What happened
Shares of furniture e-commerce company Wayfair (W -3.72%) plunged 38.2% in September, according to data provided by S&P Global Market Intelligence. Investors didn't like the terms of the company's new financing arrangement. And with the market and the economy struggling, investors fear recently strained financial results could worsen.
So what
Wayfair stock moved little during the first week of September. The company proposed raising $600 million through convertible senior notes on Sept. 7, and again the stock held steady. But on Sept. 9, it disclosed the terms for these notes, and the stock started falling.
Wayfair's notes come with a 3.25% interest rate. For perspective, the company issued convertible notes in 2017, 2018, 2019, and 2020 with rates ranging from 0.375% to 1.125%. So the interest rate on the latest offering is quite a jump. However, it's not unique to Wayfair; that's just how it works when the Federal Reserve is raising interest rates.
Investors also possibly disliked the initial conversion price for Wayfair's new notes. The newest notes mature in 2027. And whereas the offerings that mature in 2025 and 2026 have initial conversion prices of $417.15 per share and $148.48 per share respectively, the 2027 notes have an initial conversion price of just $63.45 per share. For financing, you don't want the notes that mature later to convert at lower prices -- it's backwards.
Wayfair's financing comes in handy considering how steep its losses currently are. The company's operations burned $341 million in cash in the first half of 2022, with corporate expenses eating up a big chunk of this. Management wants to spend on growth to increase its market share in the furniture industry from around 2% to 10% or higher. However, active customers are down 24% year over year as consumers spend less on furniture right now.
W Cash from Operations (TTM) data by YCharts.
It should also be noted that the market fell hard in September, and Wayfair stock has a historical tendency to move by a greater amount than the market, whether up or down. This is measured by its beta. Therefore, as the market plunged, so too did Wayfair.
Now what
If I were looking to short a stock, I absolutely would not choose Wayfair. Thinking broadly, I don't expect furniture sales or e-commerce to ever disappear, placing Wayfair at the intersection of two solid markets. Moreover, it's trading about 80% below its historically average price-to-sales (P/S) valuation, making me question how much more downside the company has.
W PS Ratio data by YCharts.
That said, Wayfair historically had meager profit margins even in good times. And now consumer demand is temporarily waning. Management says it's working hard to become profitable. But in the conference call to discuss second-quarter results, CFO Michael Fleisher also said, "Since late 2019, we have been focusing on becoming sustainably profitable and cash flow generative."
Given how long it's prioritized cash flow and how little progress it's made, I'd stay on the sidelines for Wayfair until it can show greater movement toward its stated goals.
