Wayfair (W -8.36%) stock plummeted 23% the day after the company released its Q4 and full-year results for 2022. Its dramatic drop in earnings prompted investors to dump shares of the Boston-based furniture and home goods retailer.
Additionally, the massive losses and worsening trends in its business point to serious challenges for the internet and direct marketing retail stock. The question for investors is whether Wayfair is worth a speculative buy or a company they need to avoid.
What happened to Wayfair
For 2022, the revenue of just over $12 billion dropped 11%. Unfortunately for Wayfair, 2022 losses spiked considerably higher, with the company losing $1.3 billion, a tenfold increase compared to 2021. Operating expenses surged 20% higher as revenue levels dropped.
Investors should also note that the holiday season did not offer much of a reprieve. Q4 revenue of $3.1 billion fell 5% year over year, and losses of $351 million for the period rose 74%.
That news led to selling that wiped out nearly all of Wayfair's 2023 stock gains. The shares are down nearly 90% since hitting their all-time high at the beginning of 2021, when the pandemic brought consumers to Wayfair's site in droves. As a drop shipper with a logistics network designed to ship bulk goods, it appeared to hold a competitive advantage over e-commerce giant Amazon, which almost always handles smaller items.
But with the lockdowns over, consumers returned to a preference for buying furniture offline. Over the past year alone, active customer levels dropped to 22 million, a 19% decline versus the previous year.
Wayfair's severe troubles
That shrinking customer count and financial losses place tremendous strain on the company's weak balance sheet. As of the end of 2022, Wayfair held just under $1.3 billion in liquidity. This is slightly less than its losses in 2022, implying the company has under a year left before it has to seek outside funding.
In fairness, management appears to be getting ahead of this issue. In the second quarter, Wayfair began a campaign that it expects will bring $1.4 billion in cost savings, according to President and CEO Niraj Shah.
Still, the amount of that savings already realized and the effects on revenue levels are unclear. That should concern shareholders given Wayfair's limited options for funding, especially in an extended bear market. The company holds just over $3.1 billion in total debt, a heavy burden given its negative $2.6 billion book value and current market cap of just over $4 billion.
If cost cuts do not work, Wayfair will likely have to turn to share issuances to find the needed funding. However, the state of its stock shows the limits of that strategy.
At the current price, the company would have to issue approximately 35 million shares to cover another $1.3 billion yearly loss. That is more shares than it has issued since its 2014 IPO. And even if that strategy helped the balance sheet, it would likely dilute shareholder value. That would probably defeat the purpose of a long position in Wayfair stock.
W Shares Outstanding data by YCharts
Should investors buy Wayfair stock?
Given the significant likelihood of further sales declines and share dilution, investors should consider selling Wayfair stock. While anything can happen, the company needs to bring about a recovery quickly to avert a disaster.
The company faces a possible death spiral as both losses and customer counts continue to trend in a negative direction. Also, current losses and liquidity levels indicate that Wayfair cannot sustain its current pace in the long term. If cost-cutting cannot significantly reduce losses, share issuance may be its only option. Considering all of the uncertainty surrounding the business, Wayfair appears too risky to own.
