The last few months of news and results and guidance for W have gone very much as expected. What we’ve struggled to reconcile is the stock rip on ‘had to happen’ job cuts, and the subsequent tanking on ‘had to slow’ revenue and margin guidance trends. The management team was on the road a couple weeks back pitching the profitability inflection this year, which bulls grabbed on to and spooked the bears into covering near term. But the business trends implied in guidance suggest that for the remainder of the year you have to believe in a lot of flow through in those signaled gross cost cut amounts, and hope for rapidly improving top line trends. We’re not sure we’ll get either, but we think it’s unlikely we get both.
The 4Q result was basically in line with expectations. $71mm loss in adjusted EBITDA. Revenue growth improving to +4.6%, but now slowing to -10% QTD. Cash balance down ~$650mm YY, short term investments down ~$470mm. Management is tempering the 1Q margin expectation, though that won’t include the full tailwind of cost cuts (starts in 2Q23). The team is promising a massive margin expansion ramp, while we’d expect the consumer and the category to get worse before it gets better. The market appears to be realizing sustainable profitability is going to be a real challenge, and probably doesn’t match with the revenue growth trajectory investors would then expect alongside. Management stated that after executing its cost cutting plan a MSD positive Adjusted EBITDA margin is a “philosophical floor”. That’s funny for a company that hasn’t had that kind of margin outside of the pandemic demand boom and opportunistic pricing environment. The market at the moment doesn’t believe it, and we’d caution that even if the company does cut its way to breakeven, does the resulting growth trajectory really warrant valuations like this business has seen in the past? Can Wayfair gain share without the same level of customer care and competitive investment that differentiated it (while operating at a loss). If the company delivers profits and the stock sees a bit of a rally, we wouldn’t be surprised to see a stock deal to further shore up the stretched balance sheet. This company after all has $3bn in debt due over the next 4 years. W has been a Best Idea Short since $275 in late 2020, and we took it higher on our conviction list back in January around the spike on the announced cost cuts. After a painful couple weeks post that conviction change the short is paying off.
