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Wayfair Suddenly Looks Like a Surprise Winner in the Coronavirus Economy. Is It a Buy?

By Jeremy Bowman - Apr 7, 2020 at 9:35AM

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Sales at the online home goods seller have doubled in recent weeks.

Wayfair (W -5.68%) shares surged on Monday. The online home goods seller had been one of the biggest losers in the coronavirus sell-off, with the stock down more than 60% at one point. However, the growth stock recouped much of those losses this week after the company reported a surprising surge in sales.

In its COVID-19 update, Wayfair said it would meet or exceed its earlier guidance for the first quarter. That news was a stark contrast to the parade of retailers and other affected companies that have issued business updates, only to suspend guidance and draw down lines of credit. Investors seem to have thought that Wayfair would be equally affected, but the company appears to be a beneficiary, at least for now, from shifting shopping habits as Americans adapt to coronavirus-related shutdowns.

Management said that revenue grew by slightly less than 20% in January, February, and early March, but its growth then doubled toward late March, and has remained that way through early April.

Wayfair didn't offer specific details on its sales growth, but the boom is likely driven by millions of Americans being forced to stay at home to stop the spread of the coronavirus. Adults who are suddenly working from home find themselves in need of office furniture, and potentially other home entertainment items. Parents also seem to be stocking up on children's furniture and playroom products now that kids are stuck inside the house most of the day.

However, there is another big advantage that Wayfair has right now.

A home office setup demonstrated by Wayfair

Image source: Wayfair.

The perks of being an online retailer

Aside from the need for new items to accommodate stay-at-home policies, which have also lifted sales of home office and entertainment goods at retailers like Target, the biggest reason that Wayfair's sales are surging may be that most of its brick-and-mortar competitors' stores are temporarily closed. Across the country, non-essential retailers like Bed Bath and Beyond, IKEA, TJX Companies-owned TJ Maxx and Home Goods, Williams-Sonoma, and Macy's, among others, are closed, meaning consumers' only option for buying home furnishings is online. As a pure-play online retailer with more than $9 billion in revenue in the category, Wayfair has a clear advantage over its brick-and-mortar peers. Additionally, the longer the crisis lasts, the greater the losses its peers will have to absorb. Some weaker chains could even be forced to close stores or declare bankruptcy.

Nonetheless, investors should be aware that Wayfair's current windfall won't last forever. Even if work-from-home policies continue for months, customers only need to buy home office furniture once, so the recent trend is likely to fade over the coming weeks, much in the same way that the initial stocking up on goods like food, cleaning supplies, and toilet paper caused traffic at supermarket to briefly spike.

Beyond the immediate impact of the coronavirus crisis, there is also another challenge facing the company. The country is entering a recession, and it will be difficult for people to move while stay-at-home policies are in place. Since moving is one of the key drivers of home furnishing purchases and a recession will impact overall consumer spending, Wayfair will have to confront two economic headwinds once the outbreak begins to fade, which could cause growth to slow.

Is it a buy?

With the recent surge, Wayfair has recouped most of the losses that followed its fourth-quarter earnings report, but the stock is still down more than 50% from its all-time high. Wayfair is still deeply unprofitable, losing nearly $1 billion last year on a generally accepted accounting principles (GAAP) basis, and the company had also dialed back its revenue growth guidance before the good news in the recent update. 

However, the e-commerce company remains a disruptive force in home goods, and that trend is only likely to accelerate with so many brick-and-mortar stores closed right now. Management said it's accelerating efforts to drive Adjusted EBITDA profitability and improve its cash flow, which should benefit from the surge in revenue growth.

I'm not ready to call Wayfair a buy yet, but I am putting the stock on my watch list. I'll be looking out for Wayfair's first-quarter earnings report on May 5, which will show if the recent growth spurt has held up and how the company is progressing toward its profitability goals to break even by 2021.

There's still plenty of uncertainty in the market and the overall economy, and investors should expect Wayfair stock to remain volatile as the company faces a number of challenges, both internal and in the fast-changing economy.

Jeremy Bowman owns shares of Target. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool recommends The TJX Companies and Williams-Sonoma. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wayfair Inc. Stock Quote
Wayfair Inc.
$69.36 (-5.68%) $-4.18
Target Corporation Stock Quote
Target Corporation
$175.45 (-2.63%) $-4.74
Macy's, Inc. Stock Quote
Macy's, Inc.
$20.50 (-2.89%) $0.61
Williams-Sonoma, Inc. Stock Quote
Williams-Sonoma, Inc.
$163.90 (-2.94%) $-4.97
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$68.82 (3.26%) $2.17
Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
$24.12 (16.80%) $3.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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