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Wayfair Surges Into Profitability

By Demitri Kalogeropoulos – Aug 7, 2020 at 9:15AM

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The upgraded earnings profile might be here to stay.

Investors who've been following along with Wayfair's (W -9.12%) recent reports were expecting some head-turning profit and sales figures in its Q2 announcement. The home furnishings specialist operated under close-to-ideal selling conditions in recent months, after all, with many of its physical store rivals temporarily closed even as consumers found themselves with extra cash to direct toward upgrades around the house.

It wasn't a guarantee that Wayfair could fully capitalize on this moment, though, given historic stresses on its fulfillment network and supply chain. But the company overcame these challenges to post surprisingly strong growth and financial results, almost across the board. Let's take a closer look at where Wayfair got it right during the pandemic-influenced selling months of April, May, and June.

A smiling young woman holds a credit card as she uses a laptop.

Image source: Getty Images.

All the customers

Wayfair's sales growth was impressive. The company logged 26 million active customers, a 46% spike over the prior-year period. Order volume more than doubled to 19 million, which pushed sales higher by $2 billion, or 84%, to $4.3 billion. Investors had been expecting a more modest 60% spike in revenue to $3.9 billion.

The company took a slight step backward in per-order metrics like average order value, which dipped to $227 compared to $255 a year ago. Trailing-12-month revenue from active customers slipped lower by 2% too, to $440. But Wayfair was happy to take those modest knocks, given the surge in new shoppers trying out its service. "We experienced unprecedented demand," CEO Niraj Shah said in a press release, "and saw record numbers of new and repeat customers choose Wayfair."

Sparkling finances

Wayfair's financial figures were even more impressive. The soaring sales footprint combined with aggressive cost-cutting to power major shifts in key metrics like cash flow, profitability, and earnings. Wayfair's adjusted earnings jumped to $440 million, or 10% of sales, compared to a $70 million, or 3%, loss last year. Gross profit margin shot up to 31% of sales, well above management's long-term target of between 25% and 27%.

The company generated $1 billion of free cash flow compared to a $91 million outflow a year ago. This success left Wayfair in a flexible spending position as it prepares for the upcoming holiday shopping season. Executives called the broader financial performance "a powerful profitability inflection" that was supported by their new posture aimed at producing efficient growth.

Challenges ahead

Wayfair will almost certainly announce weaker results in most of these operating metrics in the third quarter as consumer shopping takes a step back toward its normal cadence. Yet Shah and his team are still targeting overall profitability in 2020, and that forecast seems achievable given the 5% adjusted operating margin the company has managed over the last six months.

Wayfair's key challenge for the second half of the year will be to convince as many of its new customers as possible to continue using its service even as local furniture stores reopen for business. There are bound to be some losses on this score, but two metrics suggest Wayfair might continue to outperform. Repeat customers accounted for over two thirds of its total order volume this quarter and they doubled their sales volumes compared to last year. Those engagement metrics are evidence of the type of shopper loyalty that can power sustainably strong sales gains for this disruptive growth stock.

Demitri 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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