Wayfair (W -2.05%) shareholders have had a volatile 2023 thanks to rapidly shifting sentiment around the e-commerce retailer's home furnishings business. The stock is down sharply over the past full year but rallied in early May after the company announced positive news on the earnings front.
Let's take a closer look at that report, and what it might mean for the stock in 2023 and beyond.
Wayfair is still nursing a growth hangover
Wayfair is still working through a painful growth hangover driven by much lower demand for home furnishing and e-commerce spending. Sales in the Q1 period that ran through late March were down 7% to $2.8 billion. Wayfair's customer base shrank by 15% year over year, and its overall order volume declined by 7%.
The pace of losses is slowing, though, compared to 2022. The chain is winning market share as well. There are a few other encouraging growth signs, including a high proportion of repeat orders and steady average order value. Executives credit changes they've made to the browsing and buying process. "We have made significant strides in improving our offering and customer service," CEO Niraj Shah said in a press release.
Wayfair is working back to profits
Wayfair is taking big steps back toward profitability, but investors are still waiting for concrete signs of a rebound here. Gross profit margin inched up to 30% of sales last quarter from 29% of sales in late 2022. The company posted a loss on both a reported and non-GAAP basis, although adjusted losses improved to $14 million from $113 million a year earlier.
Management projects a return to non-GAAP profitability in the current Q2 period, which it says is a testament to the financial strength of the company's operating model. "We have always known, and now are clearly demonstrating that the Wayfair model is inherently profitable," executives said.
Looking ahead
Investors might want to wait for more clarity about Wayfair's profitability. The company hasn't returned to positive cash flow yet, after all, and this metric is still being pressured by a huge expense burden.
W Operating Margin (TTM) data by YCharts
Sure, cash flow and earnings will likely improve over time thanks to the combination of cost cuts and slowing sales declines. Growth stock investors want to see a clear path toward sustainable profits, however, which isn't showing up yet in Wayfair's results.
It's encouraging to see the company's losses moderate. Management's forecast calling for adjusted profitability this year is reassuring, too. But there are still some big questions about whether the e-commerce giant can deliver solidly positive operating income given that it only briefly broke into profitability on this basis during the soaring demand phase of the pandemic.
Wayfair's stock is valued at a huge discount compared to that period. You can buy shares for about 0.4 times sales right now compared to over 2 times sales back in 2021. This lower valuation makes sense today, though, given its weak cash flow and earnings trends. The stock isn't likely to generate excellent returns for investors until there are major improvements in both of these metrics.
