Wayfair's (W 2.04%) second-quarter earnings report showed a sharp acceleration in revenue growth and much improved performance on the bottom line.
But the most important number Wayfair reported was the acceleration in new active users. Usually, Wayfair depends on repeat purchases from existing customers to drive growth, but that changed in the last quarter, as orders from new shoppers grew faster than orders from repeat customers.
Management shared insights about these new customers' purchase patterns during the second-quarter conference call, which could signal an inflection point in Wayfair's growth.
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26 million customers and growing
Looking at the last six quarters, order growth from repeat customers tends to track closely with total revenue growth. In the second quarter, repeat customers placed 12.7 million orders, representing a year-over-year increase of 105%, which was higher than the growth in revenue of 84%. Wayfair welcomed a massive influx of new customers, and they were in an even better shopping mood than Wayfair's most loyal base.
"In Q2, despite the fact that repeat orders more than doubled year-over-year, new customer orders grew even faster," said CEO Niraj Shah during the earnings call on Aug. 5. "This is the first quarter that this dynamic has played out since Wayfair's IPO in 2014."
Wayfair's active customer base expanded 46% year over year, reaching 26 million. That's up from the 39% growth in active customers in the year-ago quarter. This acceleration is a big opportunity for Wayfair to gain market share and establish itself as the go-to home goods brand online.
Clearly, it's already doing that, but the challenge for Wayfair is to hold on to these customers in a competitive environment across the e-commerce landscape.
Customers are highly satisfied
Wayfair might have benefited to a degree from Amazon's focus on fulfilling orders for only essential items at the start of the second quarter in April. But digging deeper, it's apparent this doesn't tell the whole story of Wayfair's recent momentum.
During the second-quarter call, Wayfair CFO Michael Fleisher mentioned that gross revenue growth was trending at approximately 70% to date for the third quarter. This is despite Amazon already resuming shipment of home goods items a while ago.
Another thing about these new customers coming to Wayfair is their higher-than-usual engagement on the platform. "The behavior of these customers activated during the COVID era continues to suggest that they are a high-quality set who will choose Wayfair again and again," Shah explained. "Our observations tell us that this new cohort of customers is reengaging with our platform at higher than usual rates after their initial purchase and that this engagement is translating into higher-than-average repeat order rates."
Wayfair saw heavy download activity for its app, which drove 60.6% of all orders in the second quarter. That's up from 53.5% in the year-ago quarter. It's the high engagement with the app that may be Wayfair's most important competitive advantage in holding on to these new customers. Unlike those of other retail giants, Wayfair's app is 100% tailored to shopping for home goods, which makes for a more engaging customer experience.
The game has changed
Management is remaining cautious about the company's near-term outlook because of the macro headwinds and pressures on the consumer. Wayfair has experienced moderation in its revenue growth in markets where the reopening of the economy has gone smoothly. But the top-line growth is still pacing well above the level seen at the beginning of 2020.
Wayfair's recent performance shows the brand standing out in an environment where consumers are migrating to online shopping in droves. With the stock price up over 240% year to date, investors clearly sense the game has changed, but Wayfair still has a long way to go to capture its addressable market of $600 billion.
