Wayfair (W), one of the world's largest online destinations for home merchandise, is trading sharply lower today (-19%) after reporting Q3 results this morning. In terms of quick background, you probably have seen the Wayfair commercials, but the Boston-based company is one of the world's largest online destinations for the home.
The target Wayfair customer is a 35- to 65-year-old woman with an annual household income of $50,000 to $250,000, who Wayfair considers to be a mass-market consumer that is underserved by traditional brick and mortar retailers of home goods.
Because each customer has a different style and budget, Wayfair has built one of the largest online selections of furniture, décor, decorative accents, housewares, seasonal decor, and other home goods. It's able to offer this vast selection of products because it holds minimal inventory. Products are shipped to customers directly from suppliers, or increasingly from Wayfair's CastleGate fulfillment network. This ongoing reduction in its reliance on third party operators enables Wayfair to increase delivery speeds, reduce damage and costs, and improve customer satisfaction across a greater and greater proportion of its business.Also, its CastleGate platform enables suppliers to forward-position their inventory.
From 2002 through 2011, the company operated as hundreds of niche websites, such as bedroomfurniture.com and allbarstools.com. In late 2011, Wayfair made the strategic decision to close and permanently redirect over 240 of its niche websites into Wayfair.com to create a one-stop shop for furniture, décor and home goods and to build brand awareness. From 2012 to 2016, its aided brand awareness in the US grew from 6% to 77%. Over the last few years, Wayfair has invested in expanding its international business in Canada, the UK and Germany by building its international infrastructure.
By being inventory-light, this allows Wayfair to be very nimble with its promotional events and react to customer behavior. Wayfair can also avoid the typical gross margin pressure of promotional events because suppliers offer Wayfair more attractive wholesale pricing when they expect the volume uplift associated with being part of a promotional event at Wayfair.
The Wayfair family of sites includes: Wayfair, an online destination for all things home; Joss & Main (affordable furniture); AllModern (affordable prices on everything modern); Birch Lane (a collection of classic furnishings and timeless home décor); and Perigold (fine home décor and furnishings).
Turning to the Q3 results, Wayfair reported a non-GAAP loss of $(0.65) per share, which was a good bit below market expectations. Revenue rose 39.1% year/year to $1.20 bln, which was slightly above prior guidance of $1.155-1.185 bln. On the call, the company guided to Q4 revenue of $1.33-1.36 bln, which was in-line with market expectations. Gross margin was flat YoY at 23.4%. Adjusted EBITDA margin improved to -1.9% from -3.6%.
The number of active customers in its Direct Retail business reached 10.3 mln as of Sept 30, an increase of 39.2% YoY. LTM net revenue per active customer was $408 as of Sept 30, an increase of 0.5% YoY. Orders per customer, measured as LTM orders divided by active customers, was 1.75 for Q3, compared to 1.69 for 3Q16. Repeat customers placed 61.0% of total orders in Q3, compared to 56.9% in 3Q16. Orders delivered in Q3 were 4.7 mln, an increase of 38.1% YoY.
Wayfair says it was pleased with the company's strong growth and momentum in Q3. The company says it's already quickly outpacing the shift of dollars online in its category and taking a high proportion of market share. Through significant advancements across its supply chain network, Wayfair is now able to promise customers faster delivery times for millions of products.
The majority of large parcel orders such as sofas, dining tables, bathroom vanities, chandeliers and more are now flowing through the Wayfair-controlled Wayfair Delivery Network, which means Wayfair can ensure a flawless experience from start to finish for even the largest and heaviest products.
In sum, investors are clearly not happy with the large Q3 earnings miss. Wayfair does not guide for EPS, so analysts are a bit in the dark. However, this miss was unexpected. Wayfair had reported EPS upside in each of the past four quarters, including a huge EPS beat in Q2. Also, on the call, it seems analysts are a bit disappointed in the 61% repeat customer metric. Overall, the stock has had a nice run this year. It was trading below $40 in March and hit $84 in September, but this Q3 report is taking the stock lower.