Wayfair has a cash Burn Problem. The stock rallied on an inline EBITDA Q, revenue slightly ahead, and guidance roughly in line with the street. The key takeaway is that in the quarter the company burned $538mm in FCF, and CFFO for first 9 months was -772mm vs +321 last year. I’ll remind you this company doesn’t really carry inventory, this isn’t a working capital build into a high volume holiday selling season. What makes the online platform attractive is that it carries huge operating asset returns if it can be done profitably, with working capital inflows as it scales. But as revenue declines, there is a cash outflow from payables decreasing with no asset offset. Meanwhile, the company has way too much SG&A for where the business is headed, and customer acquisition costs are too high. Revenue growth remains negative, and likely stays negative until mid 2023 at least. W needs to cut costs to preserve cash, which further pressures rev growth, which further pressures profits and the working capital cash outflow. The company spent up on advertising, up 12% YY, to add the fewest new customers seen in 5 years. Back then customer acquisition was less than have the cost seen this Q. Meanwhile on revenue down 9% SGT&A was up 30%! Maybe the prior CFO didn’t want to have to be the bad guy, and with him out the company is about to clean house. But if W doesn’t get costs in line fast it could run out of cash in 6 to 12 months. Meanwhile competitors with strong balance sheets (AMZN, OSTK, TGT, WMT, HD, LOW) are going to be competing aggressively for share, particularly in what will be a promotional holiday season and challenging 1H23 with the consumer running out of discretionary income. What is this stock worth? Well considering it has never demonstrated profitability outside of the abnormally opportunistic pricing environment of the pandemic we can’t use earnings or EBITDA. We don’t think this model can make money at this kind of scale given customer acquisition costs relative to churn rates in this category. In this post unicorn bubble bear market we can’t use EV/sales. How should we value W? This is in probably in PTON territory. Is there value to the brand and infrastructure the company has built? Yes. Is that worth more than the $3.1bn in debt the company has? Probably not. And much like PTON a year ago, who wants to buy an asset with massive cash burn crashing demand and a bunch of internal operations to lean up. Might as well wait. With that setup given our current fundamental outlook, we don’t think you cover this short until closer to $10-$15.
Takeaway: W needs to cut costs, which further pressures revenue growth, which further pressures cash flow – and it only has 6-12 months of cash left.
