On this week's episode of Industry Focus: Wildcard, host Jason Moser and VP of Motley Fool Ventures, Brendan Mathews, take a closer look at how Wayfair (W -3.44%) is shaping the future of the massive home furnishings market and what Bed Bath & Beyond (BBBY) is doing to remain a part of it.
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This video was recorded on March 31, 2021.
Jason Moser: It's Wednesday, March 31st, I'm your host Jason Moser. On today's Wildcard Wednesday show, we're digging into a couple of companies in the retail space, at very different points in their publicly traded lives. Joining me this week, it's Vice President of Motley Fool Ventures, Mr. Brendan Mathews. Brendan, how's everything going?
Brendan Mathews: Great. Hey, Jason.
Moser: Hey. So glad you're with us this week. We've been chatting back and forth here over the past few days and thought it would be fun to take a look today at a couple of companies in the home goods and furnishing space. One company that seems to be defining the future in Wayfair, and another company that is fighting very hard to remain a part of it in Bed Bath & Beyond. These are two companies that you and I have followed for a while. I think you and I held relatively similar convictions for a long time on both companies as well, and for understandable reasons. But let's go ahead, let's start the conversation with Wayfair. I think actually this a stock that you and I both own, Brendan. We've owned it for a little while. We feel really good about it. Clearly, it's been a tremendous past year for the business. As a reminder for our listeners. Just real quick, what's Wayfair in a nutshell, tell us what Wayfair the business actually is.
Mathews: It's e-commerce for home furnishing, home goods. It's almost everything under the sun you would need for your home and it's dropped shipped directly from suppliers to you.
Moser: I think the interesting thing about Wayfair, I think what attracted me to this business or what attracted both of us to this business so early on was this idea of it being really more or less just a network. This is not your typical traditional retail store. This is not a store that's carrying a lot of inventory, it's an online network that is connecting buyers and sellers. But really there's a lot of value in the suppliers. There are part of that Wayfair network and then through all of the brands that Wayfair owns, it's not just Wayfair, it's a number of different brands under that umbrella. Connecting all of those suppliers with consumers initially around the country, but now Wayfair is clearly becoming a global business, and that seems to be accelerating as well. That leads me to the first question, the first point that I wanted to discuss with you in regard to Wayfair, in a key to its success at this point is, in regard to the competitive advantage I think that's part of it. It's that network dynamic versus being that traditional stodgy capital intense retailer.
Mathews: They have no or limited overhead and a huge selection, 22 million products on the website from 16,000 suppliers. It's no simple thing to have that all in a website, all the inventory connected to have their products displayed in a way that's curated and a way that people can browse through them versus a long catalog on Amazon. What they've done over the six or seven years that we've followed them is they've also built some distribution capability. They have a logistics network. If you're ordering furniture, it can be expensive to ship. One of the things they've done is they've built what they call a middle-mile. It's this CastleGate logistics network, and then a last-mile. What they're doing is they're helping you scale and technology to bring down the shipping cost. I think that's a big mile. Then the other thing we should think about a little bit is, they spend pretty heavily on advertising, they spend over 10% of their revenue on advertising. For a company that is still establishing itself, still growing, not necessarily profitable, that's a big investment. They are doing it because they need to make people aware. They need to build a brand, they need to be the go-to-place when people are shopping for this kind of stuff. I think we've seen them make big strides in that direction.
Moser: I'm glad you brought up the point there regarding distribution and the investments that they've made in that, because I think initially when Wayfair first went public, and honestly I'll tell you, I remember looking at this when they were getting ready to go public. I didn't think they were going to be able to go public. I honestly thought Amazon was going to acquire Wayfair before Wayfair ever had the chance to go public, and that obviously didn't happen and that could be for any number of reasons you got founder leaders that are calling the shots there and I'm sure that they probably wanted the opportunity just to grow this business. They had an idea, I'm sure they were probably looking at Amazon as a bit of a blueprint of what they could do. I think you've really keyed in on some of the keys to their success, its distribution, it's creating this superior buying experience. As a consumer, have you ever compared shopping for these types of items on Amazon versus shopping for them on Wayfair?
Mathews: I have. Amazon is great. They have everything if you know what you need. If I were to just say I was to buy an ottoman or something like that, if I just put in ottoman in Amazon, there would be choices for me. But I think if I were to do the same on Wayfair, it would do a better job of helping me pick out a product that's not necessarily branded. Now if it's a brand new product that I already know, if I need a new pair of AirPods, I'll just go to Amazon. But if it's something where I need them to walk me through the experience, and I need to look at a bunch of pictures, and I need them to help me figure it out, I think Wayfair does a better job of that.
Moser: Yeah. I think it always struck me, the shopping experience as always, to me, at least being superior on Wayfair. I think part of that is due to what you mentioned there. You look for something like an ottoman for example. There's not really a brand. I don't think most consumers really have a brand preference or know of leading brands in the furniture world. It's not like there's a [...] out there that everybody is just like, "Well that's a [...]. People aren't looking at furniture, I think from that perspective. To your point, they go in there knowing something that they want, but they're not sure exactly what they want. Wayfair really opens up that opportunity in that world of possibilities there. I think that makes a big difference. That's really, I think one of the insular qualities of that particular market that they're pursuing. I think it goes to show the company is focused on a specific market.
There's a way to exist and there's a way to win in an Amazon world. We've seen other companies like Etsy, for example, do very much the same thing. Focusing on that one specific niche and really building out expertise in that niche. Because when you look at the market opportunity, I was digging into one of Wayfair's recent investor presentations. We'd like to talk about total market opportunity, total available market. Then you have SAM, which is the Serviceable Addressable Market. When you look at Wayfair and the numbers that they quote, they're talking about a total addressable market in 2020 of around $840 billion globally that they see going up toward $1 trillion by 2030. This is a massive market opportunity, and Wayfair is what, $14 billion in sales last year. Seems like there's a lot of room to run for this business. But what are some of the metrics that you would look at for Wayfair to judge the progress, to judge success. What are the metrics that matter for you when it comes to Wayfair?
Mathews: For Wayfair specifically, we tend to look at revenue growth. That's very big. The other thing we look at is the total number of active customers. I think in their most recent quarter, they had 31 million active customers. One of the reasons that's important is you want to get people to order and then order again, it's the lifeblood of e-commerce. I look at their active customers and then look at what kind of business is doing from repeat customers. So even in their most recent quarter, they did 70% from repeat customers. Now, you don't necessarily buy furniture every week or every quarter, but if you order, I think you have a propensity to order again if you need something later in the year or the next year. We want them to keep building up that user base just to reiterate like the top level is going to be total sales. Up 45% in the most recent quarter and then we'd like to see the number of customers keep marching up and then healthy repeat orders.
Moser: Yeah, that repeat customer metric to me has always been crucial. That goes back to what you were talking about earlier with the amount of money that they spend on marketing, advertising. Those G&A costs that for a younger business they're requisite, I mean, you have to do that. You have to get your name out there. You got to spend money to make money as they say but part of the thesis with Wayfair, not the whole thing, but part of it at least has been over time. You see that repeat customer numbers continue to grow, particularly as the active customers number continues to grow as you explained. They don't have to pay as much to acquire those repeat customers, essentially, they don't have to pay for them. I mean, it's expensive to get a new customer on board. They got to keep that customer. The repeat customers play 72.5% of total orders delivered in the fourth quarter of 2020 for Wayfair. That was versus 68.6% a year ago. That number over the past several years has just continued to march steadily upwards. I mean, they've done a tremendous job in getting people to come back and buy more. Yeah, you're not probably buying furniture a lot, but home furnishings, generally speaking, people are buying home furnishings a lot and it's a big world obviously.
When you focus on an international or global market opportunity, you can see why they start to build out the offering, build-out the supplier network in the things that they sell, because there's so much opportunity out there based on those numbers of the total addressable market. The other thing that struck me with Wayfair, and I think that really the pandemic 2020 really accelerated this, it accelerated their opportunity to get toward meaningful and sustainable profitability. But gross margin for a business like this is important. I mean, it's important retail, but I think Wayfair is particularly important because gross margin includes those fulfillment costs as well. To see what they've been able to do on the gross margin side, it was 29% over the most recent quarter versus 22.9% a year ago. I feel like that gross margin expansion is here to stay because they've been afforded the time to build out the distribution like you were talking about.
Mathews: So gross margin is just a good way for people to think about it as the markup on the goods that they paid without the overhead. Free unbranded product, 29% is pretty healthy.
Moser: Yeah. Particularly when you consider those fulfillment costs in [laughs] moving catches is cheap I guess as they say [laughs]. So it seems like it's getting a little bit cheaper for them and obviously, as investors, that's exactly what we want to see. One of the things that Wayfair has benefited, I think from, is the consistency of visions. That is thanks to leadership. I mean, we've got a company here with the Founder-leader is still in place. You got Steve Conine, Co-Founder, Co-Chairman. You've got Niraj Shah, Co-Founder, Co-Chairman, President, CEO. These guys have been working together to build this business up for a while. Founders, as meaningful owners and leaders isn't necessarily a reason to buy, it's certainly something we'd like to see and I feel like it's an asset for this business.
Mathews: Yeah. Insiders own 25% of the company, which is a lot when you consider it's a $35 billion company. I think 11% for Steve and 11% for Niraj. In excess of $3 billion worth of shares for each of them, should be a motivator for them. It should also, I think it's a good reason for them to be aligned with shareholders because they're the bigger shareholders themselves.
Moser: Yeah. I mean, I absolutely could see being the owner of a business wanting to ensure its success. I mean, if you own a good chunk of it, well, that's incentive right there. You certainly are not in the business of losing money. I think what we've seen is what there may have been some skepticism early on in its life. There was plenty of it out there and that was understandable at least. I mean, I think the market has been giving them a little bit of wiggle room to build this thing out. You fast forward to today, this is a much stronger, much healthier, much larger company than it was just even three to five years ago. But looking toward 2021 and even beyond, I mean, we're exiting this pandemic. Things will start to get back to normal and that will change some businesses' outlooks as opposed to others. To me, I'm not necessarily sure that changes a whole heck of a lot in regards to the outlook with Wayfair. I think that Wayfair is going to continue to do well, but what are some of the things you're keeping an eye on here for the coming year and beyond? What are some of the things you'll be watching with Wayfair as they continue to grow?
Mathews: I am going to watch revenue growth. They had a much better than expected 2020, and they did benefit from the pandemic. We saw that across all of e-commerce. I think there's going to be probably a deceleration in growth when people have more of an option to go to stores. But I think you and I are philosophically on the same page here that we don't really buy a business from a one-time or one-year performance. We bought it for five, 10 years [...]. I think when you think five, 10 years down the road Wayfair, their stated goal is to index revenue by 2030. That's an audacious goal, but I think going back to those market size figures that you stated, I think there's room for them to do that. That's the path they're on. I'm definitely going to be keeping an eye on revenue growth, I would expect some deceleration in the next year as the reopening happens. But I'm going to remain very focused on revenue growth, then the things I mentioned before active customers, repeat business.
Moser: Well if Wayfair is the company helping to dictate the future of the home furnishings and home goods market, Bed Bath & Beyond certainly is a company that is fighting to keep its status, at least be a relevant part of it. For a long time, Bed Bath & Beyond, well, it's been the butt of some jokes [laughs] in the investing community, and I think deservedly so. This was a business that you could probably argue was mismanaged for a number of years. We saw a situation here with the business where clearly top-line revenue continued to decline, so they're not selling as much stuff. Then you had management that was less than focused on keeping a stellar and defensive balance sheet in a time like that. Share repurchases at just some really astronomical stock prices, in hindsight really, really had you wondering if they weren't trying to really sink the ship on purpose or at least try to arrange some type of a bailout or acquisition there.
You fast-forward to today and I think a leadership change with Bed Bath & Beyond has certainly been one of the biggest catalysts for this business. But let's talk a little bit about Bed Bath & Beyond because while this is not necessarily a company I would've been interested in investing in a year ago, I have to say over the past year I'm just very impressed with what they've been doing. I wonder, to your eye, when you look at a Bed Bath & Beyond versus something like a Wayfair, what would you say is the competitive advantage for a Bed Bath & Beyond, or is there even a competitive advantage for a business like this at this point?
Mathews: Jason, we've got the NCAA tournament going on. If we were to put this in March madness terms, put the home goods market in March Madness terms, I think Wayfair is a one seed, Bed Bath & Beyond is definitely a lower seed.
Moser: The Cinderella story.
Mathews: Yeah. If they win it would be a Cinderella. The way the valuation is, they don't necessarily need to win, they just need to cover the spread for you to make money as an investor. I think it's a TBD on what their competitive advantage is. They have around 1,200 stores now. There's nobody else specifically focused on the home goods market who has those stores. What they've done is they've brought in almost a whole new management team. I think it's late, but they're really trying to focus more on a digital and an omnichannel strategy, as well as it's a cost-cutting story, it's a turnaround story. I think it's just really whether they can execute on that plan.
Moser: Yeah. I mean, I am glad you mentioned digital, one of the snippets I pulled from their most recent earnings call. So store-to-client sales at stores, they said fell 14%. However, they experienced, "exponential, digital growth of 94%." For a business like this, the traditional aiming, when you know this is a physical store. We know this as a store you walk into and buy stuff and we know that that has been a business model that has been under severe fire here over the last several years. I don't know how much you've looked into this. I'm just curious. But one thing I noticed with Bed Bath & Beyond, and I think a lot of this has to do with leadership. But are you familiar with Target and their e-commerce platform, Ship't?
Mathews: I am not.
Moser: One thing that stood out to me, and we can talk a little bit about leadership here in a moment with Mark Tritton and what he's been able to do for this company since coming over from Target. But Target, back in I think 2017, acquired this e-commerce platform called Ship't, S-H-I-P-T, and it was more or less purchased to first and foremost, build up Target's online presence, e-commerce presence. But they've since expanded this network. I mean, not since, but I mean they've expanded the partnerships in this network with other retail partners around the country in order to bring more e-commerce and omnichannel capability out there. So even Bed Bath & Beyond now is working with Ship't in order to grow that digital business. It seems to me, at least when you look at something like Bed Bath & Beyond, if you're talking about keys to success for the future, really digital is going to be, I don't know if it's the number one key, but it feels like the number one key.
Mathews: There's digital and then there's omnichannel as well, that's something Wayfair can't match. When we say omnichannel, we mean, you can buy online, you can buy in the store, you can buy online and pick up on the store. During COVID, in particular, they've seen a big pickup in buy online, pick up in the store or you can order online or return to the store. Having a physical presence gives you options as a retailer to give to the customers that you can't do if you're solely online. We're still I think in the early days of seeing how that strategy will work for Bed Bath & Beyond. But it's definitely something that would differentiate them from Wayfair or Amazon or anyone else that's solely online.
Moser: Yeah, I'm glad you said that because that is something that for folks who think it's just a digital world, I mean, analyze the retail space just a little bit, you'll see that word omnichannel mentioned a lot. Omnichannel is really, really important. That's not just a buzzword. Whether you're a Home Depot or Bed Bath & Beyond, omnichannel is something that is being bandied about by a lot of these physical retailers because like you said, that word, omnichannel, it's about being wherever the customer needs you to be. To your point, Wayfair can't really match that. Wayfair doesn't really have that dynamic in the sense that you're not going into a Wayfair store. Maybe they have a pilot source. I feel like maybe I read something at some point where they were piloting some physical stores, and Amazon clearly has tried that as well. It does seem to me that omnichannel is becoming a little bit more important than digital because omnichannel is that total retail capability, isn't it?
Mathews: It is. It's interesting, Bed Bath & Beyond's other physical retail competitors are suffering just alongside them, so it could be a situation where physical retail had its stint, and Bed Bath & Beyond is the strongest player remaining.
Moser: What do you feel like are the metrics that matter most for a business like this right now, particularly one that's in transition as Bed Bath & Beyond is? I mean, digital gives you that opportunity to parse more data. That repeat customer data point that's so valuable for something of a Wayfair, you might not necessarily have that same insight with something like a Bed Bath & Beyond. What are the metrics that you focus on?
Mathews: Definitely the digital sales growth that you mentioned. All retailers are always going to want to keep an eye on same-store sales that's a good barometer of general health. This is a business that's in turnaround, they're losing money. I would keep an eye on the cash. They are closing stores, they are selling assets. They are trying to improve gross margin to improve their cash position. They've got more debt than cash and that's before you even go into their operating losses so I'd also keep an eye on their cash position.
Moser: Yeah, the cash burn, we talk a lot about that burn. Again, a company that's not generating income or free cash flow, nothing really to continue reinvesting in the business, they have to dip into the coffers and that can be a problem over long periods of time. Honestly, that's one of the things I was so critical about Bed Bath & Beyond for so long. Was for a company that clearly needed to be playing defense, they kept on buying back shares at these just insane prices. It drove me nuts. I didn't understand why they did it but it seems like that's at least abated somewhat. A lot of their success really seems to be part of Mark Tritton's vision. Mark Tritton, the former Chief Marketing Officer at Target, feels like he's really an important piece to this turnaround. What do you think there?
Mathews: I think they brought in a new team. The impetus is there. I think for the previous team, they've been extremely successful in traditional retail. They conquered the category but just weren't ready to pivot into online. I think their success almost gave them a blind spot. This new team, they definitely have the mandate to get it done so I think that's really the key thing.
Moser: What are you looking out for the rest of 2021 and even beyond, no pun intended, [laughs] for a company like this? Clearly they've got this plan and it seems like they are starting to execute on it. But what are the things that investors who are interested here, what should they be watching for?
Mathews: This is an interesting one. As an investor there would be a potential if you've got strong reopening, a big bump in metrics or the same-store sales, growth marketing cash, and then you've got a rerating in the stock and a higher multiple, you could see a bit of a short-term jump, especially if it looks like the turnaround is taking place. Philosophically that's not the way I tend to invest. I tend to prefer to go with the longer term opportunity than the short term. It's funny you mentioned the share repurchases. I looked this up. Between 2012-2016, we spent $7 billion on share repurchases. The current market cap is $3.5 billion, so [laughs] at today's prices they could have bought the company twice over. They've got another $825 million authorized for share repurchases which is like part of the playbook when you're a struggling business and you're trying to turn things around and you tell the market, whoa, we're going to buy back our shares. They're cheap. If they do make a turnaround and the shares do pop it's going to be, in hindsight, turn out to be a great move but it definitely makes me nervous. I feel like in a year or two if they've spent this $825 million they could be looking at their balance sheet, looking at their cash coffers and saying, I wish I had a few hundred million around [laughs] to invest in the business.
Moser: That share repurchasing data that you just lobbed out there, if we had sound effects I feel like you insert the toilet flushing sound right there, because that's just money being flushed down the toilet. I was giving them such a hard time for so long because they were buying those shares back at such high prices and the share price just continued to fall, because the business was performing so poorly and you can see that through the financials. It just seemed to me to be very misguided management, and it really does go to show that the core leadership can really have a profound impact. It goes back to what's that Warren Buffett quote? Something like finding a business that can be run by a ham sandwich or something like that. [laughs]
Mathews: Mentally a ham sandwich will. Yeah, it's certainly a capital allocation at stake in hindsight.
Moser: Yeah, just a good lesson, a good reminder for folks out there share repurchases, not always a good thing so just keep that in mind and assess those share repurchase plans in tandem with the actual performance of the business. Much like we love to add to winners here at The Fool, that's the same idea. I'm not saying I want to see companies just dropping coins on repurchasing shares while the shares just continue to march higher, but by the same token, those shares marching higher along when you look at the financials of the business can be a good indicator that the business is performing well. So you got to take that stuff in context and look a little bit deeper. Share repurchases are not always a good thing. Brendan, we'll wrap up the discussion here. I just think it's fascinating to look at these two businesses side-by-side over the past five years. You can see over the last five years to your point about long term focus they're taking the longer view. Over the last five years shares of Bed Bath & Beyond are down 40% while Wayfair shares up 680%. Then if you look at the three-year window, Wayfair up 370%, Bed Bath & Beyond a little bit more of a palatable positive 41% return. This to me is pretty amazing actually, over the last year Bed Bath & Beyond shares have outperformed Wayfair, rather significantly. Bed Bath & Beyond shares over the last year rose 605% to Wayfair's 511. Then year-to-date both companies performing relatively well but hey, Bed Bath & Beyond has the edge there so it sounds at least like maybe management's onto something here and for all of the jokes that we made at Bed Bath & Beyond's expense here over the last several years, maybe it's time we changed our tune a little bit.
Brendan, before we leave, I just wanted to give our listeners a chance really quick. For those looking to learn more about Motley Fool Ventures, what you and the team are doing over there at Motley Fool Ventures, where can they go?
Mathews: You can go to foolventures.com and we are actively investing in companies. If you're the founder of a technology company, if you have 500,000 in revenue and 100% year-over-year growth, you can email me at [email protected]. We are looking for technology companies, we are open to people from all backgrounds, we definitely love to hear from folks who are from groups that are traditionally underrepresented in venture capital so that would be female founders, black and Latin next founders and we always are interested in businesses that are doing good things for the world in addition to making money.
Moser: Well, that sounds like a very good combo and we love to see what you guys are doing there at Motley Fool Ventures. Been an exciting part of our business year now. Still new, you guys haven't been in existence all that long, but you've made a lot of progress in a short period of time. That's exciting to watch. Listen, I appreciate you taking the time out of your busy schedule to join us today for this week's Wildcard episode. We'll have to do it again real soon.
Mathews: Jason, I'm going to take this last opportunity to thank you because back in 2014-2015 when we were working together, I think on Stock Advisor and looking at Bed Bath & Beyond you said, "Hey, you should look at this company Wayfair." I said, "What is this? Some .com losing money." [laughs] Anyway, a lot more conversations went from there, I bought shares I think in September and March of 2015 and I'm getting close to a 10-bagger. I think I bought shares for about $33 so I am giving you this thank you. There will be no monetary reward [laughs] but I'm giving you this public thank you.
Moser: Well, I appreciate that Brendan. As a fellow Wayfair shareholder, I feel your joy [laughs]. Given the numbers that we've talked about today I feel like hanging on these shares for a little while longer because it sounds like the future is bright. Bed Bath & Beyond, I'm still on the fence but I tell you I'm liking what I'm seeing and definitely the jokes are done. I tell you, Mark Tritton, I'm a believer and I like what these guys are doing, I think investors would be wise to keep an eye on this one for sure. But folks, I think that's going to do it for us this week. Remember, you can always reach out to us on Twitter at @MFIndustryFocus, or you can drop us an email at [email protected].
As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Brendan Mathews, I'm Jason Moser, thanks for listening and we'll see you next week.