For anyone wondering why online furniture retailer Wayfair (W 7.40%) slid so sharply last week, the reasons can be boiled down to two simple facts. First, its supply chain is deeply rooted in China, and the tariffs President Trump has imposed on goods imported from that country are pushing retail prices higher and costing Wayfair business. Second, it's still not profitable.
But as Motley Fool Money host Chris Hill and Motley Fool senior analyst Jason Moser discuss in this segment of the Nov. 1 podcast, there were plenty of details to applaud in the company's third-quarter report. The two consider the long-term outlook for the business, and weigh the good vs. the bad.
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This video was recorded on Nov. 1, 2019.
Chris Hill: Wayfair shares down 30% this week. The online home furnishing company's third quarter report came with weak guidance for the fourth quarter. You tell me, Jason, how bad is it?
Jason Moser: Well, it wasn't as bad as Grubhub, so I wouldn't say disastrous. But Chris, it's not good. It's not good at all. It's a really difficult time right now if you're a top line story. The market is really focused on businesses making some money actually. Wayfair is not there yet. Now, with that said, they are doing some good things. But if you go to the guidance, and really, the call said at all, they said that since the beginning of the year, more than 90% of their suppliers, who are subject to China tariffs, have raised wholesale prices. That's resulting in higher retail prices, and that's affecting consumer behavior. It's resulting in volatility and some hemming and hawing, so to speak, not really committing on buying. That's a problem for Wayfair in the near term, of course. But there is light at the end of the tunnel. When you look at the core metrics of the business, they're still quite sound. Gross margin ticked up 40 basis points from a year ago. Active customers up 37%. Orders delivered up 32%. Percentage of orders from repeat customers -- remember, that's a really important metric -- it's 67.3% now, up from 66.3% a year ago. They're investing a lot of money right now in fulfillment and logistics. There are some questions regarding China tariffs. That's not just a Wayfair problem. I understand the market's trepidation today. I don't think it takes away from the long-term opportunity that they have. I think they're doing the right things. It's just going to require some patience.
Hill: I saw one analyst note that said that the lack of urgency with respect to profitability was perplexing. Is that fair to Wayfair's management?
Moser: I think so. It's a question I start to ask myself every quarter now. I'll look back to another company where I felt this way, it was Zillow. It seemed like quarter in and quarter out, there was this lack of urgency for them to get profitable. I am starting to feel a little bit that way about Wayfair. I'd love to see a little bit more information on that from management.