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Wayfair Talks Holiday Wins and International Growth Plans

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Most management teams hope to underpromise and overdeliver on short-term earnings forecasts. But Wayfair (NYSE: W) took that approach to new heights in its lates t quarterly report . The e-commerce specialist blew past its sales forecast for the holiday period and announced higher gross profitability instead of the slight reduction executives had warned about three months earlier.

In a conference call with investors, CEO Niraj Shah and his team described the key drivers of that banner holiday result while putting Wayfair's latest momentum in context with their long-term global growth plans. Here are some highlights from that chat.

A modern living room, with a couch, two small tables, a potted plant, and a pendant lamp

Image source: Getty Images.

Accelerating market share gains

We had a very successful holiday season in Q4, which continues to be a great time of year for us to attract new customers to the Wayfair offering as well as engage with repeat shoppers. The [peak shopping] period [around Cyber Monday] continues to resonate strongly with customers, with Direct Retail growth sales growing 58% compared with the same period last year.-- Shah

Wayfair's sales increased 40% to comfortably surpass management's guidance for the fourth consecutive quarter. Key engagement metrics -- including active customers, order volume, and repeat business -- all improved despite intense competition over the holiday period. Executives pointed out that the $577 million of additional revenue the company secured in the quarter translated into massive growth at an increasing scale. To put the gains in longer-term perspective, Shah noted that Wayfair added $2.1 billion in sales to its annual base this year, after adding $1.3 billion in 2017 and $1.1 billion in 2016.

Profitability wins

We were thrilled to see the analytical and collaborative approach we take with our supplier partners resulted in a product offering that not only resonated strongly with customers during the peak period but also did sell at prices that resulted in improved margins for the quarter.-- Head of Corporate Finance Julia Donnelly

Wayfair told investors back in early November that the upcoming holiday season might include deep price cuts as the company matched rivals' promotional stances. Shareholders were also concerned about a potential spike in advertising expenses that might indicate the company needed to pay up more for the traffic it was getting to its sales platform.

Neither of those concerns played out over the holiday season. In fact, gross profit margin ticked higher by a full percentage point and advertising spending landed at 11.5% of sales to mark a slight decrease from the prior quarter.

Spending will rise

We added 1,215 net new employees in the fourth quarter for a total of 12,124 employees as of December 31, 2018.-- Donnelly

Wayfair's hiring spree was the biggest factor in sending selling expenses up to a profit-busting 12% of sales . Executives said this boost supported sales growth both in the U.S. and internationally. But it was also a result of the company's deliberate strategy of taking control of more of the customer experience. Wayfair's proprietary shipping network now accounts for 26% of small parcel fulfillment, for example, up from 19% a year ago.

Shah and his team plan to continue that strategy in 2019, which helps explain why they are predicting more modest losses in their most mature market. Executives also warned investors to expect to see aggressive capital spending in the international business, particularly in Germany. Wayfair's sales there are tiny at the moment, but management sees some exciting parallels with the early days in the U.S. business.

Applying what they learned from those experiences, and with the added benefit of surging sales growth at home, executives say they're increasingly confident that the cash they're laying out today will support robust long-term earnings. Still, given that operating losses ballooned to $473 million in 2018 from $235 million a year ago, it could be some time before investors see Wayfair generate consistent profits.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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