Online retailer Wayfair (NYSE:W) reported its third-quarter results before the market opened on Tuesday, Nov. 10. Wayfair blew away analyst estimates for both revenue and earnings, and the company provided strong guidance for the fourth quarter. Despite the overwhelmingly positive results, shares of Wayfair tumbled on Tuesday, falling more than 10%.
A look at the numbers
Wayfair reported quarterly revenue of $594 million, up 76.7% year-over-year and about $71 million higher than analysts were expecting. Direct retail revenue, comprised of sales through the websites of the company's brands, rose to $545 million, up 90.9% year-over-year. The total number of active customers in Wayfair's direct retail business jumped 60.6% year-over-year to 4.6 million. At the end of the second quarter, this number stood at 4.0 million.
All of Wayfair's important retail-related metrics improved during the quarter. Net revenue per active customer over the past 12 months rose to $371, up 8.5% year-over-year, while the average number of annual orders per customer was 1.69, up from 1.65 during the same period last year. Repeat customers accounted for 55.2% of total orders during the quarter, up from 49.8% during the third quarter of 2014. This comes out to a total of 1.3 million orders from repeat customers, representing a 96% year-over-year increase.
Wayfair delivered a total of 2.3 million orders during the quarter, up 76.8% year-over-year, with an average order value of $235, up 8.3%. Ordering from mobile devices accounted for a larger share of Wayfair's total orders during the quarter, with 35.1% of orders placed on a mobile device, up from 28.7% in the same period last year.
Turning to earnings, Wayfair reported a non-GAAP net loss of $0.13 per share, a major improvement over the $0.59-per-share loss reported during the third quarter of 2014, and $0.11 higher than analysts were expecting. The earnings improvement was driven by an increase in the company's gross margin, which rose to 23.8% during the third quarter, up from 23.5% in the same period last year, as well as operating expenses growing far slower than revenue. Operating expenses were up just 56% year-over-year, compared to revenue growth of 76.7%.
What management had to say
Wayfair CEO Niraj Shah expects the holiday season to be a strong one for the company. "We are very pleased to report the third quarter in a row of tremendous growth across the business," Shah said. "New customer growth and repeat customer growth continue to accelerate at a phenomenal pace as we enhance our offering and build greater brand awareness with consumers. We are well positioned to enter the holiday season with key improvements across assortment, merchandising and marketing, and look forward to further building our leadership position as the number one destination for home furnishings and décor."
A look at the guidance
Wayfair provided guidance for the fourth quarter during its earnings conference call. So far during the fourth quarter, the direct retail business is growing at a similar rate compared to the third quarter, according to CFO Michael Fleisher. But because the fourth quarter is weighted toward the back half due to the holidays, revenue can be difficult to predict.
With that in mind, Wayfair expects fourth-quarter revenue between $575 million and $610 million, representing year-over-year growth between 66% and 76%. This puts the expected fourth-quarter growth rate below the third-quarter growth rate, but Fleisher pointed out that the fourth quarter of 2014 was a particularly strong one for the company, making the comparison more difficult.
The bottom line
Wayfair blew away analyst expectations during the third quarter, with revenue growing rapidly and profitability improving. Wayfair is still unprofitable on both a GAAP and a non-GAAP basis, but the numbers are moving in the right direction, with costs growing far slower than revenue. In addition, the company's guidance calls for a strong holiday season. Overall, Wayfair had a great quarter, and the stock market's negative reaction is a bit of a mystery.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Wayfair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.