Wayfair (W 5.52%) recently gave investors a lot to feel excited about. The furniture and home goods e-commerce company maintained an explosive sales growth pace even as the impact from COVID-19 closures and federal stimulus assistance waned. Wayfair management lifted its 2020 outlook, too, implying a historically strong holiday shopping season ahead as many consumers prioritize spending on the home.
In a conference call with Wall Street analysts last week, CEO Niraj Shah and his team explained why they think they can keep winning market share, while staying profitable, from 2020 on. Here are some additional details about Wayfair's plans for growth.
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Ideally situated for today's industry
As an e-commerce business focused purely on the home, Wayfair continues to benefit from both increased online penetration and heightened spend on the category. -- Shah
Wayfair's growth reflected its ideal position in today's retailing environment that is characterized by a flood of interest in e-commerce and home furnishings purchases. The company gained millions of new customers and saw robust repeat order volumes. These wins helped it tack on an additional $1.5 billion of new revenue in Q3, up 67% year over year. So far in 2020, sales are already up to $10.5 billion compared to $9.1 billion for all of 2019.
Not just COVID-19
While it may be tempting to attribute the recent strength of the category to so called COVID classes, like home-office furniture or outdoor furniture and playsets, the reality is quite different. -- Shah
Executives described another factor that might support their niche into 2021 and beyond. Consumers are moving outside of densely populated cities and into suburbs and more rural areas, management said. "To the extent that [these] trends continue to gain traction," Shah said, "these should prove an additional tailwind for the category."
That reading is supported by the fact that a huge portion of Wayfair's growth this year has come from categories that aren't tied to just pandemic-related demand. At the same time, the e-commerce portion of the home furnishings niche is a smaller piece of the broader retailing pie than it is for other categories like consumer electronics. Those factors all suggest there's room for many more years of above-average growth rates for the industry and for Wayfair.
Profitability is here to stay
It is true that elevated volume is clearly driving heightened gross margin efficiencies for Wayfair. While some of these benefits will fade over time, we believe a good portion of the gains will persist even as the growth rate eventually moderates to a new normal; plus, there are multiple other drivers to gross margin expansion. -- Shah
A big portion of Wayfair's newfound profitability is just a temporary side-effect of its huge sales volume surge in 2020. The company notched a 10% adjusted earnings margin in each of the last two quarters while management's long-term target for that metric is between 8% and 10%. Gross profit margin hit 30% of sales in Q3, far above the 25% to 27% range that management believes will describe the business at its mature state.
W Operating Margin (TTM) data by YCharts
Still, there's no reason to believe Wayfair is heading back toward the large and growing losses that characterized the past few fiscal years. The company has slashed costs and made its supply chain more efficient over the last year. "It's fair to say," CFO Michael Fleisher said, "that we expect gross margin to settle out substantially higher than where we entered pre-COVID, regardless of the revenue growth rate."
