W | The Model Is In Trouble – Best Idea Short

Wayfair put up its worst operating performance ever clocking in at a loss of $310mm in GAAP EBIT.  That’s even worse than the late 2019 early 2020 performance and it comes with 1Q revenue still 54% ahead of 2019.  Then the 2Q guide implies a slowdown of something around 3000bps in the 2-year trend.  If we’re reading the model and demand trends right, the company should be prepping to go into cost cutting mode ASAP. Yet the guidance looks to imply still increasing SG&A and Capex levels.  There is still lots of liquidity with revolving debt access, though the company is burning cash rapidly and does have $575mm in convertible bonds due in 2024.  Add to that the savvy CFO that brought the company public is going into retirement, and you have to wonder what equity investor would want to touch this stock right now.  Quad4 is upon us, the consumer is slowing, and the category is reverting hard.  Meanwhile the company is paying out nearly $550mm in stock for equity comp, for hefty dilution on a mkt cap approaching $7bn.  Plus relying so much on share based comp, with the stock under so much pressure, means there is a big risk of losing top talent in a tight software/developer job market.  We’re trying to spot what keeps this name from going lower, at which point we turn to the rate of change in the model.  QTD is running down mid to high teens against down 8% last year, yet the remainder of the Q compares aren’t that much easier (roughly low dd%), and with the 2 and 3 year trends falling, there does not appear to be an imminent inflection in growth.  If the company doesn’t start cutting spending, we could be looking at $800mm+ in cash burn this year, with no visibility to industry demand getting better.  Difficult to call a bottom here as there is absolutely ZERO valuation support – especially with so many higher quality businesses out there on sale. W remains on our Best Ideas Short List.