Investors have high expectations heading into Wayfair's (W 1.89%) earnings report later this week. The online home furnishings giant was among the biggest winners from pandemic shifts in shopping behavior, with sales soaring by over 50% in 2020.
Its Thursday announcement will contain signs of a slowdown from that epic growth spike, and investors are also concerned about potential inventory, pricing, and shipping challenges that might strike the business.
With that bigger picture in mind, let's look at three key trends to watch when the company reports earnings on Thursday, May 6.
Image source: Getty Images.
1. Market share: Are new users sticking around?
All indications are that 2021 got off to a strong growth start. Federal stimulus support, combined with an intense consumer focus on the home, likely kept sales rising through late March. Still, most investors who follow the stock are bracing to see a third straight slowdown, with revenue climbing by about 44% compared to 55% for the full year 2020.
More sluggish gains are a guarantee after an epic year like that, but the bigger trend to watch is market share. Wayfair gained millions of new customers in 2020 and the next few earnings reports will show whether those first-time users are sticking around even as other competitive options open up.
Good news on that score will show up in places like repeat orders, customer additions, and average spending per order, which Wayfair's management team will discuss on Thursday.
2. Operating margin: Will the turnaround hold?
Wayfair only recently started generating steady earnings, and so investors aren't yet clear about the chain's true level of profitability. Operating income soared to $360 million last year from an almost $1 billion loss. This dramatic turnaround was a key factor behind the stock's rally since the pandemic started.
But 2021 will bring new cost challenges to the business, including weaker year-over-year sales. Wayfair might also struggle to keep inventory through shipping bottlenecks. Finally, its users might balk at rising prices as manufacturing costs spike.
W Operating Margin (TTM) data by YCharts
Wayfair's performance through all these issues will show up in its operating margin, which CEO Niraj Shah predicted will rise quickly over the coming years after just having broken into positive territory. The company will first have to navigate through a tough period of volatility as shopping trends move back toward normal in 2021.
3. The wider outlook: Maintaining market share leads
Shah and his team said back in February that the pandemic has accelerated the shift toward online furnishing shopping in ways that disproportionately benefit its business. That judgment forms the basis for management's claim that Wayfair can realistically target over $100 billion of annual sales by 2030, compared to just $14 billion this past year.
Embedded in that assumption is a prediction that the industry will expand at about 15% per year while Wayfair gains market share and grows at 25% per year, on average. The company demonstrated that market power through the pandemic and today it enjoys new competitive advantages including a large user base and a proprietary shipping network built to handle bulky products.
Those assets likely kept Wayfair firmly in the market share lead at the start of 2021, which means investors have a lot to look forward to as this growth-focused business matures.
