The stock of Wayfair (NYSE:W) is barely keeping track with the market heading into the third-quarter earnings results on Oct. 31. Shares of the online home furnishings seller had nearly doubled at one point earlier in 2019, but the slump since then reflects a few new investor worries about growth trends and the potential for the stock to start moving toward profitability in the near future.
The Thursday earnings announcement will answer a few of the biggest questions that shareholders have, including whether sales gains are set to slow over the key holiday shopping period. Let's look at three key points.
1. Beating targets
Wayfair is no stranger to the practice of issuing conservative short-term sales guidance that can then be beaten if demand trends don't collapse. CEO Niraj Shah and his team have surpassed their quarterly outlook in each of the last five reports, including with last quarter's 42% revenue increase that blew past the 35% prediction from three months earlier.
The bar to beat this time around involves Wayfair's prediction that sales gains will slow to about 30% in the core U.S. market from 40% through the first half of the year. Executives described the forecast as prudent, saying in the conference call that "in our mass-market consumer business, the customer has to show up every day."
We'll find out on Thursday whether customers showed up in force over the last few months. Investors should follow engagement trends such as order volume, average order spending, and the size of Wayfair's user base. Wins in each of these areas will be needed if the company is going to avoid posting a significant growth slowdown this week.
Growth metrics show that Wayfair is winning market share, but that success will be hollow if the tech stock can't earn a healthy profit from its furnishings sales. The best way to judge Wayfair's strength on this score is to follow gross profit margin.
That figure has inched up to over 24% this year from 23% a year ago. Wayfair is aiming to get it to roughly 26% over time, and progress toward that goal would bolster management's bullish outlook.
Keep an eye on advertising spending, since that number tells shareholders a lot about how competitive the home furnishings space has become and whether Wayfair is still standing out from the crowd. The company allocated 11% of sales toward that category last quarter and still managed market-thumping growth. Pairing similar wins on Thursday would show that this business is far from finished growing.
3. The holiday outlook
With three quarters of the year passed, and with inventory now set for the year-end promotions, Wayfair will have a good idea where sales will end up in 2019 and can give investors a concrete outlook on Thursday. The shareholder reaction will depend on how much the forecast differs from the 36% increase that most investors who follow the stock are predicting. More important, though, will be management's comments about how competitive threats are affecting pricing, and those online advertising expenses. Wayfair's pace of market share gains will depend on how aggressive rivals like Amazon.com and Overstock are being in these areas, and whether those moves are raising costs and threatening the growth pace as 2019 wraps up.