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Wayfair Earnings: Get Ready for the Profit Surge

By Demitri Kalogeropoulos – Jul 31, 2020 at 9:00AM

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All signs point to a strong sales and profit announcement on the way from the online home furnishings seller.

Just since the start of 2020, Wayfair (W -3.81%) stock has moved between a nearly 80% loss to an over 150% gain year to date. That latest rally reflects investors' growing confidence in the online retailing business following the initial COVID-19 global outbreak. But the slumps that preceded it illustrate how quickly that sentiment can change.

Wayfair's upcoming earnings report will mark another opportunity for Wall Street to make a potentially sharp revision to its outlook for the company. So, let's take a look at what investors can expect to see in the announcement set for Wednesday, Aug. 5.

A young woman sitting on a couch while holding a credit card and shopping on her laptop.

Image source: Getty Images.

An unusual selling period

Wayfair's fiscal second-quarter report spans the selling months of April, May, and June, and so it syncs up almost exactly with the most intense consumer behavior changes around COVID-19 lockdowns. The combination of forced at-home time, increased income in the form of federal stimulus payments, and closed brick-and-mortar rivals created a nearly ideal operating environment for the home furnishings specialist. That helps explain why most investors are predicting blowout sales growth for the period, with revenue soaring over 60% to $3.9 billion.

The higher sales will be temporary since those conditions began wearing off in June. But Wayfair has a good shot at converting many of its new customers into loyal shoppers. For indications of success here, follow engagement metrics like repeat orders, customer satisfaction, and average order value.

Profits galore

Investors this week should be treated to something they aren't used to seeing from Wayfair: profits. The growth stock is expected to report earnings of about $0.80 per share compared to a loss of $1.35 per share a year ago.

Much of that improvement will come from the surging sales base. But Wayfair has also been busy slashing costs in hopes of becoming consistently profitable for the first time since it went public. A healthy gross profit margin that reaches at least 25% will help. But the bigger factor might be declining selling and operating costs as the chain trims its global workforce. That expense figure was over 15% of sales last quarter but CEO Niraj Shah and his team are hoping to get it down to between 5% and 7% of sales over the long term.

Looking forward

Most shareholder focus will be on the comments that Shah makes about how demand trends have stabilized since the initial spike in April and May. Heading into the report, investors believe Wayfair should see sales growth of around 28% in 2020, which would mark a modest deceleration from last year's 35% jump. That forecast could change significantly with Wednesday's updated operating metrics.

Looking further out, Wayfair said back in May that the pandemic may be accelerating positive trends that the company was already seeing in its business, including the closings of many physical furniture stores and increased consumer trust in online shopping for home furnishings. That means management might have some bullish long-term predictions to make about its growth potential, especially now that it is on firmer profit and cash flow footings.

On Wednesday, Wayfair will likely balance the optimism in its growth forecast with the potential for new pressures ahead, including sluggish economic trends, increased online competition, and an inevitable slowdown from its recent demand spikes.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool has a disclosure policy.

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