Watching Wayfair Before Q1 Earnings

Summary

• Wayfair reports Q1 earnings May 5 pre-market and has an average one-day movement following earnings of +/-12.37%.
• Shares have run up 452% as of April 29, sending shares to overbought territory ahead of the earnings report.
• Consecutive revenue beats have been dampened by EPS missing expectations, and Q1 could see that trend continue.

Wayfair (NYSE:W) reports earnings pre-market May 5, and the bar is set quite high for the retailer. As of April 29, the stock has soared 452.5% from its March 19 close of $23.52, but shares are still 20% off of the 1-year high. Such a rapid move is sending shares towards overbought levels, but a high-percentage one-day earnings move is definitely still in the cards.

Positive Signs Already

As solely an online platform, Wayfair has been able to outperform its other home furnishing peers since it does not rely one bit on in-store sales. On April 6, Wayfair reported that, while at the beginning of March, "gross revenue growth was just under 20%, similar to trends during January and February" but entering into April "growth more than doubled". In that report, the company also mentioned that "it is "accelerating" efforts to become profitable", a vital part of its business model that is lacking integrity at the moment, as the net loss has widened to almost $1 billion for the last fiscal year.

Prior Volatility

Wayfair has had a tendency of large swings following earnings reports. In the past 8 reports, Wayfair has closed lower on 5 of the 8, with the past 4 quarters all in that group. Wayfair's largest move was +27.86% last February and the smallest -1.19% last August. Average next-day closes following earnings are +/-12.37%, although the stock tends to make large intra-day swings as well (the previous earnings report in February closed -10.15%, but opened ~-24%).

As we've seen recently, Wayfair, as well as the market, has had some pretty large moves in the past two months, and this earnings report and trading day for Wayfair could be accelerated by market movements. Wayfair's report of surging growth rates in March definitely could already be priced in, but all eyes will be on EPS and any future comments on profitability or future outlook.

What to Expect

Coronavirus has caused "strong demand across most home goods categories in both its US and International segments" for Wayfair, and the company is pushing towards accelerating profitability and improving cash flow. Comments about profitability for Wayfair should be taken with a grain of salt, given the company's annual net loss reports for the past years. Net loss for 2019 came in at $984.6 million, falling from $504.1 million in 2018. Wayfair's closest year to profitability was 2012, posting a net loss of only $33.2 million. Management might comment on any steps towards profitability, but given the fact that Wayfair's net loss has fallen so far, profitability is a long way away; any positive comments could boost shares, but it seems unlikely given circumstances and pulled guidance around the market.

Quarterly EPS has been quite terrible throughout 2019. Q2 was Wayfair's "best", posting a loss of $1.98 per share. The consensus for the upcoming Q1 report is expecting Wayfair to post a loss of ~$2.60 per share, on revenues of $2.32 billion - meaning EPS is expected to be only marginally better than Q4 '19, and revenues almost $200 million below (about in line with Q3 '19).

In the past 8 reports, Wayfair has missed expectations 6 of those 8 times for EPS, while revenues have beat all 8 times. This trend is likely to continue, as expectations of revenue below Q4 '19 seem to underestimate the current gains in revenue that Wayfair has witnessed due to the outbreak. Wayfair's revenues will most likely come in above estimates, as has been the norm, but EPS is still questionable.

What to Look For

EPS surprises seem to be a larger factor than revenues for movements following earnings, as 4 of the lower closes were met with a negative EPS surprise. Per the business model, Wayfair is solely online and relies on advertising to draw customers to the platform and keep them purchasing from Wayfair from then on out. Wayfair spent $282 million in Q3 '19 and $311 million in Q4 '19 just on advertising alone - giving them a customer acquisition cost of $58 per Q3. One key thing to be aware of is advertising cost - even with a slow QoQ decreasing gross margin, increases in advertising expenses will continue to damage EPS until revenue growth can outpace growth in net expenses.

Management has, in the past, looked to expand warehouses and square footage throughout 2020 - with the outbreak, progress on expansion could be halted or future plans for expansion for this current quarter (Q2) could be scrapped. Any commentary on future expansion may not have an effect on shares but will definitely play a role in the longer-term growth of the business.

Look for any comments or changes to segment net revenue growth, as the April 6 report has indicated that revenue growth as a whole has been increasing. Management, typically, sets guidance lower than current performance, so any guidance on Q2 revenue growth is key for this report. As revenue growth rates have already been mentioned to have grown through the beginning of April, what is expected for the whole quarter, especially as the economy starts to reopen and certain competing stores might too, Wayfair might reduce its guidance and, therefore, could harm its report if it does.

Conclusion

Wayfair's rapid run-up before earnings signals a bit of caution, but the retailer still sits 20% below its 1-year high. A history of large moves following earnings reports is expected to continue, with the average 12.37% move dwarfed by an expected potential 20.1% move priced in by options expiring May 8. EPS missing the mark tends to send shares tumbling, as 8 consecutive revenue beats are expected to continue for the current quarter based on Wayfair's reports of revenue growth. Any management comments on expansion goals or decreasing expenses (given Wayfair's history of increasing expenses quicker than revenues) could also affect the post-earnings move. The general consensus in the market, as most earnings are expected to be poor, seems to be rewarding companies that aren't as poor and definitely those that beat expectations. Should Wayfair's EPS come out above expectations, shares could easily pop higher, but if EPS lags estimates again, shares could easily sink given the huge gains in the past month.

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.