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Unpacking why Wayfair’s stock popped 23.7% today

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In the midst of the day’s news chaos both political and business-oriented, you might have missed Wayfair’s big moment: In regular trading today, shares of the online home goods retailer shot 23% higher. It was an eye-catching gain during a period when the domestic economy is troubled, unemployment is rising and consumer spending is slowing.

Why did Wayfair shares rise so much in a single day? In a word, earnings. But there’s a bit more nuance to understand, so let’s talk about the company’s Q1 earnings report and what it can tell us about consumer spending trends in the COVID-19 era, because they just might impact a startup or two.

Q1 results

We’ll start with the basics: Wayfair reported Q1 revenue of $2.33 billion, up 19.8% from $1.94 billion in the year-ago quarter. The company’s gross profit rose a sharper 23.1% to $579.1 million, boosting Wayfair’s gross margins in the first quarter of this year.

The rest of Wayfair’s income statement is less attractive. The company’s operating costs, including customer service, merchant fees, advertising and a bucket of costs it calls “selling, operations, technology, general and administrative,” came to $841.2 million. That figure is far larger than reported gross profit, meaning that Wayfair’s losses for the period were large.

The company’s operating loss in Q1 2020 rose to $284.5 million (+42.4%), and its net loss totaled a slightly worse $285.9 million. Its operating cash burn also rose sharply — over 215% — to $256.3 million in the period. Wayfair closed Q1 with more than $624 million in cash, meaning that it was still well-capitalized at the end of the period.

Why did shares of Wayfair rise when its losses popped as much as they did? The expectations game, essentially.

Investors expected Wayfair to report adjusted losses of $2.60 per share. Instead, it turned in adjusted losses of $2.30 per share and its revenue topped an anticipated $2.31 billion result. So, despite some obvious potholes in its numbers, Wayfair beat the street and was richly rewarded.

Even more, the reason why it beat Q1 expectations might last a bit longer than just the first three months of the year.

Staying at home

Wayfair beat growth expectations in Q1, to investor delight, but it could crush them in Q2. In a nutshell, that’s why its share price shot higher — Q1 was better than expected, but not by that much, while Q2 might be bonkers.

To understand what’s going on, we need to read the earnings call transcript from the firm. Here’s what Niraj Shah, Wayfair’s CEO had to say on its earnings call (bolding: TechCrunch):

This period coincided with customers beginning to shelter in place at home, which led to new needs for essential products like cookware and kitchen appliances, home office products and children’s furniture and play items, and also brought to light ongoing renovation and decoration projects that customers are now taking on. The competitive landscape also shifted as many physical retail stores closed temporarily, leading customers to move increasingly towards shopping online across all categories, including home. This pickup in demand has continued to gain momentum. And in the U.S., the rollout of stimulus monies in mid-April served as an added accelerant of new and repeat customers coming to Wayfair. As a result, we have seen gross sales momentum build across almost all classes of goods across mobile and desktop platforms and across all regions in the US, Canada, the U.K. and Germany.

That’s the CEO’s overview. In summary, people are staying home at the moment and buying stuff for their house. Those two trends squarely line up with what Wayfair does, providing good lift to the firm.

Reading from the same transcript, CFO Michael Fleisher had more numbers to share that detail precisely why Q2 could blow Q1 out of the water (bolding: TechCrunch):

Quarter-to-date, our gross revenue growth year-over-year is trending at roughly 90%, translating to over $800 million added year-over-year on a constant currency basis. This momentum is widespread across almost all categories and includes comping over Way Day last year, which we deferred into later this year.

While we do not know how long these trends will persist, and thus will not provide a specific revenue forecast for the whole of Q2.

We’ve included that last riff as a cautionary item. Sure, the firm is seeing huge gains, but they might not last. So, don’t count on them. Investors, of course, are going right over their skis and bidding up the company’s equity aggressively, pricing in some of that upside to its present-day share price.

That’s standard, frankly.

What Wayfair shows is that the COVID-19 economy is a bust for many, but a boom for a select few. And apparently home-oriented e-commerce is hot right now. This may mean that startups working in similar spaces are enjoying rising demand. Expect private investors to place bets accordingly.

A good question for the future will be how much of the shift in spend to the web will persist post-COVID-19. Eventually we’ll have a vaccine, but will people keep buying home goods online?

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