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Can Wayfair Hold On to Its 5 Million New Customers?

By Demitri Kalogeropoulos – Aug 10, 2020 at 3:54PM

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A flood of new shoppers tried its home furnishings service in the second quarter.

Wayfair (W -5.38%) recently announced blowout second-quarter results that paired strong sales growth with gushing profits and cash flow. Those impressive metrics were influenced by COVID-19-related shifts in consumer spending patterns, which won't stay around forever.

Yet in a conference call with investors, CEO Niraj Shah and his team explained why they believe some of the new growth in the category will remain even after the pandemic threat lessens. Wayfair executives also broke down the main drivers behind the record growth quarter.

Let's take a closer look.

Woman sitting on a couch with a laptop in her lap while holding a credit card

Image source: Getty Images.

Winning market share

The wide spectrum of product classes we have seeded over these last several years positioned us to capture an outsized share of increased category demand.
-- Shah

Wayfair added $2 billion to its quarterly sales haul, translating into an 84% spike year over year. There is a lot about that surging growth result for management to celebrate, including the fact that Wayfair's supply chain and fulfillment networks handled a doubling of shipment volumes without suffering from major bottlenecks or service challenges.

Executives were more excited about their success at attracting eye-popping engagement during COVID-19 shutdowns around the country. Wayfair added 5 million new customers in the period, which was more than it added in the prior four quarters combined. Over 1 million previous customers also rejoined the active user ranks after having failed to make a purchase over the past year. "Q2 demonstrated that Wayfair is now a meaningful, well-recognized, and trusted household brand," Shah said.

Getting to profitability

These results demonstrate the inherent strong structural profitability of our platform.
-- Shah

Wayfair has for years predicted that the business might one day reach adjusted profitability of between 8% and 10% of sales. Investors haven't had real evidence of this potential, though, given that adjusted losses worsened to 5.4% of sales last year from 3.2% in 2018.

This quarter was different, as profitability edged past the high end of management's long-term forecast to reach 10.2%.

Sure, a big part of that boost came from the unusual sales surge, which pushed gross profit margin to an unsustainable 31% of sales. Executives see that metric landing at between 25% and 27% over the long term. But Wayfair has also been busy cutting its head count and adding efficiencies throughout the business.

Management had been aiming to break even in Q2 even before the pandemic disrupted the industry. COVID-19 simply amplified that change. "The strength of the quarter made the inflection much more powerful than even our ambitious plans had envisioned," Shah noted.

Changes are here to stay

What we have seen thus far would suggest that even as economies reopen, our customers remain focused on the home and are extremely satisfied with Wayfair.
-- Shah

The big question going forward is to what extend Q2 represents just a one-time lift that was brought on by uniquely strong selling conditions amid COVID-19 shutdowns. Wayfair is trying to figure that answer out itself, for example by analyzing the new cohort of customers for signs that they might be less profitable than its prior shoppers. That doesn't appear to be the case, management said, but the company won't know for sure until more time passes.

Meanwhile, Wayfair has noticed slower sales growth in parts of the country where economies have reopened, and so investors have no reason to expect to see anything approaching its 84% Q2 sales spike in future quarters.

The company says the expansion pace is still faster than it was in the pre-COVID days in early 2020, though, which adds heft to its prediction that the shift toward e-commerce shopping has essentially been permanently accelerated by the global pandemic.

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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