Wayfair (NYSE:W) is in no danger of giving up its positive market share momentum. In fact, the e-commerce giant just announced another quarter of surprisingly strong sales growth as it kicked off its fiscal 2019. Revenue soared 39% to comfortably pass management's February forecast.
However, investors witnessed widening losses accompanying those market share wins. In addition, a few metrics, such as advertising spending and repeat order growth, showed signs of weakness. Wayfair illustrated those contrasting trends for shareholders in an investor presentation, and below are key highlights from that document.
1. Winning over new customers
CEO Niraj Shah described the top line results as "exceptional", and that's not an exaggeration. After adding $2 billion to its annual sales base last year, Wayfair continued soaking up market share to start 2019. Revenue rose 39% in the U.S., compared to management's prior forecast of between 33% and 36%. Sales were also up 42% internationally, compared to the target range of between 35% and 40%.
The company gained almost five million customers and notched healthy volume growth. On the downside, repeat order growth took a rare step lower, so that metric will be worth watching over the next few quarters.
2. Rising costs
Wayfair warned investors to expect reduced profitability in the first quarter, in part because this selling period often pairs a sales slowdown with rising expenses in preparation for seasonally stronger quarters ahead. Encouragingly, the company managed healthy gross profit margin, which indicates healthy pricing power and rising sales efficiency. Yet two spending categories more than offset that strong result.
Specifically, advertising spending jumped to 12.5% of sales (from 11.4% in full-year 2018). That's a long ways off from management's long-term goal of around 7%. Selling expenses, which mainly involve headcount, soared to 13.5% of sales compared to 11.7% last year. Together, these trends ensured that adjusted profitability worsened to a 5.3% loss.
The good news is that Wayfair is choosing to boost these investments today in a bid to fuel growth, meaning the spike should be temporary. Still, rising losses make it harder to project when the company might eventually stabilize spending and begin marching toward generating profits.
3. International bets
Wayfair posted a $74 million adjusted loss in its international business, or about three times the losses it booked at home in the first quarter. That slump is partly because it has had less time to build out in areas like the U.K., Canada, and Germany. Wayfair's shipping network is relatively inefficient at the moment, and brand awareness isn't quite as high as it is in the U.S.
Executives believe those key markets will follow along roughly the same path that the U.S. segment has, so they're investing even more aggressively there than they did in the early days. The above graphic illustrates a key reason for that bullishness, which is that Wayfair can double its addressable market with a solid foundation in Europe alone.
For the time being, though, investors will mostly see concrete costs from the international expansion, and a path toward sustainable profits likely won't become clear until next year at the earliest. The good news is that Wayfair's robust sales pace supports management's contention that its growth initiatives are achieving solid returns.