Wayfair (NYSE: W) investors are used to volatility in their stock. Just so far in 2018, shares of the online home furnishings specialist have ranged from a 25% decline to a 50% increase.
That roller-coaster ride reflects the fact that Wayfair's business is growing far faster than its competitors', but has yet to generate sustainable profits. In second-quarter results announced this week, the company extended those big-picture trends by pairing market-thumping sales gains with continued losses.
Sales spiked 49% to mark a slight increase over the prior quarter's 48% boost . That figure included a 43% gain in the core U.S. segment, which has now grown at a 40% rate or better in each of the last three quarters. The younger international division nearly doubled, meanwhile, to $244 million, or about 15% of sales. These consistently strong sales figures suggest that Wayfair is continuing to grab market share both from bricks-and-mortar retailers and from online specialists.
Looking deeper into the top-line results, the growth appeared broad-based. Wayfair's pool of active customers grew 34% to 12.8 million and repeat customers placed 4.3 million orders during the period, equating to 66% of all orders, up from 61% a year ago. Detracting from those gains was the fact that average order valued ticked down to $254 from $258 a year ago. "We are really pleased with the growth we are seeing across our business," CEO Niraj Shah said in a press release, "and the market share gains this growth represents."
The profit picture was mixed. Wayfair managed the slightest of positive margins in the U.S. business while the international segment continued to post significant losses. Overall, the company lost $100 million, or about the same as last quarter:
Profitability looked good despite ramped-up efforts by rivals like Overstock to cut into Wayfair's market share. Gross profit margin held steady at 24% of sales, and advertising and marketing costs actually dropped to 10.7% of sales from 11.1%.
The retailer's adjusted earnings margin fell overall, but only due to aggressive growth spending. Wayfair brought on thousands of new employees, particularly in the technology development teams, to help support innovations aimed at making the furnishings-shopping process easier for customers. "By focusing on bringing customers the best possible experience in shopping for the home, from the home, we are leading the way in our category," Shah explained.
The bigger picture
Management's long-term target calls for adjusted earnings to range between 8% and 10% of sales. That goal seems far off, given that Wayfair is on track for its fourth straight year of a negative result on this metric.
Still, the overall trends are pointing in that direction. A quickly growing sales base is helping most costs drop as a percentage of sales. Once the company achieves the scale it is targeting, it can ease back on spending on hiring, and on building out its delivery infrastructure.
At that point, its leading market share should translate into robust earnings growth. Yet the stock is still likely to see significant pricing swings in the meantime, as investors try to estimate Wayfair's long-run potential to build -- and protect -- its grip on the fragmented global market for home furnishings.
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