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Wayfair: A Failure Of The 'Growth-At-All-Cost' Model

Mar. 04, 2020 5:05 AM ETWayfair Inc. (W)25 Comments


  • Wayfair reported its Q4 earnings that missed expectations on surging costs and expenses while growth continues to decelerate.
  • The company has established itself as a major player in e-commerce but is challenged by what is a fundamentally low-margin business and the logistical challenges of shipping furniture.
  • Management has acknowledged inefficiencies in aggressive expansion but still thinks the strategy can work over the long run.
  • Recurring negative free cash flow and weak financial metrics will continue to weigh on sentiment as it's unclear if the business model can ever reach consistent profitability.
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Wayfair Inc. (NYSE:W) has made a name for itself as one of the major players in e-commerce by specializing in home furnishings and furniture. While revenues have more than doubled in the past 3 years to approach $1 billion in 2019, the company has struggled to translate that operating momentum into profitability as losses continue to accelerate adding to questions over the sustainability of the financial model. The company just reported its latest quarterly result highlighted by a record cash burn driven by ballooning expenses suggesting its expansion was too aggressive and inefficient. The stock is now down over 60% from highs just one year ago in a case of the market largely abandoning the prior bullish thesis.

(Source: finviz.com)

Q4 Earnings Recap

Wayfair reported its fiscal 2020 Q4 earnings on February 28th with a GAAP EPS loss of -$3.54. The adjusted non-GAAP EPS loss of -$2.80 was $0.18 worse than expectations. Revenue in the quarter at $2.53 billion was up by 25.9% year over year and in line with estimates.

(Source: Company IR)

The story here was a combination of higher than expected costs and expenses leading to deepening losses across both the U.S. and international segments. The combination of customer service and merchant fees, advertising, and SG&A grew by 44% y/y, far exceeding the revenue trend. This year the company is integrating new technology infrastructure along with a hiring push for engineering talent that added to salary costs and overall expenses. For the full year 2019, Wayfair lost $984 million, up from $504 million in 2018.

The other concern here is a relative deceleration at the top line compared to stronger trends previously. U.S. segment growth in the quarter at 23.9% y/y is fine at face value, but this is in the context of a stronger 38.5% y/y growth rate in Q4 2018. The

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This article was written by

Dan Victor, CFA profile picture

15 years of professional experience in capital markets and investment management at major financial institutions. 

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (25)

Well done.

With respect to CASH, I note that W has been financed in primarily three ways:
1) IPO - $ long gone
2) 3 “debt” raises that are actually call options and now worthless
3) By leaning on Vendors - look at the A/R - A/P differential.

I calculate that W will need cash circa June or July. If sales slow, then the AR / AP will turn around and become a run on the bank. This could cause a cash crunch as early as May.

I don’t think they can raise debt.
1) No one wants a W call option
2) The financial statements do not support debt

I don’t think they can do a secondary offering. I don’t think anyone will underwrite it at any level that makes sense for W.

Will you grind through the financials and weigh-in with your view as to when “Cash Becomes CRITICAL?”

Much appreciated
the shoe has been dropped...this pos has been exposed by the market...bankruptcy this year is coming
The next shoe to drop will be downgrades from Moody's and S&P. Bonds start coming due in 2022 and Wayfair can't even fund it's operating losses let alone pay maturing debt. Wayfair debt will never mature without a restructuring.
marriottmare profile picture
Buy...furniture retail for millennials and more
Value Digger profile picture

The Wayfair bubble has started to burst and as a result, the subscribers to our research have recorded triple-digit returns by shorting W.

Also, W's bankruptcy is not out of the question due to massive losses and cash burn.

Where are all those short-sighted and incompetent fund managers and "analysts" who were bullish on W in 2017, 2018 and 2019 while raising their price targets?

Additionally, Wayfair (W) is NOT alone regarding the "growth at all costs" model.

Many technology companies such as Smartsheet (SMAR), Crowdstrike (CRWD), Slack (WORK), Fastly (FSLY), Anaplan (PLAN), Okta (OKTA) etc. have been recording massive losses every quarter and sell "the growth story" to inexperienced investors while glossing over key investment criteria and metrics such as profits, positive operating CF, Free CF etc.

We believe that the technology bubble associated with these unprofitable cash incinerators from the technology sector will burst too.

It's an axiom that all the bubbles burst sooner or later.

And unfortunately some will learn the hard way.
Dan Victor, CFA profile picture
respectfully, please stop posting on my articles about your service. im sure its great
here is a short Wayfair article from last year when it was at $137
Value Digger profile picture

With all due respect, I know that we share the same bearish approach on W. I have read all your articles about W.

Actually, I have been reading your articles including those about W from day one because I consider them to be very good.

Furthermore, my comment above primarily talks about W's model and the fact that many other tech names follow the same model too. So I think it's unfair that you pinpointed and focused on the line regarding my service.

Best of luck with your investments.
David Orr profile picture
It's counter intuitive, but the best way to beat a bubble is shooting it in the back. This seems like the worst time to quit the short. If someone thinks the company is worth zero (I do), *after* momentum breaks down and the story falls apart is the best time to be short. Why? Just like at $130, there's still 100% downside from here.
I 'm 100 % with you...this is the best short...now
Wez profile picture
It may not be the best short, compared to so many other fraudulent companies out there, because W does have almost $9B in annual revenues.
As I have stated on another SA article concerning W ... at some point, Accounting 101 comes home too roost. It doesn’t matter that they sold $9B in furniture and other household items and have a great website and CS (they take back anything you don’t like and not only refund your
Money in full, but eat the shipping freight charges), they lost almost $1B doing it and there is no sign that the scale
they have reached will yield a profit as W has had years to try. Their business model doesn’t work. One of the few stocks red today when all markets up big.
there you go folks wayfair isn’t going bankrupt anytime soon
yes, they will go Bk...next year
ckarabin profile picture
3 mon sales rose $500MM and the loss rose $190MM. Some leverage! On every additional sale they make they lose 38%!!!! They certainly won't grow their way out of this! And even if they eliminated ALL advertising, they'd still be losing money. But without advertising, their sales would plunge! No way out of this mess, just go file chapter 7 now and be done with it
David Orr profile picture
Bezos started AMZN with items that sell most efficiently, and worked his way down the line. Books into music, etc.

$W is the exact opposite.
woww...this is surreal. why the mutual funds and institutional investors keep money in this Pos company?
w need to raise money this year again. cash burning is huge and management will sell more shares
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