by BOSTON — Even though Wayfair once again spent more money than it brought in, as reported by Home News Now last week, CEO Niraj S. Shah did what CEOs of public companies are expected to do: He spun the numbers as positives.
Shah predicted Wayfair a winner in the long game of market share and, provocative by the standards of earning calls, he said the company is in a good position to weather the tariff headwinds because the burden of those tariffs is on suppliers, not Wayfair.
“There are multiple companies who participate in the value chain, and the burden of the tariff can be shared across that group,” he told analysts. “In 2019, we saw this playing out in real time. Suppliers that found a way to keep wholesale costs low were the most successful. They can often make up the margin difference with the volume gains by taking share from their peers that chose to pass the cost burden through.”
The e-commerce giant reported another quarterly net loss, this one of $113 million on flat net revenues of $2.7 billion. The good news here is that the loss is less than half that for the same quarter a year ago, when it was $248 million.
Eating someone else’s lunch
Not surprisingly, tariffs were top of mind on the call. Doling out what the Street calls “color,” Shah recounted some history with duties, tariffs and anti-dumping measures introduced since the early 2000s before explaining how Wayfair’s business model puts the company in a better position relative to most of its competition.
“Just as we’re seeing now, back [in the 2000s], there was a lot of speculation about how much tariffs would ultimately increase retail prices,” said Shah, who is also co-chairman and co-founder. “It’s important to remember that the tariff is applied to the value of the goods at the time of import, which is a fraction of our wholesale price.”
Thus, Wayfair is somewhat “insulated” from the effects of the eye-popping tariffs slated for furniture coming from Asia, because it’s Wayfair’s 20,000 or so suppliers upon whose backs the burden of tariff-related pricing will mostly fall.
Shah next cited the diversity of sourcing options the company can shift amongst based on which factories have the best value equations, and he noted that value can be achieved a lot of different ways other than simply price. He emphasized the longer game of taking market share as something that unites Wayfair with its suppliers, most of which have experienced already several of the boom-to-bust-to-boom swings that have come to characterize the home furnishings industry.
‘Bring it!’
In emphasizing market share as a priority and the accelerated extinction of weaker players as a benefit, Shah echoed RH CEO Gary Friedman on RH’s earnings call a couple of weeks ago. Friedman likes to remind the investment community that tough economic sledding winnows out weaker competition and tends to reward sound long-term planning. Both Shah and Friedman foregrounded their companies’ planning, strategy and battle-ready operations infrastructure.
For Wayfair, the centerpiece of this readiness is CastleGate, the company’s data-driven, end-to-end logistics service that optimizes the Wayfair supply chain. It also puts suppliers in competition with each other to deliver, in Shah’s description, “the best value” to the end consumer.
According to Kate Gulliver, Wayfair’s CFO, many of these suppliers prepared for the tariff announcements by ramping up imports this past quarter. Wayfair’s inventories were $90 million at the end of the quarter, up from $76 million in December, she said.
“We’ve been working with our supplier partners for months to help them strategize and plan for the incremental cost from tariffs,” Gulliver said. “We saw many suppliers lean into CastleGate as we closed out the quarter, keen to bring in inventory ahead of increased duties.”
So, while using CastleGate to get product here fast yielded higher upfront costs for Wayfair, which in turn ate into gross margins, “it will pay dividends in the future as we both collect CastleGate fees from the shipment of the increased inventory and have more availability,” she said.
New World Order
This emphasis on inventory again echoed Friedman’s hot take on tariffs two weeks ago, when he declared, “Welcome to the new world, when at least at this moment, inventory is your friend.”
A big difference between RH and Wayfair, however, among about a million other things, is the fact that RH owns its inventory, whereas Wayfair is a middle man driving the supply chain ultimately into consumers’ homes. This contingent role was picked up on by Peter Keith, an analyst at Piper Sandler & Co., who asked whether, in a few more quarters, if tariffs stay in place, there becomes a risk that CastleGate inventory could drop off as suppliers hoard inventory in their own distribution centers, just as they did during Covid.
Shah took a detour from the Friedman logic to answer Keith’s question: “It’s not clear that there’s going to be inventory shortages, based on the conversations we’ve been having with folks. We think the equilibrium will be held (between) supply and demand” as suppliers keep moving goods rather than being content to sit on them, Shah said.
Like Wayfair, suppliers on CastleGate see the tariff situation as an opportunity to take share from competitors, according to Shah, who said, “You actually see the stronger ones wanting to take advantage of the opportunity [and not] let a crisis go to waste.”
And this crisis, if a crisis it becomes, certainly hasn’t materially affected demand yet, at least for Wayfair, at least according to Shah. He called demand “pretty good,” and he noted that suppliers haven’t yet raised prices.
“We have a large team that works with our suppliers to create joint plans to make sure the inventory in bestsellers stays in stock,” he said. “They know the way our platform works is that they need to compete with each other to impress the customer, or they don’t get the sales.”
Michael Lasser, an analyst at UBS Securities, asked whether Wayfair’s stock has been negatively affected by people misunderstanding how tariffs work. Shah agreed that the stock, which he said “has not been great,” is vulnerable to just this sort of misunderstanding, especially as it relates to Wayfair’s business model.
“I do think folks misunderstand some of our relative strengths and how well things are going,” he said. “There’s actually a large amount of capacity outside of China. . . . In terms of disruption, I wouldn’t claim that that makes it then just a light switch and super smooth, but this is again where our platform helps us because we have this logistics capability that’s fully integrated that actually operates in all of these places already.”
Story time
Lasser and Shah are probably right. Most consumers have no clue how goods get from there to here. This ignorance, highlighted by reactions to the Suez Canal freighter blockage back in March 2021, inspired Ryan Petersen, founder and CEO of Flexport, a logistics company, to write The Big Ship and the Little Digger. It’s a children’s picture book explaining the complexities of ocean freight and global trade.
Petersen’s take on the current tariff situation? Have you put the children to bed? Because his prediction would scare the bejeesus out of them.
“If they don’t change the tariffs, it’s going to be an extinction-level, asteroid-wiping-out-the-dinosaurs kind of event,” Petersen told Dow Jones Institutional News. “Only these aren’t dinosaurs. These are dynamic, healthy businesses.”
Petersen said Flexport handles about 1% of U.S. trade, which is more than enough data for him to connect dots. He predicts that thousands of U.S. companies will fail if the global trade war doesn’t calm. His next picture book could become a ghost story.
And one final note: RH announced that its chief legal and compliance officer, Edward Lee, will resign his position in June for a similar role at another company. RH has launched a search for Lee’s replacement.
