Wayfair's (W -0.02%) management team is clear about the core reason for its latest sales spike. "Millions of new shoppers have discovered Wayfair while they shelter in place at home," CEO Niraj Shah said in a press release announcing first-quarter results. E-commerce is getting a lift from social-distancing mandates, and that demand shift is likely temporary.
Yet the home furnishings retailer's pool of shoppers jumped 29% year over year to 21.1 million for the quarter, with even quicker gains arriving in April. It added roughly 1 million customers just since the start of the year.
A few other metrics point to a strengthening business that could maintain solid momentum even after brick-and-mortar stores are able to return to their normal operations. Let's look at two of the biggest.
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Engagement is key
Wayfair isn't just attracting brand-new users who are looking to test its proprietary delivery network for bulky home products like sofas, vanities, and hot tubs. Its repeat business is surging, too. Repeat orders jumped by 28% to 6.9 million, which pushed that segment up to 70% of all sales compared to 66% a year ago.
Repeat orders are a useful metric for investors to consider since they reflect customer loyalty. That's especially important in Wayfair's niche since shoppers are used to being able to physically inspect home furnishings before buying them. The company's steadily climbing engagement is a sign that it's delivering value and giving customers the confidence to move more of their home spending online.
Gross profitability gains
The last few weeks have been as close to an ideal selling environment as Wayfair could hope to see. In its niche, hundreds of millions of customers were restricted to online shopping options, its rivals' stores were closed, and a large swath of U.S. consumers received stimulus checks while finding more time to work on home renovations and upgrades.
The company also notched several efficiency wins that won't disappear once the nation's physical retailers fully reopen. Lower logistics and sourcing costs, plus rising demand for in-house brands helped push Wayfair's gross profit margin up to 24.9% of sales from 24.2% a year ago. Combined with surging sales, that pushed gross profit up to $579 million from $471 million.
Speeding the shift
The bad news is that Wayfair's huge cost burden, especially in the operations and tech development niches, erased its gross profit gains. Its operating loss worsened to $262 million from $194 million. Executives said in a conference call with investors that this trend isn't yet reflecting the cost-cutting efforts they've been making for the last several quarters. "We have been aggressively maneuvering the whole business toward sustainable positive adjusted [earnings]," Shah explained.
Investors can follow the major expense areas of advertising and labor to judge how quickly Wayfair might get to the 8% to 10% range of adjusted annual earnings that management is targeting. Losses on that score amounted to 5.5% this past quarter and 5.4% in 2019.
As for the recent boost in sales, management says they understand it's likely temporary. But that doesn't mean the company can't capitalize on it to accelerate the shift toward online spending in the home furnishings business.
"It is likely that e-commerce adoption is going through a step change across a wide swath of categories," Shah said. A move like that should favor the online leader long after the COVID-19 pandemic recedes and retailers start welcoming customers into their stores again.
