Wayfair (W 1.96%) investors have been on a wild ride in the past three years. Shares in the online seller of home furnishings returned nearly 70% early in that period, yet a painful slump in the past year or so pushed stock lower by almost 80%. And now, in just the past month the shares are up some 25%.
The e-commerce business had been among the biggest beneficiaries of early pandemic demand spikes for home furnishings, but now the business is contracting and giving up much of those sales gains. The big question is whether the investing thesis is broken for this formerly high-flying growth stock.
Let's dive in and find out.
A tough time for the industry
Wayfair's first-quarter update showed that it still has a lot of work to do before sales trends stabilize. Sure, sales only fell 7.3% through late March. But that result was lifted by rising prices. Wayfair reported a loss of 15% of its active customer base, which contracted to 21.7 million. Order volumes were weak too, declining 7%.
The silver lining here is that the wider industry fared even worse. Wayfair gained market share this past quarter, even as people dramatically scaled back on discretionary spending in the home improvement industry. Success here implies that the business can see a sharp rebound once the current cyclical downturn ends. "This was a strong quarter for Wayfair," CEO Niraj Shah said in a press release.
Restructuring the business
The scale of that downturn put immense pressure on Wayfair's profitability, even though the business is relatively capital-light. The company's net loss expanded to $355 million this past quarter from $320 million a year ago, and operating cash flow trends were negative.
W Operating Margin (TTM) data by YCharts
As a result, Wayfair has had to take on more debt recently, issuing $600 million in convertible senior notes to help fund the business. That's on top of the roughly $3.1 billion in long-term debt the company currently holds. This shift exposes the company to rising interest rates and adds more pressure on earnings.
The good news is that management sees a return to adjusted profitability coming by mid-2023, with further improvements ahead as the industry returns to growth in future years.
The three-year outlook
The bigger question is whether Wayfair still has a good chance at dramatically expanding its annual sales over the next decade or more. It currently accounts for just around $14 billion out of a massive total addressable market of over $800 billion for e-commerce sales of home furnishings.
While that's an impressive growth potential, revenue has only declined over the last several years after peaking in the early stages of the pandemic. This poor track record means investors can't assume a quick return to Wayfair's prior growth trends.
A rebound in the industry, combined with a return to profitability, would mean market-thumping returns for shareholders over the next several years. Yet the risk is just as high that industry trends will remain pressured or even worsen into 2024.
That's why investors should watch this stock from the sidelines for now. While you might miss some of the biggest gains by waiting, a conservative approach makes sense here given Wayfair's shrinking sales footprint and persistent net losses.
