Wayfair's (W 10.53%) stock price in 2019 has reflected significant investor uncertainty around whether the quickly growing company can profit from its early-mover advantage as home furnishing spending moves online. The e-commerce giant has demonstrated a knack for winning market share in a wide range of competitive environments. However, shareholders aren't seeing financial benefits from those wins as management directs all of its cash toward bulking up the global business.
On Thursday, Wayfair announced third-quarter results that fit right in with that frustrating growth story. Sales again beat expectations, but costs ballooned to produce expanding net losses -- including in the key U.S. market.
Let's take a closer look.
Wayfair beat its own sales outlook for a sixth straight quarter. Rather than rising by around 30%, revenue in the core U.S. segment improved 34%. International gains were even faster, accelerating to 46% from 41% in the prior quarter. Overall, sales landed at $2.3 billion, or just slightly higher than the $2.27 billion most investors were expecting.
The key engagement metrics described a solid market share performance over the summer months. Wayfair's average order value rose, as did its base of active users and the frequency by which these loyal shoppers made purchases. "Our business continues to benefit from meaningful long-term investments that directly and dramatically impact the customer experience," CEO Niraj Shah explained in a press release.
Gross profit margin was also strong at 24% of sales, or just below management's long-term target of between 25% and 26%.
The list of worrying trends for investors got a bit longer, though. It's not news that the company is spending aggressively on adding shipping infrastructure both at home and in international markets. Those initiatives helped push selling and administrative expenses far higher, up to 14% of sales this quarter from 12% at the end of 2018.
What changed this quarter is that the tech stock's advertising costs jumped to over 12% of sales, or close to double the rate management sees as sustainable for the long-term health of the business. Wayfair also produced significant losses in the U.S. segment. That market's margin fell to a negative 3%, marking its worst performance in years and showing a break from management's aim to keep the U.S. at breakeven while investing in the international unit. Combined with the ballooning costs from adding headcount, these trends pushed net losses to $272 million for the quarter.
Management implied that Chinese tariffs were to blame for the worsening U.S. profit picture, which they see just as a temporary problem. "We could not be more confident in the future growth of the business," Shah said.
Still, with the U.S. division burning cash and with headcount soaring to support Wayfair's international rollout and the upcoming holiday season volume spike, it's clear that investors will have to wait until well into 2020 before seeing any signs of a move toward profitability. In the meantime, the big question is whether the U.S. segment can quickly bounce back, or if it is instead caught in a new painful period of falling profitability.