Check out the latest Wayfair earnings call transcript.
The word "volatile" just doesn't seem to capture the year Wayfair (NYSE:W) investors just witnessed. The e-commerce upstart's stock ranged from a double-digit loss to a near 90% gain before collapsing down to modestly outperform the broader market with a 12% increase in 2018.
Wayfair's actual business value didn't change nearly as much, of course. But the swinging stock price shows just how divided investors are about its long-term earnings prospects.
While shares are likely to move wildly again in 2019 as those expectations shift, there are a few things we can be reasonably certain about for the home furnishings giant's business.
Entering new categories
It's a safe bet that Wayfair will continue winning market share, both in its core industry and also in new geographies and product niches. The retailer logged market-thumping growth in each of the last three quarterly reports despite stepped up competition from the likes of Overstock. Sales gains in the most recent quarter passed 40% and were supported by a range of healthy engagement metrics, including rising repeat customer order volume and increased spending per order.
Some of the best news came at the close of 2018, though, when Wayfair announced that sales jumped nearly 60% during the key holiday shopping period. Those market-share wins came through sales of staple products like sofas and mattresses. But Wayfair also sold tons of vanities, a niche it just recently entered. Investors can expect to see many similar moves in the year ahead as the company aims to capitalize on its big customer base and its proprietary shipping network by extending into related home furnishing and home-improvement categories.
Spending more than it earns
There no reason to think Wayfair will post a profit this year. It's not just that the company has spent more than it earned in each of the last five fiscal years; it's also that Wayfair's expense commitments are rising.
That's not necessarily a bad thing. CEO Niraj Shah and his team believe they can achieve significant scale both in the U.S. and by extending into new global markets. Recent sales results support that optimistic reading. However, the e-tailer will be spending aggressively to secure its leading position. Selling expenses passed 12% of sales last quarter, in fact, or about double management's long-term target. Management predicted no end to that spike in the coming quarters, either.
The critical test
Investors won't have to wait long to find out whether Wayfair entered the year with healthy operating momentum. Its fiscal fourth-quarter report will post in late February and will include updates on key metrics like order volume and customer traffic.
However, the more important number to watch, in my view, is gross profitability. Executives warned in early November that margins could drop in the fourth quarter if the competition gets more aggressive in its price cutting over the holidays. A loss of market stature might show up in these falling gross margins, or in elevated advertising costs as Wayfair is forced to spend more cash to capture sales growth. Given its impressive recent results, though, it's at least as likely that the chain outperforms rivals while protecting its pricing. That success would, ironically, have a negative impact on Wayfair's short-term earnings outlook because it would convince management to extend -- or even accelerate -- their costly but promising growth initiatives.