Wayfair (W +5.20%) stock had fallen significantly in the months leading up to its fourth-quarter report. Investor optimism declined as the e-commerce business posted slower growth in the U.S. and failed to stem its surging cost profile.
The company's holiday-season earnings announcement didn't do much to change that broader operating picture. Sales gains were robust in late 2019, but not as strong as they had been in past quarters.
Wayfair also generated significant losses for the quarter and the wider year. Let's take a closer look.
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Sales growth
Sales landed at $2.5 billion, translating into a 26% increase that met management's lowered outlook. That result marked Wayfair's weakest growth in some time. Revenue had been expanding at a 40% clip through the first half of 2019, after all.
The demand slowdown was evident in both of Wayfair's main divisions. The international segment grew 37% compared to over 40% in each of the prior two quarters. The home furnishings retailer's U.S. business struggled to stand out against the competition, too, with sales gains falling to 25%.
Executives had warned back in early November that tariffs were disrupting the business by pricing many of its products out of consumers' shopping lists. That trend pressured several of its engagement metrics, with average order value ticking down year over year and average annual revenue per customer only inching higher.
Cost pressures
Wayfair's finances took another step in the wrong direction. While gross profit margin held steady, indicating good pricing discipline, the company spent more on advertising and on expanding its global selling infrastructure. As a result, adjusted losses expanded to over 5% of sales from 3% a year ago. Wayfair booked nearly $1 billion of net losses for the full year, or over 10% of its annual revenue base.
Management referenced these cost challenges in a press release. "We are taking important steps to further optimize the business and drive greater efficiencies where needed," CEO Niraj Shah said, "to enhance our customer experience and further propel us down the path to profitability."
Looking ahead
Wayfair executives said they still see plenty of potential for robust sales growth both in the U.S. market and in newly established footprints in Europe. "We have barely scratched the surface of our total addressable market," Niraj said, "and are only just beginning to reap the benefits of our large strategic investments across North America and Europe."
While those investments are likely to support increased global market share in 2020, investors still have two big concerns that weren't lessened by this earnings announcement. First, it's not clear yet that the tariff-fueled growth slowdown will be just a temporary challenge. And second, Wayfair's ballooning losses aren't showing signs of stabilizing, let alone progressing toward profitability.
Until the growth stock can make significant progress on both of these fronts, investors might continue seeing pressure on the stock, which was a Wall Street darling as recently as mid-2019. That sentiment has changed, and now its up to Wayfair to demonstrate that it can continue winning market share while curtailing its spending rate.
