Wayfair (W -1.94%) pioneered the art of losing gobs of money selling furniture and other home goods online before the pandemic. While the company's revenue was growing at a brisk pace prior to early 2020, every other metric was moving in the wrong direction. In 2019, Wayfair posted a net loss of nearly $1 billion on $9.1 billion of revenue, and free cash flow was just shy of -$600 million.
The pandemic temporarily reversed those trends. People were stuck at home with limited avenues to spend, and stimulus payments kept rolling in. Revenue accelerated, and for a brief moment in time, Wayfair was turning sizable profits. Free cash flow in 2020 was $1.1 billion, a positive swing of roughly $1.7 billion.
A return to form
This prolific consumer spending on online furniture turned out to be an ephemeral phenomenon, and Wayfair was not prepared for the party to end. Revenue began sinking in 2021, and that decline hasn't let up.
Wayfair's latest quarterly report paints a grim picture. Total revenue dropped 4.6% year over year in the fourth quarter of 2022, compounding with an 11.4% decline in the fourth quarter of 2021. The number of active customers plunged 19% to 22.1 million, orders per customer over the past year declined slightly, and the total number of orders delivered fell 9.1%.
Wayfair's revenue is still higher than it was before the pandemic, but other metrics have resumed their pre-pandemic trajectories. After a brief flirtation with producing positive net income, Wayfair's net income has quickly reverted to roughly where it would have been if the pre-pandemic trend wasn't interrupted.
Chart by author. Data source: Wayfair.
The same story has played out for free cash flow. The company produced positive free cash flow in 2020 and 2021, but plunging demand has sent this all-important metric deep into negative territory. Like net income, free cash flow has essentially returned to its pre-pandemic trajectory.
Chart by author. Data source: Wayfair.
Even pandemic-era profits couldn't halt the persistent decline in Wayfair's book value, or assets minus liabilities. The decline slowed a bit in 2020, but it's picked up again now that the company is back to unprofitability. Asset-light companies like Wayfair can operate with negative book values, but considering the profitability metrics, the deterioration is concerning.
Chart by author. Data source: Wayfair.
Cost cuts and a meaningless goal
Wayfair announced a broad cost-cutting plan in January. It laid off about 10% of its global workforce, and it set its sights on reducing overall annual costs by $1.4 billion. Roughly $750 million in savings would come from reduced labor, $500 million in savings would come from reductions in cost of goods sold, and $150 million in savings would come from other miscellaneous cost cuts.
Wayfair has set a goal of reaching positive adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization.
It's a silly goal because adjusted EBITDA is a silly number. It's not a particularly good proxy for cash flow, and in Wayfair's case, it adds back hundreds of millions of dollars' worth of stock-based compensation. Stock-based compensation is a real expense, and it shouldn't be ignored. If Wayfair reaches this goal, it means nothing.
In the longer run, Wayfair is aiming to grow its free cash flow. Free cash flow also ignores stock-based compensation, and the company's track record of producing positive free cash flow is constrained to the first two years of the pandemic, which included the absolute best demand environment the company has ever seen and will ever see.
Wayfair is not a once-profitable company weathering the post-pandemic storm. It's a never-profitable company that got lucky during the pandemic, and it's not clear whether a viable path to real profitability exists. While it can be tempting to buy beaten-down stocks like Wayfair, investors should tread carefully.
