W with a revenue miss, and every revenue metric slowing significantly on a 1 and 2 year basis expect for average order value. US revs down 21% slowing from -15% and getting crushed by OSTK in the growth battle that had revs down just 5%. International revenue declined as well to -7% and International margins went back into the negative double digit territory. Gross margins beat, but slowed and compressed YY meaning gross profit growth slowed 850bps to -23%. The revenue trends are atrocious. To put them in context, the 3Q 2yr CAGR was 16%, 4Q guide implies a CAGR of 14%. Those are the worst growth trends the company has ever seen, way worse than the late 2019 slowdown that sent the stock sub $80. We get the bull case of “but look at the margins”. But we thought the gross margin strength was supposed to be around fixed cost leverage, on permanent share wins. The revenue results suggest the pandemic demand ramp and share wins were temporary. So why should we expect the margins to be permanent if the company expects to ever grow again? We think it’s an opportunistic pricing environment driving the margins higher, and why shouldn’t a company have high margins when ceding massive chunks of share and being significantly outgrown by the likes of OSTK. Keep in mind Amazon is ramping infrastructure investment to all-time highs, setting up for accelerated share gain in the coming quarters when growth will be harder to come by as consumers continue to shift back to more services spend and in person shopping. We expect margin reversion as competitive intensity rises when supply chains normalize, otherwise W will grow below the industry rate. Margins aren’t enough for a W bull case. This is a growth company with a supposed massive TAM and a peaky EV/Sales multiple. It needs to grow top line 20%+ to support the valuation.
On the call management spent time talking about the multi-channel strategy and growing its brick and mortar presence. That actually is probably a good strategic move, the best retail concepts are multi/omni channel. However, this would negate one of the attractive aspects of the W business model, which is the platform model with low capital requirements. Stores would completely change the long term return outlook vs a profitable ecommerce platform. That has to be a risk for the multiple.
It’s odd that this stock is loved by the certain tech investors, it’s a retailer that sells commodity home goods online (and apparently increasingly more in stores). It has a track record of gaining share with big negative margins, and now losing that share with positive margins. We’ve been a broken record on W since going short a year ago, but with the revenue and margin trends we see this stock remains on our Best Ideas Short list. We see EV/Sales going to trough levels that W historically sees when revenue trends slow. That’s 0.8x to 1.2x, or downside to a $100 to $160 stock.
