Analysis: Wayfair has failed to turn over a new leaf as net loss continues to rise

In starting its new fiscal year, Wayfair’s results make it clear that the company has failed to turn over a new leaf. Indeed, if anything this quarter’s numbers represent a marked deterioration in performance. On the bottom line, the net loss has risen to $285 million from $200 million last year. Kicking off the year over a quarter of a billion dollars in the red is far from auspicious.

The source of the woe is, as it has always been, marketing costs. This quarter, Wayfair spent around $275 million on advertising – a 13% increase over the same period last year. This represents $13 for every active customer. Given active customers spend around $112 each quarter, this means 11.6% of that value is immediately absorbed by advertising expense. That, in our view, is quite unsustainable.

The heavy cost of advertising is, however, merely the icing on the cake. Even without it, Wayfair’s model does not completely stack up. At operating level, minus marketing cost, the company would have made a $13.7 million profit this quarter – a very meager return and not nearly enough to cover its $22.2 million of debt interest for the period.  Whichever way it is cut, the Wayfair pie does not look particularly appetizing.

Worryingly, despite spending more on advertising than last year, the increase in net sales has now fallen below the 20% mark. The rise in active customer numbers has also moderated and the average ticket continues to fall. To be fair, the top-line uptick is one that most retailers would kill to achieve. However, it needs to trend much higher if Wayfair is to eventually find a pathway to profitability; the fact it is not suggests the company will, at some point, hit a wall in terms of growth which will leave it extremely exposed.

In the near term, Wayfair is extremely upbeat about its prospects because of the coronavirus crisis. We agree that while many other retailers have remained closed, Wayfair has most likely been a beneficiary in terms of customer numbers and spend. From our own data we know that many consumers have turned to online for furniture and furnishings, many of them for the first time. This will undoubtedly provide a fillip to Wayfair’s revenue. However, we are less optimistic about profits. The cost of fulfilling home furnishings online is far from cheap and higher expense associated with safety and protection during the coronavirus crisis will further flatten already thin margins.

We also believe that the crisis provides only a short window of opportunity for online retailers. As traditional shops reopen, some of the trade gained during the lockdown period will drift back to regular patterns of buying. This is especially so for furniture where being able to see and feel products in person remains vital for many shoppers.

A further area of concern in the medium term is the economic impact of the crisis. To date, Wayfair’s results have been produced in a benign consumer economy where the housing market and high confidence have propelled spending on the home. Over the remainder of this year this position will change, and consumers will be more financially constrained and reticent to spend. This may well push down active customer growth and average spend which will only further damage the economics of Wayfair’s business.

Overall, we remain unimpressed with Wayfair. The company has racked up debts of $1.6 billion and its liabilities now exceed assets by $1.1 billion. As such, we are entirely unconvinced by the economic soundness of its business model nor do we see a pathway to future profitability.