in this market for several years now, but it's been dominated up until the 2010s on by companies that listeners are so familiar with, like the Crate & Barrels and Williams-Sonoma's of the world. This online market, which the companies I just mentioned haven't participated in as much, is wide open.

What jumps out at me is, Wayfair, which has been competing in this space for quite a while -- it had its IPO in 2014. 2002 to 2014, that's a really long lifetime in online commerce. They're still growing at a really fast rate. This most recent quarter, which the company just reported on, the company had $1.6 billion in sales. That increased almost 49% year over year. Extremely impressed by that, it certainly piques my interest, given that Amazon last year said it wanted a bigger chunk of this market.

And, I'm interested in the fact that the company has extremely low gross margin, around 23%A to 24%. It's able to operate on a slightly positive basis when you look at adjusted EBITDA -- earnings before interest, taxes, depreciation and amortization. Long-term, the management team has set its gross profit target for right where it is, around 25%. They say that's optimal for the company to flourish.

These things jump out at me. How did a small company manage to grow so quickly, maintain a very consistent form of fast growth and stable margins? I think some of the answer is in the way that it approaches the customer experience on its website.