Wayfair's (W 1.13%) second-quarter earnings results were somewhat muted, as revenue posted a decline of 10% year over year. This was expected, however, as the company faces tough year-over-year growth comparisons in the near term. In the third quarter of 2020, revenue surged 66% year over year, but analysts expect Wayfair to grow revenue by just 1.8% in the next quarter.
The economy is more fully open than this time a year ago, and that makes forecasting near-term results very difficult. However, it is encouraging that Wayfair's second-quarter revenue was still up 28% on a two-year compound annual growth rate basis, which indicates what growth will look like once Wayfair moves beyond the year-over-year comparisons with the start of the pandemic.
Despite the recent decline in revenue, there are three reasons Wayfair is looking very strong as the economy reopens.
1. Wayfair has more loyal customers
There is a lot of short-term noise with the wild shifts in consumer behavior, but management sees the underlying structural elements for growth in the online home-goods category still intact.
Wayfair is still on track to gain significant market share over the long term, which is the primary investing thesis for the stock. In fact, two metrics illustrate that Wayfair is in a better position to accomplish this coming out of the pandemic.
Last quarter, active customer accounts grew 19.6% year over year to reach 31.1 million. Equally important is the growth in repeat orders, which increased to 75.6% of total orders in the second quarter, up from 67.4% in the year-ago quarter.
CEO Niraj Shah explained that even as people have more opportunities to get out and away from home this year, consumers still have plenty of buying power, and interest in home spending is not going away. He said the annual Way Day sales event during the second quarter "proved to be the largest in the company's history, even as consumer spending began to flow back to experiential categories." This reflects Wayfair's growing customer base.
Shah sees the potential for Wayfair to grow even faster beyond the pandemic. He explained that customers tend to shop one room, one project at a time. However, home to-do lists are essentially endless, which is why the home goods market is estimated to be over $1 trillion. Wayfair only commands a tiny $14 billion of that market.
2. Wayfair's financials are strong
Wayfair is gaining new customers while strengthening its financial position with improving free cash flow. Some might recall that Wayfair stock got scorched in late 2019 over aggressive capital spending that was burning a hole in the bottom line.
In 2019, Wayfair produced negative free cash flow of $598 million. But over the last four quarters, Wayfair generated $701 million of free cash flow, and this is correlated with the lower costs to serve repeat customers.
As Shah explained it, "We believe we are leaving the pandemic period with an even stronger repeat-customer base than when we entered it, which should have long-lasting benefits given it cost us relatively less to drive repeat purchases than initial orders."
3. Wayfair is built to grow
There will likely be further quarter-to-quarter noise in operating results. Wayfair is dealing with supply shortages and longer delivery times, which management doesn't expect to normalize until 2022.
However, Wayfair has advantages to counter some of this headwind, which also speaks to its long-term advantages in delivering returns to investors.
Shah said: "Our inventory-light model helps us foster substitution with more than 22 million products on the platform, and we're leveraging our logistics and technology solutions to closely manage customer delivery expectations, both pre- and post-order. We believe this transparency is helpful in building long-term customer trust in Wayfair."
Through this crisis, Wayfair has demonstrated it's an e-commerce powerhouse on the rise. After an initial spurt at the beginning of the pandemic, the stock price is down about 10% over the last 12 months. At a price-to-sales ratio of 2.1, it's only a matter of time before the stock starts heading higher again, as Wayfair continues to tackle a massive addressable market.