We pulled the plug on the Wayfair short back in October, as we thought the topline trend after a -20% move would add enough support to Wayfair over the near-term despite decreased visibility in the near and long-term profitability prospects. The 2% beat in the quarter (2nd lowest beat rate in W’s history) proved that thought process (as well as intro-qtr revenue check) correct, but the subsequent guide left a lot to be desired. This is still a company that we don’t think will make money – ever. And, there ultimately does not need to be any equity value here. As 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 we wouldn’t touch it either way on this -15% move this morning.
Perhaps the most interesting callout from today’s print and ensuing conference call was Wayfair’s commentary proving that it’s not immune to the consumer environment. Case in point, the top end of the 4Q guide came in 7% below current consensus estimates. That’s good for 25%-30% revenue growth off from high 75% plus through 2H15 and 1Q16. To be fair to Wayfair, there isn’t any concept in retail growing at that rate (with the exception of AMZN), but the management team forever and a day had touted its insulation from certain macro factors because of the share available due to the shift from Brick and Mortar to e-commerce. It’s clear that the management team is much more cautious with today’s guide. Hence the 20% negative move from print to current levels this morning.
Where’s the focus? We find it troubling that Wayfair’s #1 priority is investment in non-core businesses, aka international. The other two points of emphasis are on logistics and penetrating the US TAM. We’d argue that the focus here is upside down. Does international provide opportunity? Sure it does. But when a company has less than 15% of its total target US TAM penetrated and stalling customer awareness, we think the priority should be much more heavily weighted to the US business. The international investment muddies the water a bit, and allows the management team to speak to improving US customer metrics without providing the proof. But what we see as we analyze the numbers is deteriorating metrics on the margin and an incremental EBIT margin of -13.4%.
Cost Ups As Top Line Decelerates. Incremental margin on the addition of $270mm in revenue came in at -13.4% in the quarter good for the worst rate in nearly 2 years. 4Q suggests a slight improvement on the margin, but we think the trend here after much improved economics in 2015 continues to support negative EBIT over the near and long-term. Much of the hiring binge is over, as the 212 employees added this year was the lowest rate since 1Q15. But awareness in the US market is stalling out, and if there is anything we’ve learned, it's that extra 25% of the consumer population is expensive to attain.
Orders Per Active Customer Just Went Negative. That’s bearish as we see it, as orders per active customer needs to continue to grow in order for the ad efficiency thesis to play out. This is the first time since W started reporting the metric that orders per active customer went into negative territory. Of course, number of orders is only one part of the revenue equation with average order value being the 2nd. That also took a major step down from mid-teens growth against easier comps to 3.8% in the quarter (2nd chart below). To offset that, Wayfair will need to continue to push the active customer count up, which should take ad expense higher.
