The days of pandemic-fuelled profits and $300 stock prices are a distant memory for Wayfair Inc. (NYSE: W). Things would normalize for the online home goods retailer, but the fall from grace was one of the most stunning post-Covid plunges to date.
The reality check back to 2014 IPO levels took another hit last week after Wayfair reported its fourth consecutive quarterly loss. It was the worst yet.
After the stock dipped below $30, bargain hunters emerged to push the stock back above $40 on Friday (albeit amid a broad two-day market rally). It may seem tempting to declare Wayfair a potential turnaround story in 2023, but there are still plenty of headwinds, not least a slowdown in US e-commerce activity.
How were Wayfair’s third quarter financial results?
Wayfair reported that third-quarter sales fell 9% to $2.8 billion. About 80% of sales came from US websites, the rest from international websites where sales fell by 24%. While total revenue was slightly ahead of the consensus forecast, a worse-than-expected net loss of $2.11 per share was hard to digest.
But the most concerning statistic was that repeat customer orders dropped by 19%. With online shopping no longer the only show in town, it suggests that consumers have returned to physical stores where they can personally touch and feel products. This is an advantage of furniture showrooms that Wayfair will find difficult to match. The novelty of virtual showroom tours and room visualizers seems to be waning.
Wayfair had 22.6 million active customers through the end of the third quarter. This was about 23% less than a year ago. Yes, the average order size increased to $325 as shoppers took on increased operating costs. Unfortunately, this was more than offset by the shrinking customer base and a decrease in the number of orders per customer, which continued to fall below two.
What are the challenges for Wayfair?
Wayfair faces an uphill battle when it comes to competing with established physical furniture retailers. Many of these traditional players have deep roots with suppliers and customers that are simply difficult to replicate online.
Nationally known companies such as Ethan Allen, La-Z-Boy and Williams-Sonoma also often have deeper pockets to weather turbulent trajectories and invest comfortably in expansion opportunities. The same goes for chain stores such as Walmart and Target. Even the warehouse clubs are getting more involved in the home goods game.
Complicating matters is the fact that physical retailers are ramping up their own e-commerce initiatives. This makes it even more difficult for Wayfair to develop customer loyalty and more expensive to acquire customers. Management is trying to overcome this challenge in part by expanding abroad, but again this is not a cheap endeavor.
Then, of course, there’s Amazon. Most Wayfair products can be found at Amazon.nl and the prices are comparable. This leaves Wayfair with a grueling choice: undercut Amazon’s prices or spend a lot of money on advertising? Either way, as we saw in the third quarter, earnings are being hit hard.
The bottom line is that Wayfair is being forced to spend more on marketing to acquire customers. And with consumers spending less on things and more on experiences in the post-pandemic economy, luring home buyers online is a big challenge these days.
Meanwhile, Wayfair’s balance sheet is also being compromised as losses mount. The company exited the quarter with more than $3 billion in long-term debt on the books compared to a cash position of $731 million.
Will Wayfair Stock Recover?
If Wayfair has any chance of regaining favor with investors, it will first have to reverse its streak of six consecutive quarterly revenue declines. Until the company returns to revenue growth (and ideally sustainable revenue growth), the stock will have a hard time attracting bidders. Day traders and meme stock conspiratorsmaybe – but not the big money of fundamentally oriented institutional investors.
It will be especially difficult for a sustained uptrend to sustain when profitability is unlikely to come soon. The Street is bracing for several more quarters of net losses, including a net loss of $1.70 per share in the fourth quarter Christmas shopping period.
Like most retail areas, the purchase of furniture, housewares and home decor is shifting online. This is the main reason to be hopeful for long-term recovery. But of course, a growing number of brick-and-mortar retailers and upstart e-commerce players will make competition fierce.
To its credit, Wayfair has a solid collection of popular websites. But the macro and company-specific hurdles make it difficult to get behind the stock right now. Investors in long-term growth should cherish the idea.