But stock soars on earnings beat as the e-commerce giant laps pandemic buying frenzy
BOSTON — Home furnishings e-commerce giant Wayfair posted a 10.4% drop in second quarter net revenue and net income was less than half of what it was a year ago. But the stock rallied on its earnings expectation beat, strong gross profit and, most likely, the understanding that the results were compared to unprecedented pandemic-fueled online shopping the same time last year.
Net revenue for the period ended June 30 dipped to $3.86 billion from $4.30 billion for the same quarter last year. Net income decreased to $130.4 million, or $1.14 per share, from $274.9 million, or $2.54 per share. But when compared against the first quarter this year or even the first half vs. the first half of 2020, the company showed the kind of momentum Wall Street seemed eager to cheer.
Wayfair’s stock closed up 10% Thursday, or up more than $25 to $276.16 per share.
On Thursday’s conference call, Wayfair executives encouraged the investor community to think past the “year-over-year noise,” to better see the direction the company is heading. A few takeaways from the call and earnings report:
The proof is in the profits and overall sales trends. Many have questioned whether Wayfair can be sustainably profitable as the pandemic recedes, said CEO and co-founder Niraj Shah. And the second quarter offered “clear evidence to make that case.” Among the highlights the company pointed to: gross profit reaching $1.1 billion, 29.2% of net revenue.
“This quarter represented the toughest year-ago comp, as we lapped the surge of pandemic-driven demand in the spring of last year,” Shah said. “Against that backdrop, vaccination rates picked up, the economy more fully reopened, and consumer behavior understandably adjusted.” That $3.9 billion in net revenue, while down about 10% year-over-year, was actually up 11% from the first quarter, and the two-year compound annual growth rate was better than 28%.
These are the better metrics to pay attention to because of an outlier pandemic-influenced 2020. Shah said it in May and he said it again: “sequential growth rates and two-year growth metrics will likely be more telling for investors until we get past 2021.”
That said, Wayfair still looked strong even when comparing the first half of 2021 with 2020. Net revenue for the first half totaled $7.34 billion, up from $6.63 billion in the first half of 2020. Net income totaled $148.66 million compared to a nearly $12 million loss in the first six months of last year.
While more consumers are stepping away from their phones to shop in stores, e-com wins in the long run. Or as Shah put it: “While there may be some short-term rebalancing towards brick and mortar over the next couple of quarters, we’re convinced the structural trends towards e-commerce will hold and potentially accelerate.
“History tells us that e-commerce gains tend to speed up when categories cross the 20% threshold, and the pandemic helped bring us to this point.”
Chief Financial Officer Michael Fleisher added that a reopening economy also means consumers are spending more on “categories they have surely missed over the past 18 months.” It makes complete sense, he said, but at the same time, “we would not expect interest in the home category to meaningfully wane sequentially.”
Wayfair is not immune to supply chain woes and related inflation but … “We’re seeing sequential improvements in inventory availability and fulfillment,” Shah said. He added that it’s “incremental,” and it’s not happening overnight.
Shah said the company also is leaning into its CastleGate warehousing network (sort of the equivalent of Amazon’s fulfilled-by-Amazon warehouse businsess) to improve product availability, “yet the industry still has to deal with narrower selection and longer-than-desired lead and delivery times, which are unlikely to normalize until some point in 2022.”
The ongoing supply chain problems also have led to inflation, Shah said, adding that Wayfair is working with suppliers “to pass through some of these higher costs” but at the same time, paying close attention to how consumers are reacting to them.
“So far, we believe customers are generally absorbing the higher prices reasonably well, though the operating environment is, admittedly, very fluid,” he said.
Two more stats: Repeat customers placed 75.6% of total orders during the second quarter, a new high and up from 67.4% a year ago. And average order value increased to $278 from $227. Fleisher said the latter had to do with inflation as well as a higher-than-typical mix of outdoor category purchases, which tend to be bigger tickets.
“We believe we’re leaving the pandemic period with an even stronger repeat customer base than when we entered it, which should have had long lasting benefits given it cost us relatively less to drive repeat purchases than initial orders,” Shah said.