W | Investing to Build an Empire that Should't Exist

Takeaway: W continues to build an infrastructure for a TAM that does not exist. Our research contends TAM for W is $27bn today, not $90bn.

Investing to Build an Empire that Does Not Exist

The top line growth is impressive with the direct business up 98% with delivered orders up 82% and average ticket up 9%.  That’s great at face value. But the company added $339mm in revenue year/year, and only $9mm in incremental EBIT. AND it still put up a negative EBIT number. Also, we’re starting to see customer acquisition costs go up on the margin, and advertising efficacy go down. At the same time the company continues to build an enormous infrastructure of people (employee growth accelerated to +17% sequentially vs 14% in 3Q) for a Total Addressable Market that does not exist. Our research contends that the TAM for W is $27bn today, compared to management’s assertion that it’s market is $90bn. That is absolutely unrealistic.  That might not matter today, given that Restoration Hardware’s miss is making Wayfair look like a champ. But we continue to believe that this company will never run a profitable business. All the signs are there.

Performance Metrics:

Customer Growth

Sequential customer growth accelerated in Q4 , and grew 67% in 2015, faster than the 54% growth last year.

However if we look at ad spend per incremental customer, and incremental advertising per incremental customer, both metrics weakened significantly in Q4.

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Growing Average Order

Average order growth accelerated to 8.8% against a tougher comp.  This is a clear positive for the company.  Since it is unlikely the average price of merchandise assortment has changed materially, this means customers are spending more at Wayfair.

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Ad Efficiency Slowing

Looking at revenue dollars generated per advertising dollar, it grew 12.8% yy, but slowed significantly from 3Q and was the lowest growth rate in 2015.

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