The pandemic has been good to home improvement companies and their stocks. Lowe's gained 34% in 2020, while rival Home Depot was up 22%. Williams-Sonoma ended the year 39% higher, and even beleaguered Bed Bath & Beyond enjoyed a small 3% rise. But the top winner in this space was arguably Wayfair (W 4.45%), up 150% last year after posting phenomenal sales and earnings growth.
Best of all, investors can expect those gains to continue in 2021.
1. Digital shopping is here to stay
There was a huge uptick in digital adoption during the pandemic as customers shopped from their homes, but while some of that spending is returning to physical stores as they reopen, there's no turning back from the allure of e-commerce.
Wayfair estimates there is an addressable market for home goods worth $800 billion, with that figure split evenly between the U.S. and Europe. And within that category, the online channel is growing 15% annually. Management estimates that of the 15% growth in 2019, Wayfair was able to claim 38% of it in the U.S., good for $2 billion in new sales.
The company was perfectly positioned to grab even more market share during the pandemic, and in the third quarter, sales grew 67% year over year with earnings of $173 million as it reversed a loss in the prior-year period. As a digital company, Wayfair relies on technological innovations such as 3D room views and personalized recommendations powered by artificial intelligence. This also makes the transactions more personal, encouraging customers to make the switch to online.
2. Customers love coming back
Repeat customers accounted for 72% of total orders in the third quarter, up from 67% in the year-ago period. These customers also increased the number of orders they placed by 84% to 11.3 million. This is an important number behind Wayfair's growth.
In the second quarter, the company signed up five million new customers, more than the previous four quarters put together, and it was the first quarter since 2014 that new customer orders outpaced repeat orders, which still more than doubled. New customer order growth retreated a bit in the third quarter, growing 49% as that business returned to normal levels. However, repeat orders cost less in advertising, and repeat customers tend to spend more over time, almost ensuring growth through this cohort alone.
The pandemic was a time of significant customer acquisition, meaning Wayfair is going into 2021 with serious momentum behind it.
3. More people are moving into its target demographic
Wayfair's typical customer has a median income of $75,000 and is between the ages of 35 to 65 -- 45% of sales came from customers aged 31 to 50. The company sees a boon in the rising demand from 80 million millennials (aged 20 to 37). Millennials have strong online shopping habits, according to Adobe research, and many plan to stick with e-commerce after the pandemic, giving Wayfair a greater chance to capture more of this target market.
The company operates under several brands to meet demand in different categories, including not only the mass market Wayfair banner but also Perigold, Joss & Main, Birch Lane, and All Modern.
There are still challenges for the company to overcome -- the logistics involved in transporting large and bulky items at competitive prices and without damage are complex. The company has just one storefront and one outlet center, which means it cannot take advantage of the ominchannel options that have been so successful for companies like Target.
But Wayfair is always working to improve its fulfillment capabilities, and given the serious tailwinds from e-commerce growth, millions of new customers, and favorable demographics, investors can expect the company to extend the strong sales growth and market share gains of last year into 2021 and long term as well.