Wayfair Losses Widen as It Attempts to Capture Massive Market Share

Here's why Wall Street is ignoring the red ink.

Brian Stoffel
Brian Stoffel
Feb 22, 2019 at 3:30PM
Consumer Goods

Wayfair (NYSE:W) co-founder and CEO Niraj Shah ought to send Amazon leader Jeff Bezos a letter thanking him for convincing Wall Street that it's OK to take on massive losses if it means growing defensible long-term market share.

If ever a company followed the blueprint set out by Amazon, it would be Wayfair. That makes sense, given that both are e-commerce players with a laser-focus on logistics. The difference, of course, is that Wayfair is focused on home furnishings, while Amazon is going after...everything else.

Plant on table and lamp in warm living room with yellow curtains, posters and pillows on sofa

Image source: Getty Images.

If this week's earnings release says anything, it's that Wayfair is finding success with the aim-for-the-long-term approach.

Wayfair earnings: The raw numbers

Before we dig into the numbers, let's review the headline numbers for the company's fourth quarter.

Metric

Q4 2018

Q4 2017

Growth

Revenue

$2.01 billion

$1.44 billion

40%

EPS*

($1.12)

($0.58)

N/A

Free cash flow

($23.2 million)

$1.4 million

N/A

Data source: Wayfair. *EPS presented on non-GAAP basis.. N/A = Not applicable

Ordinarily, numbers like that would send investors running for cover. Sales increasing 40% while losses widen by almost a factor of two? But for now Wall Street is willing to accept the trade-off. The stock is up 27% at 2:45 p.m. on Friday. The real reason for the wider losses is investments the company is making in its own infrastructure. Spending on sales, operations, technology, general, and administrative expenses increased 65% to $266 million, representing by far the biggest reason for the wider loss.

The two factors dictating increased spending

But Wayfair is doing this because it sees an enormous opportunity, and evidence that its current success is defensible. Let's tackle these two one at a time.

First, when it comes to spending on home furnishings, brick-and-mortar stores are showing their age: Sales of such goods are expected to grow by 3.7% over the next decade, but third-party estimates show sales at brick-and-mortar stores are expected to drop 0.8% per year between 2023 and 2028. E-commerce channels, however, are expected to grow 15% throughout the next decade. Essentially, sales at brick-and-mortar stores will be flat over the next decade, while e-commerce sales are expected to quadruple.

And Wayfair is already having success in its first three international markets: Canada, the U.K, and Germany. "We see clear parallels in the progress of our businesses in Canada, the United Kingdom and Germany and the successful course of Wayfair.com in the U.S. at similar stages of development," said Shah. And Wayfair has reason to be excited: In 2018, Wayfair captured 35% of all e-commerce growth in home furnishings.

Of course, none of that would matter if competition could swoop in and start eating away at this advantage. But Wayfair is demonstrating a two-pronged moat in this realm: the strength of its brand and its fulfillment network.

On the brand awareness side, total active customers grew by 38% to 15.2 million. But even more important is the fact that those customers are largely sticking with Wayfair for further purchases. Total orders by repeat customers grew 51% to 5.8 million, outpacing total order growth.

What this means is that customers are exceedingly satisfied with their Wayfair experience. That's thanks in no small part to the fulfillment network Wayfair has built out. There are currently eight CastleGate warehouses in the U.S., Canada, U.K, and Germany combined, along with seven cross-dock centers and 34 last-mile home delivery locations. The bottom line is this: Few companies have the resources to compete with Wayfair's network now. The internal costs for guaranteeing such fast delivery would be prohibitively expensive for most.

Check out the latest Wayfair earnings call transcript.


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Looking ahead

There will continue to be extensive investments in warehouse space in 2019. Roughly 3 million square feet will be devoted to the domestic expansion of CastleGate, 1 million to international CastleGate warehouses, and another 1 million toward last-mile delivery. 

The company expects revenue in the first quarter to grow at a mid-point of 35.5% to $1.88 billion. Of that, sales growth in the United States is expected to come in at 34.5%, and international growth is expected to register near 37.5%. All of that being said, management also disclosed that first-quarter growth is currently trending above 40%, so the company may well surprise investors when its numbers are announced in May. International revenue is also growing at over 50% on a constant-currency basis. No matter how you cut it, customers are clearly flocking to Wayfair.