Investors came into Wayfair's (NYSE:W) holiday-quarter earnings report with high expectations, but even that optimism was overshadowed by the e-commerce specialist's actual results. While closing out its fifth consecutive year of significant net losses, the retailing chain revealed several operating metrics that point to a long runway for growth ahead in the business.
Let's take a look at why investors are sending Wayfair's stock higher despite its worsening earnings trends.
Management issued a cautiously optimistic outlook on the fourth-quarter back in early November, saying sales growth should slow to about 37% from 43% in the prior period. Among the challenges the company would face was a prior-year quarter that saw sales soar almost 50%, surging competition in the online and physical channels, and the potential for aggressive price-cutting by its peers.
None of those factors stalled the home furnishings specialist's business momentum. Instead, sales gains landed at 41% for the quarter and 45% for full-year 2018. Wayfair's engagement metrics nearly all pointed in the right direction, too. Its base of active customers improved to 15 million from 11 million a year ago, repeat business expanded to 66% of the sales base from 62%, and order volume shot up by 51.1% year over year. Average order value ticked lower by $2, but still remained strong at $227.
Meanwhile, the potential profitability pinch that management hinted at in early November didn't materialize. Gross profit margin was 24% of sales in Q4, higher than the 23% executives had signaled. That success implies the company felt only modest pricing pressures from peers in the intensely competitive holiday shopping season.
That optimistic reading is bolstered by the fact that advertising spending amounted to 11.5% of sales to mark a slight decrease from last quarter's 11.9%. In other words, Wayfair had to shell out a bit less money to attract significantly more order volume -- all while rivals did their best to end its market share momentum.
While gross profit margin and advertising costs improved, Wayfair saw its selling expenses land at an elevated 12% of sales, or about even with the prior quarter. This line item includes investments in hiring across its customer service, fulfillment, and software engineering focuses. The spending rate is rising thanks to management's aggressive moves to expand control over the customer shopping experience in the U.S. market while setting up new infrastructure in several international geographies. Those soaring selling expenses are the main reason why operating losses ballooned to $473 million for the full year from $235 million in 2017.
The good news is that these expenses reflect optimism on the part of the management team that Wayfair has a powerful business model that's likely to generate significant earnings in the U.S. soon, with outside markets following suit later on. The company could quickly lower selling expenses down toward its long-term goal of about 6% of sales, or half the current pace. However, CEO Niraj Shah and his team see no reason to rush that shift when there's more scale to be won in building a global e-commerce platform. "We remain focused on our long-term approach to investing in the business," Shah said in a press release.
Ironically, the company's healthy engagement metrics suggest investors might see persistent losses ahead since management is gaining support for their spending-heavy growth approach. That strategy has delivered mounting net losses so far, while allowing Wayfair to secure a market position that's becoming more difficult for rivals to challenge.