Furniture isn't usually the most exciting investment topic -- especially compared with hot areas like tech -- but one stock is soaring of late. Online furniture retailer Wayfair (W 2.08%) has seen its shares more than double this year -- and that's despite dramatically declining sales and a depressing near-term outlook.
What gives? Let's see what shareholders have picked up on, and imagine where Wayfair could be next year at this time.
Perfect on paper, but not in real life
Wayfair has a fantastic business model. It sells completely online, so it doesn't need to invest in costly real estate for showrooms. The digital platform also opens it up to a huge market of the entire U.S. population, and it operates in some other regions as well.
Lastly, it works with a drop-ship model. That means instead of buying inventory and keeping it on its books, or needing to pay for warehouses to hold it, its web presence is a platform that connects suppliers (that keep the inventory) with customers. When Wayfair makes a sale, the product is shipped straight from the supplier to the customer.
Wayfair's business centers around developing the best platform for these products, which includes excellent visuals and descriptions, its own customer service, and a logistics network that suppliers can sign up for to provide quick and safe delivery.
Yet, for a company whose model is in theory much cheaper to run than a fully stocked warehouse, it spends an awful lot of money. You can blame external headwinds for a lot of Wayfair's troubles, but I don't buy it. Its biggest problems are a result of inefficiencies.
What's going wrong?
Wayfair has reported sales declines over a breathtaking eight consecutive quarters. I suppose some investors would call it good news that these declines have "improved" from double digits to single digits. But these are still declines on top of declines. For example, sales fell 14% year over year in the 2022 first quarter and only 7% in the 2023 first quarter.
Even worse, after finally turning a profit at the beginning of the pandemic, it's back to losses. Lest you think this is a post-pandemic problem, it has been plaguing Wayfair for years. It was just net profitable when it went public 10 years ago, and instead of becoming more profitable as it scaled up, profits tanked as the company went on a spending spree to generate higher sales. As sales continued to increase, losses did as well.
It overshot when building out more infrastructure to meet increasing demand in 2020, but it already had been doing that for years, never getting to a point of scale where intake overtook spending -- and that's despite consistent sales growth. This is a broken model.
Management is attempting to fix its cost structure and took actions like letting go of thousands of workers to get back on track. Its first goal is to get to breakeven based on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which it says it will reach in the 2023 second quarter.
The company gave a fairly complex explanation of how it sees profitability improving from there, and how it plans to balance growth and profitability. In sum: Expect it to take a long time, and it's not guaranteed to work.
This is not a cheap stock
Wayfair stock sure looks cheap, trading at a mere 0.6 times trailing-12-month sales even as it's up 107% this year. It's incredible that so many investors are confident in Wayfair right now. Those who buy the stock presumably expect a boost, but that has happened and might not go any further. Or they are banking on a comeback, which is certainly possible, but it's so uncertain now as to make this a risky play. As the stock price rises, so is the amount of float sold short, which is a very high 47% right now.
One year from now, if we go with management's rosy outlook, Wayfair should be demonstrating improvements, but still be a ways off from net profitability. Revenue may or may not be growing. I'm all for accepting the possibility of a turnaround, and I hope management is able to pull it off. That would be great for the company and its customers and shareholders. But I wouldn't recommend buying Wayfair stock right now on the chance it happens.
