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Wayfair Has a New Profit Outlook

By Demitri Kalogeropoulos - Feb 28, 2021 at 10:00AM

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The home furnishings specialist is aiming for higher margins following a record fiscal year.

Wayfair (W -11.37%) just ended a fiscal year that included some head-turning records for the business. It added millions of new customers in 2020, handled surging volumes, and generated a net profit for the first time as a public business.

The fourth-quarter results give the home furnishings giant solid momentum in early 2021, which should continue to be affected by COVID-19-related demand boosts. But Wayfair's updated long-term outlook implies that management believes some of the most supportive industry trends will continue long into the future.

Sales jumped

Sales gains slowed for the second straight quarter but remained impressive. Revenue rose 45%, a bit slower than many investors had expected. The company still easily outpaced the industry by adding $5 billion to its annual sales base, or a blistering 55% growth rate, in 2020.

Living room in modern design

Image source: Getty Images.

The updated readings on customer loyalty all pointed in the right direction. Active customers jumped 54% year over year in the fourth quarter to 31.2 million, and a rising proportion of those users are making repeat orders, which accounted for 73% of all sales. The average value of each order held steady at $223.

"[W]e are cementing our position as the leading platform for the home," CEO Niraj Shah said in the earnings press release. "Online shopping behavior is becoming increasingly entrenched," he noted, "and consumer demand remains strong."

Reaching profitability

Wayfair had hoped to reach the break-even point in 2020 even before the pandemic disrupted the industry. It easily achieved that target.

Gross profit margin landed at 29.1%, well ahead of management's long-term goal. Advertising and selling costs were restrained too, and adjusted EBITDA margin for 2020 was 6.7%, compared to ballooning losses in the last four years.

And the company generated $185 million of net income last year after having lost nearly $1 billion in 2019. "We are at the early stages of proving out just how large the gains embedded in Wayfair’s business model will be, and we expect them to compound for a very long time," Niraj said in the shareholder letter.

Looking to 2021

The record growth this past year has Wayfair feeling more ambitious than ever as it seeks to move into new areas like business-to-business sales and the heavy appliances niche. Management expects many of the demand changes brought on by the pandemic are here to stay, including an increased affinity for online shopping when it comes to home furnishings.

As a result, Wayfair now believes it can sustainably generate EBITDA margins above the 8% to 10% annual target that executives have been predicting for years. Its record growth in 2020 gives the company just a small share (around 2%) of a massive industry that should grow past $1 trillion by 2030, management estimates.

What should have growth investors even more excited is the fact Wayfair is becoming a fixture in many home shoppers' budgets. Nearly 60% of its orders this past year came from customers who had made at least three lifetime purchases from the platform. That loyalty metric sat at 30% just five years ago.

The momentum suggests shoppers are getting plenty of value from the retailer. It also implies an uphill struggle for rivals as they work to try to slow Wayfair's expansion over the next few years.

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