What happened
Shares of Wayfair (W 1.89%) sank 13.3% this week, according to S&P Global Market Intelligence. The online retailer focused on home goods and furniture did not have any business/earnings updates this week; however, other retailers like Target and Walmart made bad comments about the general retail environment, which caused investors to sell Wayfair stock. At one point, Wayfair stock was down 17.2% this week.
So what
Earlier this week, both Target and Walmart released their latest earnings results. On its conference call, Target executives said starting in March, it saw a huge slowdown in demand for home merchandise as the company lapped last year's stimulus payments and consumers started to spend more on travel items like luggage, which was up 50% year over year. Management also said freight and transportation costs are soaring for its operations, with an expected $1 billion expense bump in 2022 compared to what they guided for at the start of the year.
Image source: Getty Images.
Walmart had a less bearish report but still said that some customers are pulling back on discretionary purchases because of high gasoline and food prices. Combined with the lapping of the COVID-19 stimulus checks, this makes sense looking back to the 2021 numbers.
This is not good news for a company like Wayfair. It not only operates in a business that is seeing worsening demand (home goods and furniture) but operates as an online retailer, meaning it relies heavily on the nation's transportation networks. With freight costs soaring and demand going down, Wayfair will likely struggle to grow its revenue and cash flow in the coming year. In fact, it already showed these struggles last quarter, with revenue declining 14% year over year and operating cash flow coming in at negative $226 million.
Now what
Wayfair stock has gotten hammered in the past year. The stock is down 75% year to date and 85% in the last year, with investors souring on the business coming out of the COVID-19 period when everyone wanted its products.
It also isn't great the company can't seem to generate a profit while its revenue is declining. Yes, this is compared to a tough period when the pandemic was in full swing and people were shopping heavily for home goods, but it isn't surprising that investors are nervous about these developments.
However, if you believe in Wayfair's business over the long term (meaning it can generate healthy cash flow margins consistently), now may be a good time to pick up some shares. The stock trades at a discounted enterprise value-to-sales ratio (EV/S) of 0.5, which is much lower than the market's average of around 2.5. This sort of valuation can be a setup for potentially strong returns for investors buying for the long haul.
