Our Wayfair short call has done ‘fine’ on an absolute basis, but has been a major alpha generator in a huge consumer up market. We think there is still significant downside for this stock over 6-9 months.
This was a good headline earnings quarter for Wayfair, but on a reasonably large US sales miss. In 4Q the rate of change just going the wrong way up and down the P&L. Active customers grew about the same as last Q, up 54% YY, but orders slowed from +73% last Q to 47% this Q and average order value fell 1.3% YY, meaning revenue slowed about 2200bps from 67% to 45%. That was over 1500bps slowdown on the 2 year as well. The company guided quarter to date revenue accelerating to mid 50s, which makes all the sense in the world given easier compares and stimulus help so far in the quarter. 1Q would need to see ~50% revenue growth for the 2 year trend to not slow further from big 4Q falloff. We’ll see what happens to the top line as the company has to lap the big industry acceleration that started in March 2020 with share ceding by major online competitors who shifted focus to essentials as consumers scrambled for home office solutions and extra furnishings for home quarantine.
At the same time margins in 4Q expanded at a reduced rate, and guidance implies another quarter of slowing margin expansion. Not surprisingly churn picked up this Q after seeing reduced customer loss rates in the peak demand quarters of 2Q and 3Q. As we hit 2Q21 and beyond margins will no doubt see a big YY compression. Gross margins will be coming under pressure as supply and demand normalizes. Management clearly stated that shipping issues are delaying product availability, it’s an industry wide problem, supply can’t keep up at the moment. Given the extended delivery times for the backed up supply chains there is no incentive for competitors to discount to drive demand. As supply normalizes and retail re-opens, competitors will be more aggressive in capturing share and the artificially high W margins will revert lower. Wayfair will also ramp marketing to drive new customer growth and try keep the top line sustained, meaning further margin pressure. And with sales likely to inflect to no growth or negative we’ll see SG&A deleverage.
Drastically slowing revenue and significant margin compression to us means a high likelihood of the EV/Sales multiple heading down to the lower end of its historical range, or 0.8x to 1.2x from the current 1.6x, a stock of $100-$165 and 35%-60% downside. Fundamentals start collapsing at the same time we near macro Quad4, where growthy ecommerce stocks like Wayfair typically get crushed, so maybe we’re underestimating the downside. Stock is down about 7% since we made it a Best Idea Short in early November while consumer names have been ripping (XRT +56%) in Macro Quad 2.
For our original note on W adding it to the Best Idea Short List CLICK HERE
For a replay of our Black Book outlining the short thesis CLICK HERE
