Wayfair's (W +2.73%) latest earnings report didn't deviate from the major trends investors have seen for over a year. The e-commerce upstart soaked up market share in core home furnishing categories and extended its reach into new areas despite intense competition. At the same time, losses ballooned thanks to aggressive spending in areas like the supply chain and shipping logistics.
In a conference call with Wall Street analysts, CEO Niraj Shah and other executives put those investments into context with their growth plans. Management also explained why Wayfair is projecting an especially rough quarter ahead, both on the top and bottom lines. Below are a few highlights from that presentation.
Image source: Getty Images.
Winning around the world
In the U.S., our strong momentum ... continues. In Canada, we're seeing sequential acceleration in growth, and the U.K. and Germany are tracking in line with the high expectations we set for ourselves, reflecting customers' growing awareness and appreciation for the Wayfair brand and shopping experience.
-- Shah
Wayfair trounced management's growth outlook, as sales jumped 42% rather than the 35% prediction they issued back in May. The outperformance was broad-based, with U.S. gains benefiting from a successful push into the outdoor furniture category and with Canada growth rebounding after a slowdown last quarter. Stepping back, Wayfair has added over $1.2 billion, or 40%, to its sales base in just the past six months.
Efficient marketing spending
Our ad spend decisions are governed by our approximately one-year contribution margin payback threshold, and we continue to see attractive opportunities to invest advertising dollars within this framework. We believe the success of that approach is evident in both ... active customers and [the] percentage of orders driven by repeat customers, [which hit] all-time highs this quarter.
-- CFO Michael Fleisher
Wayfair's advertising expenses came in lower than management had predicted, which is a sign of brand strength and reflects the company's premium market position. Executives said these efficient investments are paying off for the business not just by supporting revenue growth, but by also lifting key engagement metrics such as repeat-order rates.
Profits ahead, but not soon
We continue to believe we are on the path to sustained adjusted profitability for the U.S. business, but repeat that it will not be a straight line.
-- Fleisher
Wayfair is projecting a head-turning loss for the fiscal third quarter, with adjusted losses amounting to over 6% of sales. That decline would be double the past quarter's level of red ink and is being driven mainly by temporary costs such as a jump in hiring tied to college recruiting. The company could scale back that spending to better match with the variability of its sales cadence, but management sees no reason to do that. "We will not alter our [return-on-investment] positive long-term investments to make any particular quarter more profitable," Fleisher explained.
Conservative outlook
Our guidance-setting discipline is to consider our quarter-to-date performance as well as our expectation for the full quarter, and then prudently guide. As you've heard me say almost every quarter, in our mass-market consumer business, the customer has to show up every day, and there is still a lot of the quarter to go. Given our typical approach, we are setting our guidance ... just below our current quarter-to-date performance.
-- Fleisher
Wayfair took a conservative approach to its short-term outlook, saying sales growth will slow down to around 30% in the core U.S. segment in Q3 from 40% this past quarter. That prediction relies in part on a sluggish start to the quarter.
Investors keeping score likely remember that management sounded a similar tone back in May before the business shot well past its targets. Still, it makes sense for executives to err on the side of caution given some of the uncertainties in the overall economy.
