People bought a lot of furniture and other home goods online during the first year of the pandemic. Stuck at home and flush with stimulus cash, consumers went on a spending spree. Wayfair (W -3.04%), which was chronically unprofitable before the pandemic, suddenly (and temporarily) looked like a sustainable business.
In 2019, Wayfair posted a free cash flow loss of nearly $600 million. Growth was impressive, but achieving that growth was costly. Everything changed in 2020. Revenue shot up 55%, and Wayfair printed $1.1 billion in free cash flow. The stock soared as investors apparently bought into to the idea that this was the new normal.
It was not the new normal. Demand started to falter in 2021 and weakened further in 2022. Free cash flow tumbled to just $130 million in the year following Wayfair's record haul, then dove deep into negative territory in 2022. Through the first nine months of last year, free cash flow was a loss of just over $900 million, a swing of more than $1 billion from the prior-year period.
An aggressive cost-cutting plan
Wayfair announced a broad cost-cutting plan last year, and it filled in some details on Friday. The company is aiming to reduce annualized costs by about $1.4 billion in an effort to reach adjusted EBITDA profitability by the end of 2023. Eventually, Wayfair wants to get back to producing positive free cash flow, although the company didn't provide a timeline for that metric.
As part of this plan, Wayfair will reduce its workforce by about 10% by laying off roughly 1,750 employees. The corporate workforce will take the biggest hit, with 18% of corporate jobs being eliminated. Including other actions Wayfair has taken since it announced its initial cost-cutting plan, total annualized savings related to labor are expected to reach $750 million.
On top of labor savings, Wayfair is working on boosting efficiency and saving costs in other ways. The company plans to wring out an additional $500 million in costs from its operations, which will show up as a reduction in the cost of goods sold. However, Wayfair noted that it may use some of these savings to boost demand through a stronger value proposition for its customers.
The last piece of Wayfair's cost-cutting plan is another $150 million in annualized savings in areas like advertising, capital expenditures, and general and administrative expenses. The company has already identified places where it can reduce its spending.
A tough sell
Wayfair CEO Niraj Shah framed these layoffs and other cost-cutting measures as a correction to excessive growth in spending during the heyday of the pandemic. "The good news for Wayfair is that we have operated in a highly productive and efficient way for the vast majority of our 20-year history, and we are now simply returning to that," Shah noted in the press release announcing the news.
The idea that Wayfair was "highly productive and efficient" prior to the pandemic is quite a stretch, at least when you look at the numbers. As a public company, Wayfair never produced positive net income prior to the pandemic year of 2020 -- not once. The company posted a net loss of $505 million in 2018 and $985 million in 2019. Going back to how it was before the pandemic is not a good thing.
W Net Income (Annual) data by YCharts
Wayfair has yet to prove it can be a profitable, sustainable company outside of the extraordinary economic environment of the early pandemic. This cost-cutting plan is necessary, but don't expect a miracle or a recovery in the stock price.
