Wayfair (W 12.52%) investors are in for some intense stock price swings over the next week or so. The online home furnishings retailer reports quarterly results on Thursday, Aug. 5. Share prices have been volatile heading into that announcement on worries about slowing growth in the wake of an easing pandemic.
That's what Wall Street was fretting over last quarter, but Wayfair erased those concerns by revealing spiking demand and rising profit margins. Let's look at the prospects for similarly good news in the company's fiscal Q3 report.
1. Look at more than just sales
Investors are expecting Wayfair's first sales decline since the start of the pandemic as the company begins to go up against the strongest growth period from the early phases of the global outbreak. Revenue through June should land at about $4 billion, or down 3% compared to last quarter's 49% boost.
The bigger questions surround the engagement level of the millions of new customers Wayfair added in the past year after COVID-19 sparked soaring demand for home furnishings. If these shoppers act similarly to previous new converts, then the growth outlook is especially bright. Follow repeat order volume and the size of Wayfair's active user base for answers on this topic.
2. Prices are up, inventory is under pressure
The past few months brought new challenges that might hurt profitability, including rising costs and inventory pressures. Wayfair likely dealt with higher delivery expenses, increased prices from its suppliers, and cost spikes for online advertising.
CEO Niraj Shah and his team have predicted that the business might eventually reach a gross profit margin of around 30% of sales. "Our strong profitability should not only continue, but expand," he told investors back in May. Investors will be looking for confirmation of that bold prediction in this quarter's result and in Wayfair's updated outlook for the rest of the 2021 year.
3. Looking ahead
In mid-May, Wayfair didn't leave any doubt in its comments regarding management's enthusiasm about growth prospects in 2021 and beyond. Shoppers are fundamentally more willing to shop online for an expanding range of home furnishings, Niraj predicted.
That outlook helps explain why most investors are looking for sales to rise by double-digit percentages this year even after Wayfair added a whopping $5 billion, or 55%, in 2020.
That optimism means it would be easy for Wall Street to get spooked by even faint signs that the pandemic boost is ending or that Wayfair isn't profiting as much as it had hoped from its newest cohort of shoppers. Those are just two of the biggest risks to the elevated growth expectations investors are holding heading into Thursday's report.
On the other hand, even a reduced 2021 outlook wouldn't threaten Wayfair's wider ambitions for a much larger sales base. The company has a dominant position in a growing industry niche. If it can keep satisfying customers looking for home furnishings and upgrades, as it did over the past year, then shareholders should see solid returns by holding this growth stock over the long term.