Wayfair: It's Only Getting Worse (NYSE:W)

34.89K Followers

Summary

Losses increase and cash burn accelerates.
Q1 guidance well below expectations.
Another capital raise likely needed.

It was nearly a year ago that shares of online retailer Wayfair (NYSE:W) hit an all-time high near $174 a share. As the chart below shows, it's been all downhill since then, and that's despite shares bouncing roughly 20% from last Friday's low. Unfortunately, the company's latest earnings report showed that the company's financial picture is still not improving, and disappointing guidance means investors will likely need to brace for another funding round.

(Source: Yahoo! Finance)

For the fourth quarter of 2019, total revenues came in at more than $2.53 billion. That was up more than 25% over the prior year period, and was in-line with street estimates. International revenue growth was more than 37%, but this is just a small fraction of the company's total. The number of active customers was up almost 34%, with the average order total and orders per customer up slightly. Repeat customers were an even larger part of the business than in Q4 2018.

Unfortunately, it's the company's expense structure that remains a big problem, something I discussed a few months ago. Gross margins declined by 130 basis points, operating expenses soared more than 43% over the prior year period, and interest costs basically doubled. In the end, the company announced a GAAP net loss of more than $330 million, compared to $144 million in Q4 2018. Even on a non-GAAP basis, the company lost $2.80 per share, up from a $1.12 loss a year ago. This adjusted figure missed street estimates by 15 cents.

In the end, the company lost more than $8 per share on a non-GAAP basis. That's a $740 million adjusted loss, more than doubling the $365 million seen for all of 2018. The worst part of this is that the miss of street estimates came despite estimates plunging over time, as the chart below shows. At the end of Q1 2018, the street was only looking for a non-GAAP loss of $1.60 per share in 2019, and don't forget this increasing loss scenario was actually helped a bit by ongoing dilution.

(Source: Yahoo! Finance analyst estimates page)

Unfortunately, the Q4 results probably weren't the worst part of last week's report. The guidance that management gave on the conference call for the current quarter was much worse. Q1 2020 revenues are forecast to be in a range of $2.235 billion to $2.275 billion, or approximately 15% to 17% growth year over year. The street was looking for $2.47 billion, or a nearly 29% increase over the prior year period.

Additionally, management is calling for an adjusted EBITDA margin in a negative 7.3% to 7.8% range, compared to negative 5.3% in Q1 2019. The street was already expecting a non-GAAP loss of $2.44, up from $1.62 a year earlier, but estimates will definitely change in the coming weeks. Between this guidance and what we've seen in recent periods, 2020 estimates are following the trend we saw with 2019 numbers.

Wayfair's balance sheet is also a problem that needs to be examined again. I've mentioned in the past the need for additional capital raises, and that likely will be the case yet again. During the fourth quarter of 2019, working capital swung from a positive $237 million to a negative $234 million. In the past, a negative working capital balance has usually meant a debt or equity offering to follow, and I expect we'll see another one at some point this year.

Primarily thanks to those large losses, Wayfair burns a lot of cash. The graphic below shows how bad the situation has been in recent years, with cash burn being nearly $600 million last year alone. It's quite dramatic to see the Q4 2019 cash burn be more than the 2018 total. Even though the company finished the year with about a billion in cash, it also was approaching $1.5 billion in debt. The next raise will be even more painful given the stock's plunge, meaning more dilution than we would have seen over the past year or potentially a higher interest rate as the street adds a little more risk premium to debt.

(Source: Wayfair Q4 earnings slides, seen here)

Management did admit on the conference call that it's not where it wants to be at the moment, primarily in regards to its expense structure. The recently announced job cuts will help a little, but as I've detailed above, operating expenses need to be controlled much more. The potential global economic slowdown in the near term due to the coronavirus won't help, so I'll be really curious to see how the name performs later this year.

In the end, the situation at Wayfair is only getting worse, which is why shares have continued their massive fall recently. The Q4 2019 loss was worse than expected, even though estimates have fallen dramatically, and cash burn remains a major problem. Investors will likely see another capital raise in the next couple of quarters, and now management must work on getting its expense structure in line. For shares to attempt a major comeback, Wayfair needs to show that future profits are a possibility, not a fantasy.

This article was written by

Bill Maurer

34.89K Followers

I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

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