Wayfair (W -0.43%) recently announced its first quarter earnings results, and investors didn't see much change in the headline operating trends. The company is still winning market share in the massive home furnishings industry while pushing into complimentary niches. However, sales gains slowed in the international segment, and costs soared.
CEO Niraj Shah and his executive team discussed those challenges in a conference call with Wall Street analysts that also included Wayfair's updated outlook for the fiscal second quarter. Let's take a look at the biggest highlights.
Image source: Getty Images.
Keeping pace
Clearly, our offering of broad selection, inspiring visual merchandising and superior customer service and delivery are resonating with customers, particularly as we see ongoing improvements to the customer experience as a result of the investments we have been making. -- Shah
Wayfair had plenty of good news to report on the top line. Despite another period of intense competition from rivals like Overstock, the company again beat its prior revenue outlook as the U.S. segment expanded at a 39% rate, equating to $542 million of additional revenue.
Key engagement metrics were mostly positive, with the customer base shooting up to over 16 million from 15 million in the prior quarter. Executives said those wins were supported by major investments they've made over the last few years, including building a proprietary delivery network and expanding into new niches like mattresses, bathroom vanities, and now storage and organization.
Blame Canada
Our Canadian business has been facing growth headwinds with revenue growth falling below the growth rate of our U.S. business. -- CFO Michael Fleisher
It wasn't all good news in this report, as sales growth slowed in the international segment and key metrics like revenue per customer declined slightly. Wayfair said both of these issues were driven by weakness in the Canadian market, which is seeing sluggish economic growth lately.
Stripping out that impact, management said its other key markets of the U.K and Germany are still outgrowing the U.S. segment and that revenue per customer continues to rise. Still, Wayfair sees Canada weighing on overall results at least through 2019.
About that advertising spike
As mentioned on the Q4 call, we expected to lean in on advertising in Q1 given the attractive buying opportunities we were seeing. The opportunities we saw in capture resulted in advertising spend of $244 million or 12.5% of net revenue. -- Fleisher
Advertising spending jumped to 12.5% of revenue, or a full percentage point higher than last year. That's a potential red flag for Wayfair, since it could imply weakening market strength as the company pays more to acquire new customers. The company's long-term target for this metric is just 7% of sales.
Management predicted the increase last quarter, though, and they explained that the boost was tied to attractive ad buying options they're seeing in the relatively slow first-quarter selling season. That positive reading on the business is supported by the fact that gross profit margin hit 24.2% of sales to edge past the high end of Wayfair's targets.
Looking ahead
We forecast [second-quarter] direct retail net revenue of $2.2 billion to $2.25 billion, a growth rate of approximately 34% to 37% year-over-year and representing year-over-year direct retail dollar growth of approximately $550 million to $600 million. -- Fleisher
Wayfair predicted another quarter of elevated spending ahead as it continues to hire thousands of new employees in areas like logistics, fulfillment, and software engineering. Sales growth should reflect the aggressive gains they're targeting both in the U.S. and internationally. The home market should see growth between 35% and 38%, while international gains will be between 30% and 35%. That division will again underperform the U.S., thanks to the struggles in Canada.
The overall outlook for 30%-plus growth implies hefty market share gains. But economies around the world have to cooperate for Wayfair to hit that target. "In our mass market consumer business," Fleisher stressed, "the customer has to show up every day."
