We’re taking Wayfair off our active Short list. It’s an odd move for us, because this is a company that we don’t think will make money – ever. There ultimately does not need to be any equity value here – never mind 2x the value of RH (which has a bold yet realistic strategic plan, and something called earnings that W does not care about). The management team is building up infrastructure to capture a much bigger market that is/ever will be realistic for Wayfair. As it shifts away from furniture into marginal categories that you can otherwise find in a Bed Bath & Beyond, Williams-Sonoma, Kohl’s, Target and even Wal-Mart.
But there are a few things that give us pause in pressing the short today.
1. The category is in the tank, and Wayfair is STILL growing its top line by better than 75%. Shorting here – after the deceleration from near 100% earlier this year. To short it here – after the blow up last quarter -- we’d have to point to another sharp deceleration in sales growth from here. Based on the data we see daily, we don’t think that’s in the cards.
2. Did you see Pier 1 blow-up again? It got ‘Amazoned’ and ‘Wayfaired’ way faster than just about anyone suspected (not the least of whom was PRI’s CEO, who was fired). This is a zero sum game. The reality is that Wayfair is putting considerable pressure on the brick & mortar incumbents. No one cares (except us) that it will cost W margin dollars. Revenue growth is the key to the kingdom with Wayfair’s valuation. GM% weakness probably won’t matter. People will look through it as long as the revenue is there.
3. The new W wedding registry should not be underestimated. It is such a no-brainer that we thought it already had one in place. This is bad on the margin for the KSS, M, JCP’s and BBBY’s of the world. Good for W.
4. The Wayfair chart that has been killing PIR. We recently did some analysis on the demographics around the PIR/W phenomena, and the results were intriguing…
A. There are so many reasons why PIR has been a disaster, not the least of which is quintupling the percent of its online business to 18% over just three years.
B. That might have seemed like a good idea at the time. But the reality is that PIR largely sells commoditized product like copper drinkware, semi-ugly table runners and rattan coffee tables.
C. Nearly everything PIR sells can be found on AMZN or Wayfair.
D. I think the second chart below tells a massive trend as to who is shopping at PIR vs Wayfair.
i. As PIR struggles with inventory issues, the average age of the shopper got older (48 years) and poorer ($81k income vs $88k).
ii. As it got cleaner – sort of – we saw the age skew lower to 44 years and income levels rise.
iii. In other words, PIR has the least sticky customer we can find in this space. They’ll come and go based on discounting.
iv. Wayfair, on the other hand, has one of the stickiest customers. Average age gets younger by the day, which is very bullish. At the same time, average income grows steadily higher – again, very bullish. Check out first chart below.
v. If you’re bearish on Wayfair, this is a pretty big ‘thesis challenging’ trend to factor into your process.
In the end, we’re going to put our money where our mouth is. The customer is getting steadily more appropriate (younger, wealthier) for this model – important given that it currently has 75% unaided awareness. It’s rolling out new initiatives like wedding registry while going heavier into commodity housegoods. Not good long term by any stretch, but for the TRADE and TREND, the long term (TAIL) simply does not matter.
We’re likely to revisit on the short side when the near-term factors are stacked against Wayfair. And given what we see today, we’d even be interested in renting W for a TREND duration – but only if something happened to knock another $9 out of the stock and it started with a $2-handle. In the interim there’s every reason to think that WSM, BBBY, and to a lesser extent KSS, and TGT will blow up again.
Below is our previous note from 9/6/16:
W | Ammo For Your 1-on-1
Takeaway: W mgmt is working the conf circuit. They sell the story well – but can’t execute commensurately. Here’s what we’d hit ‘em with in 1-on-1's.
Wayfair remains one of our top ideas on the short side. While still 16% below where it was before the earnings blow-up four weeks ago, it has been strong over the past week headed into the Goldman conference. That’s not a surprise given that this management team is actually quite impressive when on the presentation/breakout/1-on-1 circuit. But as good as it is in selling its story to the street, as bad as we think it will prove to be in selling home furnishings profitably to a target market that we don’t think exists.
Here’s a few visuals that might offer up some context for questions for management on Wednesday morning.
1) $$$$$. If there’s one thing that’s clear, it’s that this company needs to spend up meaningfully to drive its top line (which, while decelerating, is still clocking in at an impressive 60%). We’re seeing the employee count grow at a staggering rate of 88% YY on top of 61% growth in customer acquisition expenses in the latest quarter. What interests us the most is how correlated customer acquisition costs are with repeat customer rate. In other words, repeat customers no longer need to be acquired. This could be a powerful model if acquisition costs roll off without a deceleration in revenue – but we would not bank on that. Aside from articulating – with specificity – what product categories to what consumers will profitably drive its top line (ie why its data/market research is better than ours), drilling down on these numbers would be our top focus with management.
2) EUROPE – THE FINAL COUNTDOWN? The original plan was for EBITDA to inflect at the end of 2016, but then European expansion pushed that out. At a fundamental level, we question why the company would look to grow in an even more difficult and fragmented market like Europe when it has yet to prove that can make money in a homogenous market like the US. Could the difference in cultures throughout Europe offer up more opacity in pricing – ie better margins? How does this offset the complexity of operating there? For example, the drive from the Northernmost point in Italy to the southern tip is about the same as NY to Miami. And while the customer in both US markets are the same, they are dramatically different from one another in Italy – not to mention the rest of Western and Northern Europe. When and how will incremental margin turn positive?
3) COMPETITION. Someone humor us and ask management how they think competition is reacting to Wayfair’s growth. Online vs Brick & Mortar. We don’t think management is arrogant or cocky enough to say ‘we don’t worry about competition given the $90bn addressable market.” If they said that and acted accordingly, then it would make the longer-term call close to bullet-proof. But if management articulates who and what it competes with different brands and in different product classifications and price points – everything from Bed Bath & Beyond to Amazon, to Pier 1, to Pottery Barn, West Elm, Williams-Sonoma, and RH – then we’ll be extremely impressed. Our bet is that they come out closer to the former. Anyone long this stock should want to prove us very wrong here.
4) ADDRESSABLE MARKET. Our research suggests (see slides below) that management’s $90bn/60mm household target market is a pipe dream. The brands currently have about 75% awareness, which translates to about 3% of the targeted addressable market and 11% of target households as customers. How will the company get this done without excessive cost?
5) INSIDER SALES. When does this trend stop?
Addressable Market
