W | Lightning Rod

Takeaway: W turned out to be the unintentional lightning rod of our Home Furnishings Black Book presentation yesterday. Here's the summary and links.

HOME FURNISHINGS BLACK BOOK

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W turned out to be the unintentional lightning rod of our Home Furnishings Black Book presentation yesterday. Here's the summary and links.

Full Text (in larger font) is below.

W  |  Lightning Rod - W chart1

This chart show the percent of people within each income bracket that are comfortable buying furniture without first touching it. 

W  |  Lightning Rod - W chart2

This chart shows that Wayfair's price points are meaningfully above what people are willing to pay. The company needs a high-end consumer, and even that might not be enough.

W  |  Lightning Rod - W chart3

CONCLUSION: We think Wayfair is a structural short. It might have RH’s sales base and market cap, but it’s unlikely to ever have RH profitability. Actually, it is very unlikely to earn a penny -- ever.  Here’s why…

1) Mono Channel does not work. Restricting sales to just the internet in this category, is just as bad as a retailer who focuses 100% on physical stores. Both are highly likely to fail over time.

2) TAM is limited. The categories that W needs to grow its business profitably skew to the higher-end consumer who is focused on aesthetic and assortment. W’s consumer is focused on Price. The competitive set there is not pretty. Of the $323bn home furnishings market, we think that just $20bn is relevant for W.  In other words, it currently has 12% share of its market. RH has 3%, IKEA 4%, WSM 6%, and PIR 1.5%.

3) The financial model does not work. Could W build from $2bn in revenue to $5bn over 3-4 years? Yes, it could. Given its solid balance sheet and lack of working capital, there’s no reason why that can’t happen. BUT, the whole time it will likely continue to lose something in the vicinity of $100mm/yr.

There will be ebbs and flows in this model when people will temporarily believe that it could make money. But let’s be clear, this is not like AMZN, who simply has to stop investing in drones and smart phones in order to make EBIT margins pop. Given Wayfair’s lack of capital intensity on the balance sheet, it has to continually invest in the P&L (SG&A) in order to grow.