Another quarter goes by, and another data point is added to the mix proving that Wayfair (W -5.40%) is enormously popular with furniture shoppers. The problem: it costs a ton of money to serve all of those customers.
Over the past year, Wayfair's order deliveries have boomed. At the same time, however, free cash flow losses increased more than 10-fold. Wayfair reported second-quarter results on Thursday. Let's take a look.
Wayfair earnings: The raw numbers
We'll dig into the numbers and what they mean in a minute. But first, let's review how Wayfair performed on the headline numbers for the second quarter.
|Metric||Q2 2019||Q2 2018||Growth|
|Revenue||$2.34 billion||$1.66 billion||41%|
|EPS*||($1.35)||($0.77)||Loss widened 75%|
|Free Cash Flow||($92 million)||($8 million)||Loss widened 1,050%|
There are really two big takeaways from these numbers. First, revenue growth continues to be robust. Direct sales in North America grew 42% to almost $2 billion. International revenue -- primarily in Canada, the UK, and Germany -- grew 41%, but contributed a much smaller $343 million to the top line. Clearly, Wayfair is still gaining legions of fans.
The second story is the continuation of large losses. Believe it or not, non-GAAP gross margins actually expanded 64 basis points to 23.94%. That's good news -- as it means Wayfair isn't moving furniture by selling it for less. The main culprit, then, came from a 50% increase in operating expenses. This was a mix between spending more on advertising (an increase of 46%) and headcount increases.
Speaking on the conference call, management said that much of the headcount increase came from hiring for fulfillment jobs that were previously carried out by third parties. As I'll cover in the next section, this is an expensive decision, but one that should widen Wayfair's moat.
So far, investors have been more than willing to sacrifice short-term profitability on the promise of long-term dominance. Looking at the more granular metrics, the company continued to show impressive growth.
|Metric||Q2 2019||Q2 2018||Growth|
|Active customers||17.8 million||12.8 million||39%|
|Total orders||9.2 million||6.5 million||42%|
|Orders by repeat customers||6.2 million||4.2 million||46%|
Of all the metrics, I would argue that the last one is the most important. At the end of the day, it doesn't take much to offer furniture -- or anything else -- online. The true differentiation -- and moat -- comes from Wayfair's brand drawing in more customers and the build-out of the fulfillment network that can get furniture to you quicker than anyone else.
Because furniture is a one-off purchase, the fact that customers are repeatedly going back to Wayfair shows that the brand, and the experience via the fulfillment network, are paying off.
And management made it clear that the expansion of fulfillment networks across Europe is on its radar. In fact, CEO Niraj Shah said that the Castlegate fulfillment networks in the U.K. and Germany could one day be hubs of a "pan-European network."
What else happened during the quarter?
Here's a rundown of other tidbits from the quarter:
- The company launched a new high-end home furnishings brand, Perigold.
- The company plans to add 5 million square feet of fulfillment space, adding to the 12 million it started the year with.
- Currently, there are 13 Castlegate locations, and 39 last-mile delivery centers.
- The value of orders flowing through Castlegate locations has doubled over the past year, meaning that the benefits of scale that come with the network are starting to accrue.
- Wayfair added 1,200 employees, bringing the total to just over 14,000.
- Wayfair ended the quarter with $714 million in cash and investments, with $761 million in long-term debt.
Perhaps the most disappointing part of the release for investors was the company's outlook. Management sees third-quarter direct revenue coming in between $2.22 billion and $2.27 billion. If this hits the midpoint, that would represent growth of 32%.
While that's still very solid growth, it's a notable slowdown from 41% growth in the second quarter. The outlook was informed by sales in July, which are showing growth in the mid-30% range. Despite this slower-than-expected growth, management made it clear it is not taking its foot off of the reinvestment pedal. As such, adjusted EBITDA margins are expected to come in at a loss of 6% to 6.5%.
Over the short term, that means even bigger losses. However, if it translates into more business that's defensible by a fulfillment-center moat, it would mean long-term gains.