This e-tailer blew the door off earnings estimates last quarter, posting EPS of $2.30, vs. analyst projections of $0.80.
Wayfair Inc. (W)
From Canaccord Genuity Research
Wayfair delivered another quarter of impressive results in Q3 as eCommerce adoption accelerates and consumers continue to shift discretionary spend to the home goods category, with 66% y/y direct retail net revenue growth and record profitability. Higher utilization of the company’s logistics network, along with increasing uptake of seller services, led to gross margin expansion, and both new and existing customers are displaying increasing repeat purchase behavior, which is driving advertising leverage. While Wayfair did not provide guidance, QTD gross revenue has been tracking to ~50% y/y growth, and the combination of an elongated holiday selling season and more time being spent at home this winter has the company optimistic that growth will remain strong throughout Q4. We continue to find shares of Wayfair attractive even as pandemic-driven tailwinds begin to subside, with the company’s years of logistics investments paving the way for operating leverage going forward.
Wayfair added 2.8M customers in Q3, well above CGe (Canaccord’s estimate), bringing total active customers to 28.8M (+51% y/y), with customers acquired during COVID displaying similar repeat purchase behavior as prior cohorts and 72% of total orders placed by repeat customers (vs. 67% in 3Q19). Direct Retail net revenue grew 66% y/y to $3.86 in Q3 (vs. 84% in Q2), 4% ahead of CGe, as the home goods category continued to see strong eCommerce demand as a result of pandemic-fueled tailwinds. This year’s 48-hour Way Day event represented the two largest sales days in Wayfair history, with the event contributing more to Q3 growth than expected due to logistics efficiencies, although overall sales trends moderated toward the back half of the quarter when excluding the impact of WayDay. GM expanded 650bps y/y to 29.9%, well ahead of expectations, due to continued logistics efficiencies driven by higher utilization along with a mix shift to in-house brands and increased uptake of supplier services. Adj. E6ITDA of $371M was roughly double both our and consensus estimates, representing a record 9.7% margin (+16pp y/y).
Logistics investments show value, progress in Europe: Although inventory levels are at times still below pre-COVID levels, Wayfair believes they are improving and is working with suppliers to drive demand to products with the best availability. While delivery speeds have also improved, fulfillment is expected to be slower than normal during the holiday season. The company reiterated that it has significant capacity available within the ~18M square feet of its CastleGate logistics network to support robust growth over the next few years, continuing to leverage its scale to gain extra space on cargo ships and grow its ocean freight forwarding business. Wayfair continues to expand its presence in Europe, which the company sees as a significant opportunity given the ~$400B total addressable market (TAM)—(B2C & B2B) and lower eCommerce penetration relative to the US. Consumers in the UK and Germany, two markets that make up ~45% of that TAM, can now choose from more than 4.2M products (+30% y/y) offered by Wayfair’s ~400 European suppliers, with some US-based suppliers also expanding their presence into Europe to access this growing market.
Strong demand trends expected in Q4 despite recent deceleration: Wayfair did not provide formal Q4 guidance due to ongoing macroeconomic uncertainty, but QTD gross revenue has been tracking up ~50% y/y. and the company expects strong demand during an elongated holiday season despite some deceleration in late Q3, as consumers are likely to spend more time at home this winter. The company expects Q4 gross margin to be between 26-28% (vs. prior CGe of 26.4%) as it sees continued logistics efficiencies, customer service & merchant fees at ~4 of revenue, advertising normalizing around 10-11% of revenue, and SOTG&A of tv$400M.
We are raising our PT to $350 (from $340), which is based on tv2x (no change) our increased 2022 revenue estimate and supported by DCF valuation.
Maria Ripps, CFA, Michael Graham, CFA, and Jason Tilchen, CFA, Canaccord Genuity Research, canaccordgenuity.com, November 4, 2020