Up 34% Since January 19, Stock In Boston’s Wayfair Will Fall Further
BOSTON, MA – JULY 31: Co-founder and co-chairman Steve Conine, left, and CEO, co-founder and … [+] co-chairman Niraj Shah pose for a portrait at their desks, surrounded by their employees, at the Boston headquarters of Wayfair on July 31, 2018. Wayfair is among the city’s fastest-growing companies. It added about 2,000 employees in the first half of this year, and its headcount is approaching 10,000. The company is rapidly outgrowing its headquarters and next year will expand into a nearby building with space for another 4,000 employees. Wayfairs stock has made cofounders Steve Conine and Niraj Shah billionaires. But they arent coasting, approaching work as if Wayfair was still in its early stages, charting a course to dominate the $600 billion global home furnishings market. (Photo by Suzanne Kreiter/The Boston Globe via Getty Images)
Boston Globe via Getty Images
The stock market is a complex machine whose movements are difficult to understand. However, one thing seems clear — if a company grows faster and projects a brighter future than investors expect, its stock price will rise. If that same company’s performance and prospects fall short of the Wall Street view, its stock price will plunge.
For investors, this simple rule is not particularly useful because it is virtually impossible to predict ahead of time whether a company will exceed or fall short of investor expectations.
What’s more, there are times when a company’s performance and prospects are a matter of being in the right or wrong place at a time when factors outside of management’s control abruptly shift the rules of the game.
You don’t have to look into the distant past to find examples. In 2020 and 2021, the pandemic created a boom in people working from home (WFH). That was spectacular news for companies like Zoom Video, Peloton, and many others who were well positioned to satisfy the burgeoning demand from people in the WFH set.
These pandemic darlings enjoyed rapid revenue and stock price growth. When the pandemic tailed off, their revenue growth slowed and their stock prices plunged.
This comes to mind in considering another pandemic darling — Boston-based Wayfair — which has suffered an 86% plunge in its stock price since it peaked in March 2021. Over the last two years, its revenue has shrunk and it recently announced that it would layoff 10% of its workers, according to the Wall Street Journal.
This announcement prompted the stock — 35% of its shares are sold short — to pop 34% since last Thursday in January 23 pre-market trade. Does this make Wayfair a screaming buy? Not bloody likely. Despite the risk that Wayfair will report better than expected fourth quarter 2022 results, I see three reasons this stock has further to fall:
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Declining revenues and weak prospects Lack of industry growth Declining market share
(I have no financial interest in the securities mentioned in this post).
Q3 Results and Forecast
Last November, Wayfair reported third quarter results that featured a decline in revenue and a huge loss.
Specifically, the online furniture retailer’s revenues fell 9% to $2.84 billion and it posted a $283 million net loss.
Why did revenue — which fell 3% in 2021 and 13% for the first nine months of 2022 — decline? One possible reason is a significant drop in the number of active customers. According to Boston Business Journal that figure dropped 23% from 29.2 million in the third quarter of 2021 to 22.6 million in Q3 2022.
Meanwhile, CEO Neeraj Shah pinned Wayfair’s lack of profitability on too many employees and ineffective operations. In August 2022, Wayfair cut about 900 corporate roles which Shah said would reduce expenses by “more than $500 million.”
Wayfair also suffered from inefficient operations. Last November Shah told investors that the company planned operational changes such as “returns modernization, scam reduction, incident prevention, logistics optimization, and more.”
This was not enough cost cutting for Wayfair. So on January 19, the company announced it would cut another 1,750 employees. The August and January rounds “of layoffs will deliver annualized savings of $750 million as part of a restructuring that aims to reduce annual expenses by $1.4 billion,” according to the Wall Street Journal.
While I cannot find a fourth quarter revenue forecast, Yahoo!Finance reports that the mean analyst target for Wayfair’s fourth quarter 2022 revenue is $3 billion — representing a 7.7% decline from the year before.
Lack of Industry Growth
Wayfair is shrinking faster than the online houseware/home furnishing industry. Last November, Digital Commerce 360 projected that the top online retailers in the houseware/home furnishing category would collectively suffer a 2.3% drop in 2022 sales.
This represents a painful slowdown from the rapid growth during the peak years of the pandemic. In 2020, demand soared 48.2% as people moved to furnish home offices and otherwise spruce up the place that they were spending most of their time. This growth slowed to 10.2% in 2021, according to Digital Commerce 360.
Sadly for investors, demand for furniture and home furnishings continued falling in December. High inflation and concerns about a slowing economy contributed to December 2022’s 1.1% drop in U.S. retail spending. According to the Journal, last month, “Sales at furniture and home-furnishings stores fell even more sharply, down 2.5%.”
Declining market share
Why is Wayfair shrinking faster than its industry? Part of the problem could be its business model. Wayfair sells and distributes furniture and other inventory from thousands of manufacturers. According to the Boston Globe, this model caused “major weakness amid all of [2022’s] supply chain glitches.”
Shah called this a “tough stretch” which he says Wayfair is overcoming. Wayfair’s supply chain woes are recovering as manufacturers and shippers “get back to normal,” noted the Globe.
With plans for expansion into Europe, Shah is exuberant about its future, telling the Globe, “Frankly, we’ve figured out how we can be very successful in the future with the right-size team.”
It is difficult to square Shah’s optimism with Wayfair’s loss of more than a million customers in the third quarter. Neil Saunders, an analyst at GlobalData Retail, told CNNBusiness, “Wayfair’s business isn’t working and it is losing an extensive amount of market share.”
Competitors are picking off Wayfair’s most popular products. A December 2022 study by MoffettNathanson noted, “We see sustained competition and anticipate Wayfair’s market share declining,” according to the Journal.
Is The Worst Over For Wayfair?
Today’s stock market is not buying the bearish view of Wayfair. Indeed, in January 23 pre-market trading, shares have risen “more than 12% after being double upgraded to overweight from underweight by JPMorgan. The Wall Street firm cited improving market share trends and a better grasp on spending from management,” notes CNBC.
Not everyone is as optimistic as JPMorgan. For example, last October, RetailDive included Wayfair on a list of retailers with between a 10% and a 50% chance of going bankrupt. Top on the list was Party City — which filed for bankruptcy on January 17.
At the bottom of the RetailDive list of those 10 retailers — based on CreditRiskMonitor’s FRISK scores as of September 30 — was Wayfair.
Saunders expressed skepticism of Wayfair’s business model. As he said, “There is a fundamental weakness in Wayfair’s business model: It needs considerably larger volumes and many more regular customers to attain profitability. Now [that] demand is normalizing, Wayfair is back to making eye-watering losses.”
To be fair to the bulls, Wayfair has cut people. However, I do not see its stock recovering unless it reports faster than expected growth.
Perhaps investors’ low expectations will be easy for Wayfair to exceed — which could cause its stock to rise if the large number of Wayfair short sellers are forced to buy to close out their positions.
However, with Wayfair revenues and customer counts shrinking faster than the already contracting online home goods retailing industry, I do not see growth tailwinds catalyzing its escaping a doom loop of declining revenue followed by further cost cutting.
