Wayfair's (W -0.02%) stock closed at its all-time high of $345.47 on March 22, 2021. At the time, the online furniture and home goods retailer seemed like a solid play on soaring home sales and stimulus-induced spending.
But as of this writing, Wayfair trades at about $47 a share. Its stock plummeted as sales of new homes stalled out, its supply chains were disrupted, and inflation boosted its shipping costs. Rising interest rates also drove investors toward less cyclical stocks.
At its peak, Wayfair was valued at nearly $36 billion, or 2.6 times the sales it generated in 2021. Today, it's worth just $5 billion, a mere 0.4 times the sales it's expected to generate in 2023. Should investors consider Wayfair to be a deep value play that has a shot at recovering over the next 12 months?
Image source: Getty Images.
Why did the bulls abandon Wayfair?
Wayfair sells its furniture and home goods online through its eponymous e-commerce platform and four other websites: Joss & Main, AllModern, Birch Lane, and Perigold. It cuts out middlemen retailers and enables its 22.6 million active customers to buy products directly from more than 23,000 suppliers across the world.
Wayfair's growth can be gauged in its number of active customers, its latest-12-month (LTM) revenue per active customer, its total orders delivered, and the average order value (AOV). It experienced a major growth spurt in 2020 as consumers bought more products online during the pandemic. Wayfair's growth in active customers cooled off as the lockdowns ended, but its AOV continued rising as inflation forced it to pass on some of its higher costs to its remaining customers.
|
Metric |
2020 |
2021 |
First nine months of 2022 |
|---|---|---|---|
|
Active Customers Growth (YOY) |
55% |
(13%) |
(21%) |
|
LTM Net Revenue Per Active Customer Growth (YOY) |
1% |
11% |
13% |
|
Orders Delivered Growth (YOY) |
61% |
(15%) |
(28%) |
|
Average Order Value Growth (YOY) |
(4%) |
14% |
19% |
|
Total Revenue Growth (YOY) |
55% |
(3%) |
(13%) |
Data source: Wayfair. YOY = Year-over-year.
Some moderate AOV growth would be healthy, but only if it's rising in tandem with its active customers. Right now, it's clear that Wayfair can't offset its ongoing loss of active customers with price hikes alone.
Those price hikes also aren't shielding its margins from inflation. Its gross margin contracted from 29.1% in 2020 to 28.4% in 2021, then shrank to 27.7% in the first nine months of 2022. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 35% to $614 million in 2021 and came in at negative $345 million in the first nine months of 2022.
What are Wayfair's near-term challenges?
Wayfair's situation seems grim for three reasons. First, home sales in the U.S. peaked in 2021 and declined throughout most of 2022 as rising interest rates made mortgages less appealing. Slower home sales will likely curb its sales of new furniture and home goods. Analysts expect Wayfair's revenue to decline 11% in 2022 and stay nearly flat at $12.1 billion in 2023.
Wayfair also faces intense competition from other mass retailers like Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), and IKEA, which are all selling their furniture and home goods at competitive prices. To make matters worse, the potential bankruptcy of Bed Bath & Beyond (NASDAQ: BBBY) could flood this saturated market with cheap products.
Second, rising interest rates are also driving investors away from unprofitable companies like Wayfair. Wall Street expects it to end 2022 with an adjusted EBITDA loss of $419 million, followed by a narrower loss of $44 million in 2023 as it aggressively reins in its spending.
However, Wayfair recently accelerated its cost-cutting plans to bring its adjusted EBITDA back to breakeven levels in 2023. After trimming 870 jobs (5% of its workforce) last August, it recently said it would cut another 1,750 jobs (10% of its remaining workforce) to save $750 million annually and boost its free cash flow (FCF) back toward positive levels.
Lastly, inflation will likely continue to generate fierce headwinds for Wayfair by boosting its supply chain costs, forcing it to raise its prices, and throttling the spending power of the average consumer. Therefore, investors should expect its growth in active customers to stay sluggish for at least a few more quarters.
Can Wayfair recover in 2023?
Wayfair's stock looks cheap, but that discount fully reflects its near-term challenges. The bulls won't come back unless it gains more active customers, grows its revenues, and boosts its margins again -- and I don't think it will check all three boxes within the next 12 months. Wayfair might not be doomed yet, but it will likely underperform the broader market this year.
