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Wayfair's Pandemic Boom Is Over

By Demitri Kalogeropoulos – Nov 9, 2021 at 10:30AM

Key Points

  • Wayfair reported net losses and much weaker cash flow.
  • Management believes it will take a few more quarters before more normal growth returns.
  • While 2021 marks a step backwards for the business, the long-term outlook remains bright.

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Sales volumes are collapsing as shoppers scale back on home furnishing spending.

Wayfair's (W 11.04%) business is suffering from a growth hangover. The home furnishings e-commerce giant said on Thursday that sales declines accelerated in the third quarter as compared to booming results during earlier phases of the pandemic. That slowdown was a bit worse than expected but still left the company's sales footprint much higher than it was before COVID-19 scrambled demand trends.

Let's look at some key takeaways from Wayfair's third-quarter earnings announcement along with management's updated outlook for the full year.

A couple shopping for home appliances.

Image source: Getty Images.

The home furnishings boom is over

A year ago, Wayfair was benefiting from a uniquely positive selling environment. Many brick-and-mortar home furnishings stores were closed due to social distancing even as consumer demand in the niche soared.

Things have changed in the second half of 2021. Sales for the third quarter fell 19% over the year-ago period. Shoppers are simply directing cash toward other priorities, executives said. "As various geographies reopened post-pandemic," CEO Niraj Shah said in a press release, "consumers naturally shifted some spend[ing] toward travel and entertainment and...toward brick-and-mortar."

The good news is that the business is still growing its user base and notching engagement improvements. Average order spending rose, and the proportion of repeat business continued to climb. Wayfair's $3.1 billion in Q3 revenue is still far above the $2.3 billion mark from the same period in 2019 .

Back to losses

The collapsing order volume nonetheless pressured earnings. And those profitability issues were amplified by the inflation and supply-chain congestion problems that are impacting the industry today.

For the third quarter, the company incurred a net loss of $78 million, or 2.5% of sales, compared to a net gain of $173 million, or 4.5%, in the year-ago period. Meanwhile, the adjusted earnings margin dove to 3.2% from 9.7%. Free cash flow took a hit as well, falling back into negative territory after surging through most of the past 18 months. And net cash from operating activities through the first three quarters of 2021 came to just $321 million vs. $1.2 billion in the pandemic-fueled, year-ago period.

Looking ahead

Wayfair hasn't changed any of its ambitious, long-term growth and earnings forecasts. The company still believes it has a good shot at reaching $110 billion in annual revenue by 2030, executives say, compared to $14 billion last year. The company also expects margins to expand.

But it will be a bumpy ride in the next year or so, including the upcoming holiday season. "It will take a few more quarters for our get back to normal," Shah said in the third-quarter press release.

In the meantime, investors should focus on engagement trends to judge whether Wayfair is losing market share or is simply dealing with the temporary impacts from soaring demand in 2020.

The growing shopper base, expanding order size, and high repeat order volumes imply that home furnishings shoppers are still thrilled with the platform even if they're currently spending much less time and money in the category. As a result, Wayfair should get back to showing steady sales growth by 2022 after taking a modest step backwards this year.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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