Wayfair (W 2.08%), the online home decor and furnishing company, demonstrated solid progress in meeting its strategic goals in the second quarter of 2023, causing its stock to jump 14% last week. Is this a real turnaround? Should you buy its stock now?
Growth interrupted
Wayfair's original plan was to create an all-online furniture company with a huge collection of products to meet any budget. The idea is to operate as a dropshipping platform, which means it provides access to thousands of suppliers without the expense of holding inventory. When a sale goes through, goods are sent by the supplier, and only then does Wayfair pay for the cost of the product.
Products conform to Wayfair branding, so when a customer goes online to shop, there's no hodgepodge of suppliers. It's a smooth, well-run organization with advanced search and visual technology. The company's logistics network, Castlegate, accounts for more than 20% of fulfillment, which gets merchandise to customers quickly and safely. In fact, 97% of products get to customers in as little as two days, according to the company.
Wayfair enjoyed years of high sales growth before the pandemic, and its stock price reflected that. Then demand for home improvement soared, powering sales higher early in the pandemic. It also briefly became profitable at that time.
But between inflation keeping customers away from large, nonessential purchases and high pandemic-driven growth that's been difficult to match, Wayfair's sales have plunged.
Still facing its greatest challenge
Wayfair was nearing profitability when it began as a public company in 2014, but instead of reaching profitability as it scaled, revenue and income diverged as if on cue.
Data source: YCharts
This didn't seem to bother investors as the stock price rose regardless. But it signified a deeper issue with the company's model, which was that it couldn't, or didn't care to, figure out how to grow and make money.
Meeting the moment
Wayfair has posted revenue declines for the past nine quarters, but the decreases have been getting smaller. You could look at that as progress, but it's also a natural slowdown since decreases were so vast at the beginning. Management says that its 3% revenue drop in the 2023 second quarter was better than a 10% to 20% decline for the industry. Customers just aren't really buying furniture these days, making it a challenge for Wayfair to demonstrate any significant progress.
It has started a cost-cutting plan as net losses deepened last year, and it is demonstrating success. Gross margin was 31%, which management pointed out was as high as when it was posting its best gains during the pandemic-fueled boom in furnishings buying.
Data source: YCharts
Chief Executive Officer Niraj Shah noted that the widening margin is coming from real work the company is doing, and not just soaring revenue. That's a step in the right direction.
The company also posted positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow of $128 million. The net loss of $46 million was a big improvement from the net loss of $378 million last year and makes net profitability seem close by.
Better the second time around?
Management missed the opportunity to strive for efficiency when it grew rapidly in the past. It's in a much better place today than it was last year as it finally doubles down on operational efficiency, and Shah said that the company "plan(s) to take full advantage of this." That rings a little hollow, because Wayfair had that chance before and squandered it.
Believing in the company now requires a small leap of faith. There are some great features here, including a strong brand, millions of active customers, an advanced digital system, and a solid logistics network. Now the company has to make it all work to be a viable business long-term.
Risk-tolerant investors may see enough potential here to take the risk and buy shares now. After all, if you'd bought at the beginning of the year, you have a gain of more than 150% right now. But most investors should wait and see if Wayfair can sustain its progress before deciding whether it's a worthwhile investment.
