I’m short Wayfair, but am hardly taking a victory lap for not being louder into what was an inevitable smack-down as the earnings algorithm (or lack thereof) becomes more of a reach – as evidenced by today’s metrics. The cost of growth continues to rip at Wayfair. For the first time in its history, the number of new active customers added, was less than the number of new active customers added in the prior year’s quarter. Essentially, customer acquisition is decelerating, while advertising spend continues higher accelerating 350bps this Q. This company/stock is egregiously overvalued, imo. Uncanny that WMT announced a new site that basically mimics Wayfair’s business model in conjunction with W’s earnings report… With top line decelerating, customer metrics eroding, management selling and competitive pressures increasing (a lot), W will be under pressure to curb investment (even though the opposite is needed) to actually turn a profit. Do the bulls really want to see W valued on earnings? If so then today’s move is the tip of the iceberg.
-- McGough
Ad Spend Accelerating, Customer Growth Slowing
As noted above, for the first time in its history, the number of new active customers added was less than the number of new active customers added in the prior year’s quarter.
That means that by 4Q this year, Wayfair had 2.69mm more active customers than 4Q last year. That same number last year (2016 vs 2015) was 2.94mm. This is the first time that number was not higher yy.
Essentially, customer acquisition is decelerating, while advertising spend continues higher, accelerating 350bps this Q.
Growth is getting more expensive, for a company that doesn’t make money.
Slowing Revenue Growth
Even with returning customers shopping more frequently and spending more per order, it’s not enough to offset the slowdown in new customers.
The 2 revenue year trend slowed 340bps in 4Q, 1Q was guided to slow again, and the compares get harder in the rest of 2018.
A slowing topline is very bad for a stock that trades primarily on revenue, and was at a peak 1.95x EV / trailing revenue into this print.
Margin Trajectory
After 2Q17 posted the first positive incremental margin in 6 quarters, its returned to negative with a downward trend, as compares get harder.
Management is guiding to an incremental margin of about -10%, significantly worse on the margin.
Management Selling
We know insider sales persist at Wayfair as management has 10b5-1 plans essentially selling all shares upon vesting. That doesn’t signal confidence in higher stock prices for investors.
The latest sale was rather egregious. Just 2 days ago CFO Michael Fleisher’s 10b5-1 program sold 10,000 shares at $99. That’s about $230k more in value than if it was to wait until after earnings, at the expense of shareholders.
We understand management needs to be compensated, but perhaps the company could pay real salaries to its execs. It is a multi-billion dollar company after all. This would make for more transparent/comparable SG&A expenses, and less stock dumping.
The average Wayfair officer (the top 6 in the company) is paid just $160k in salary.
