Wayfair (NYSE:W) shareholders have been treated to a few blockbuster earnings reports this year. Despite increasingly aggressive moves by its rivals, the e-commerce specialist's rate of expansion has accelerated throughout 2018, and revenue increased by a market-thumping 49% in the most recent quarter.
The market has responded to the good news by pushing Wayfair's stock price upward by more than 40% so far this year, a situation that raises the stakes for its third-quarter report, which is due out on Thursday. Let's consider the metrics that will allow investors to best gauge whether the home furnishings e-tailer is holding its momentum as it heads into the key holiday shopping season.
Market share is a focus
Wayfair is currently prioritizing growth as it seeks to quickly build scale in the fragmented home furnishings industry. It has plenty of competition in that niche, from major national retailers like Walmart to e-commerce specialists like Overstock.
So far, Wayfair's results suggest it's having no trouble amassing market share at a faster rate than its peers. Sales jumped by 49% last quarter, an acceleration from the 47% year-over-year growth booked in Q1 2018. During 2017's holiday quarter, sales rose by 48%.
Management has predicted sales gains of between 34% and 36% for the current quarter in the company's core U.S. market. International growth should push the overall figure to at least 39%, according to most investor expectations. Shareholders will also get a fresh look at customer loyalty and engagement as measured by Wayfair's repeat order volume and its average order value. Ideally, the company will deliver improvements in both metrics.
Watch advertising costs
Investors will be looking for evidence that Wayfair has a path to profitable growth. After all, it's easy to sell lots of home furnishing products for a short time, if you're willing to take a loss on each order.
There are two key metrics investors can consult to judge the strength of Wayfair's sales model. The first is gross profit margin, which should hold steady at around 24% of sales in the third quarter or increase slightly toward management's long-term target of between 25% and 27%. But keep an eye on advertising spending, too, since an uptick there may suggest weakening market position. Wayfair logged an encouraging decline in that metric last quarter: It fell to 10.7% of sales from 11.5% in the prior quarter, despite aggressive competition. Another step down would be welcome news.
A continued high spending rate
Wayfair isn't profitable, and in fact, the company's net losses are growing just now as it adds employees and builds out a more robust delivery network in the U.S. The company's capital needs have also been lifted by an international expansion that generated over $40 million of losses in each of the last two quarters.
Executives have signaled that this international red ink will climb to between $45 million and $50 million in the third quarter, while forecasting that the U.S. business will operate at just below break-even. CEO Niraj Shah and his team believe these losses are a small price to pay for a prime market position in the home furnishings industry that Wayfair can use to expand into new categories, as it has done recently with bulky products like hot tubs and gazebos, and in the home improvement niche with items such as bathroom vanities.