It turns out that Wayfair (W -1.60%) doesn't need widespread retailing closures and a flood of federal stimulus support to generate head-turning sales growth. The home furnishings giant on Tuesday announced surprisingly strong third-quarter operating results and extended its streak of profitability into a second straight quarter.
Management had some encouraging comments for investors about the pace of growth for the holiday shopping season ahead, too. Let's dive right in.
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Just a modest slowdown
As expected, sales trends slowed from the second-quarter pace that was supported by near ideal selling conditions, as consumer interest flocked toward the online home furnishings niche during COVID-10 retailing closures. But growth was still impressive.
Sales improved by $1.5 billion, or 67%, to $3.8 billion. That result blew past investors' expectations and seemed to confirm CEO Niraj Shah's prediction that growth trends will stay elevated even after COVID-19 disruptions fade.
A few other indications of the strength of those sales gains include spiking order frequency among Wayfair's shopper base, which grew 51% to 28.8 million. "Category momentum is vibrant," Shah said in a press release, "[and] demand is moving online at an accelerated pace ."
Financial hits and misses
Wayfair needed to spend a lot in areas like fulfillment to support that surging sales base. But the news was almost uniformly good in this arena, too.
Advertising expenses landed at 9%, or just below management's long-term target, indicating no costly struggle to maintain market share against rivals like Overstock and Home Depot. Gross profit margin jumped for a second straight quarter as well, so that overall adjusted earnings were 9.7% of sales, or just below last quarter's record 10.2%. Wayfair has been saying for years that this metric should settle at between 8% to 10% even though it has been in negative territory for each of the last four fiscal years .
Through the last nine months, Wayfair has generated $161 million of net income compared to a $654 million loss in the prior-year period. Executives forecast back in August that their selling platform would remain significantly profitable, and these latest results add weight to that prediction.
Looking ahead to the holidays
Wayfair has some good reasons -- and solid data -- to back up a positive outlook for the next few months. "We expect the home to be even more important than usual when it comes to celebrating the holidays this year," Shah said.
Management is also optimistic about its potential to maintain the newly established positive earnings trend long after the COVID-19 demand spike has ended. Wayfair sees a few factors supporting this judgment, including market-share growth in places like the U.S. and Europe, strong cash flow, and high engagement by its newest customers.
Speaking of those new shoppers, it still might be a few quarters before Wayfair knows important factors about them, including whether they'll stick around beyond the current pandemic period. The company's experience through late September suggests that they will, and that's good news for investors hoping to see a big finish in the works for Wayfair's record fiscal 2020.
