The good news is that demand remained very healthy as revenue jumped by 43%, showing no signs of dropping off from its recent growth rates. Furthermore, most of its key demand-oriented operating metrics also demonstrated that business was strong during the quarter. However, in order to obtain that robust level of growth, Wayfair did have to bolster its marketing spend, which is probably discouraging investors this morning.
Taking a look at the headline numbers, Wayfair reported a loss per share of ($1.28), missing the consensus estimate by $0.19. Unfortunately, the company now has a bit of a track record in terms of coming up short versus the Street's bottom line projections. In fact, it has now missed the EPS consensus for five straight quarters, which suggests management is having some execution challenges and difficulty reigning in expenses.
For instance, in Q3, Selling, Operations, Technology, and G&A expenses spiked by 58%, easily out-pacing the 43% sales growth. And, as a percentage of revenue, this expense accounted for 15.8% of revenue, up from 14.2% in the year ago period. During the conference call this morning, Wayfair commented that it exceeded its expected level of hiring in Q3 and that it has added about 2,000 new hires so far this year. So a ramp-up in hiring certainly is part of the expense equation.
But the company also boosted advertising spend by 43% to $202.6 mln, stating that as the quarter progressed, it continued to see intriguing opportunities to increase advertising spend, both in the U.S. and internationally. Management admitted that the step-up in marketing spending will result in lower EBITDA from time to time, but it remains focused on driving long-term profitable growth in the years ahead.
As the company continues to expand internationally -- particularly in Germany and the U.K -- it is also investing heavily in its logistics network. With its European markets showing strong growth (international revenue was +58% year/year) and becoming a larger portion of the company’s overall pie, Wayfair is now putting considerably larger sums of capital to work to really scale those businesses, especially with regards to work-force. On the logistics side, Wayfair opened a new 900K square foot facility in Dallas, TX during the quarter and also recently launched last-mile delivery services in Seattle and Minneapolis.
The end result of these investments, at least in the near-term, is a negative impact on earnings, Adjusted EBITDA, and cash flow. Adjusted EBITDA fell to ($76.4) mln from ($22.7) mln while free cash flow plummeted to ($58.8) mln from ($18.5) mln.
The good news is that customer demand remains healthy, as is illustrated by a few of its key operating metrics: the total number of customers in its Direct Retail business climbed by 35% to 13.9 mln while orders per customer was 1.84, up from 1.75 in the year ago period. Also, repeat customers placed 66% of total orders, increasing from 3Q17's 61%, showing that customer loyalty remains strong.
Looking ahead, Wayfair said it expects to continue being aggressive on the advertising front in Q4, expecting levels similar to Q3. Management also commented that projecting Q4 results is particularly challenging and that it expects gross margin to be consistent at the 23% area. However, it added the caveat that it will remain market-priced, and as such, there is some risk that gross margin could fall below that level.
With that in mind, the company is forecasting Adjusted EBITDA to remain in the red, with margins of (4.1%)-(3.8%), with International Adjusted EBITDA coming in at ($60)-($55) mln.
On the top line, it guided for revenue of $1.92-$1.968 bln, in-line with the $1.93 bln consensus. Its Direct Retail segment is expected to deliver growth of 34-37% year/year.
Wrapping up, Wayfair is doing a good job of attracting new customers, gaining market share, retaining customers, and driving more sales from those customers. However, its performance on the cost side, which has led to consistent under-performance relative to analysts' expectations, has been spotty at best. Consequently, investors have continued to lose some faith in the company and its execution.