Wayfair (NYSE:W) is riding a wave of investor enthusiasm into its upcoming earnings report set for May 2. The e-commerce upstart achieved a few impressive wins over the last 12 months, including adding over $2 billion to its sales base, compared with a $1.3 billion increase in the prior year.
At least some of that stellar growth news is reflected in Wayfair's surging stock price, with shares up about 70% so far in 2019. The rally raises the bar for the company to show more market-share gains and progress on its expansion into new niches and geographies -- without spending too much cash -- in 2019.
Defending its market position
There's no shortage of competitors targeting Wayfair's home furnishings niche. That's understandable given that the huge offline retailing segment is moving online and has a long runway for growth as penetration rises in the coming years.
Wayfair had no problem gaining share in that competitive environment during the key holiday shopping season, and sales jumped 40% to comfortably outpace the guidance that CEO Niraj Shah and his team had issued. Management is just as bullish about the current quarter. In fact, it predicted back in February that retailing revenue will grow by between 33% and 36% in the U.S. and between 35% and 40% in international markets. Investors will be interested in whether actual results meet or surpass those targets, especially given stepped-up competition from rivals like Overstock.
A good chunk of Wayfair's growth is essentially purchased through its digital marketing programs and competitive product pricing, which means investors need to follow metrics like advertising spending and gross profit margin to judge whether its market position is strengthening or weakening.
Both numbers outperformed expectations last year as gross margin held steady at 24% of sales and advertising was flat at 11.5% of sales. The outlook for the first quarter isn't particularly bright, though, since seasonal trends tend to lift expenses while slowing revenue growth. That helps explain why executives see adjusted earnings being negative in both the U.S. and international markets this quarter. Still, investors will get a good reading on Wayfair's operating strength by following gross profit margin and any updates management makes on its advertising spending outlook.
The international business is a few years behind the U.S. market in terms of maturity, and that's the biggest reason overall losses have ballooned in recent years. Wayfair is spending aggressively to build out its shipping infrastructure in places like Germany because management sees the potential for these areas to follow a similar path as in the U.S., which has delivered market-thumping growth lately. The company has been on a hiring spree, too, to support rapidly expanding fulfillment needs and its ambitions to dramatically improve the online shopping experience for home furnishings.
Management's goal, Shah said in February, is to deliver "the best customer experience with vast selection, inspiring visual merchandise, fast and convenient delivery, and world-class customer service." Investments in these areas will pressure earnings in 2019 just as they have in each of the last three years. Wayfair expects to eventually reach adjusted earnings margins of between 8% and 10%, though, versus the low-single-digit losses it has booked since 2015. Ideally, this year's results will add more clarity for investors about when the company might finally break into a path toward achieving that sustainable profit level.