Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Wayfair the Biggest Online Retail Success you Never Heard of

Home furnishings outlet Wayfair (NYSE: W) was the biggest online retail success you never heard of. Until, an odd controversy about furniture sales to US Border Patrol detention facilities splashed Wayfair’s name across headlines.

To elaborate, the controversy is minor; involving $200,000 worth of sales, The New York Times reports. However, the scandal involving treatment of illegal immigrants shines a spotlight on one of the biggest online successes around.

In fact, Wayfair is now the sixth largest US online retailer with sales of $4.83 billion in 2018. Notably, Statista calculates Wayfair’s 2018 sales were larger than those of Macy’s (NYSE: M), Costco Wholesale (NASDAQ: COST), and Target (NYSE: TGT).

In detail, Statista estimates Target had online sales of $4.823 billion in 2018, Costco had 2018 online sales of $3.983 billion, and Macys had online sales of $4.8 billion for 2018. Thus, Wayfair is now outselling some of the biggest names in American retail.

Wayfair’s Explosive Growth

Wayfair’s growth over the past few years has been explosive. For example, Statista estimates the number of active Wayfair customers grew from 10.99 million in 2017 to 15.16 million in 2018.

Moreover, Statista calculates Wayfair had only 2.09 million customers in 2013, 3.22 million customers in 2014, 5.36 million customers in 2015, and 8.25 million customers in 2017. Thus, Wayfair’s customer base grew by 13.07 million shoppers in just five years.

Sales volume is also exploding at Wayfair. Notably, Statista estimates the number of orders Wayfair ships grew from 3.31 million in 2013 to 28.08 million in 2018. Specially, Wayfair shipped 5.24 million orders in 2014, 9.17 million orders in 2015, 14.06 million orders in 2016, and 19.41 million orders in 2017.

Wayfair’s Impressive level of Repeat Business

Therefore, Wayfair’s shipping volume grew by 24.77 million in just five years. Moreover, Wayfair claims it is making more money from those orders. To clarify, Wayair management claims it made $443 from every active customer in 2018, an increase of 5% over 2017.

Importantly, Wayfair management estimates most of those orders were repeat business. Impressively, repeat customers made up 66.4% of Wayfair orders in 4th Quarter 2018 and 62.4% in 4th Quarter 2017, a press release claims.

In fact, Wayfair estimates it received 5.8 million repeat orders in 4th Quarter 2018. Thus, Wayfair seems to have a high level of satisfaction.

Is Wayfair Making Money?

Data shows Wayfair knows how to make online customers happy but is it making money?

Unfortunately, the answer is no. Dramatically, Wayfair reported a quarterly operating loss of -$193.63 million and a net loss of -$200.39 million on 31 March 2019. However, Wayfair reported a $470.46 million gross profit revenues of $1.94 billion for the last quarter, Stockrow calculates.

Thus, Wayfair is growing like crazy but losing lots of money, like Amazon (NASDAQ: AMZN) used to. Notably, Amazon reported a net loss of -$241 million and no operating income as recently as 31 March 2018.

Wayfair is Burning Through a lot of Cash

In another similarity to Amazon Wayfair is burning through a lot of cash.

Specifically, Wayfair had an operating cash flow of -$81.35 million; an investing cash flow of -$44.7 million, a financing cash flow -$89,000, and a free cash flow of -$166.82 million on 31 March 2019. Interestingly, Amazon had a free cash flow of -$875 million, a financing cash flow of -$2.377 billion, and an investing cash flow of -8.123 billion on the same day.

However, Amazon had an operating cash flow of $1.846 billion at the end of March. Thus, like Amazon, Wayfair has to burn through a lot of cash to serve its customer base.

Yet Wayfair has some cash left over. Importantly, Wayfair had $805.66 million in cash and short-term investments on March 31, 2019. In detail, Wayfair had $733.36 million in cash and equivalents and $83.3 million in short-term investments on that day.

Is Wayfair a Cash Rich Company?

Consequently, Wayfair keeps a lot of its cash like Amazon. Although, Wayfair’s cash and short investments fell from $963.74 million in December 2018 to $805.66 million in March 2019.

On the other hand, Wayfair’s cash and short term investments grew by $223.60 million in a year. To elaborate, Wayfair had $582.06 million in cash and short-term investments in March 2018 and $805.66 million a year later.

Thus, Wayfair is not yet a cash-rich company but it is on the way being cash rich. I think one of Amazon’s biggest attractions is its ability to keep a lot of cash. Amazon, for example had $37.02 billion in cash and short-term investments on 31 March 2019.

Amazon’s experience proves online retailers can generate a lot of cash. Consequently, I predict Wayfair could accumulate a lot of cash at some point.

Is Wayfair a Value Investment or the next Amazon?

No, I do not think Wayfair is a value investment because Mr. Market overpriced it at $143.10 on 1 July 2019.

On the other hand, Wayfair is a bargain compared to Amazon (NASDAQ: AMZN). Amazon shares were trading at $1,922.19 on the first of July 2019.

Moreover, Wayfair pays no dividend, another similarity to Amazon. Yet, Wayfair is definitely a stock to watch because it proves you can compete with Amazon.

Plus, I think Wayfair is hurting brick and mortar retailers like Bed Bath & Beyond (NASDAQ: BBBY). Wayfair hurts brands like Bed Bath & Beyond and Macy’s by giving people an excuse not to go their brick and mortar stores.

A soccer mom, for example, can shop for sheets and stay home and garden rather than drive to the mall or strip mall. Moreover, the soccer mom does not have to all the trouble of lugging furniture home from Home Goods. Plus, she can avoid the hassle of having to talk her husband or son into moving furniture.

Are Millennials Driving Wayfair’s Growth?

A true nightmare for brick and mortar retailers is two or three generations of Americans that only shop for furnishings online.

Interestingly, we may that right now with Millennials (22-37) and Generation X (38-53). Two generations that grew up with the internet but are now in their prime family starting and child-rearing years.

Under these circumstances, I think Wayfair is a threat to department store operators including; Kohl’s (NYSE: KSS), the TJX Companies (NYSE: TJX), and possibly Nordstrom (NYSE: JWN). Essentially, Wayfair hurts department stores by killing foot traffic.

Is Wayfair driving the Retail Apocalypse?

Foot traffic falls because a large percentage of would-be customers are out jogging, watching their kids’ games, or sitting at home playing Fortnite. If these trends continue, foot traffic could fall to such low levels many retail stores will become unprofitable.

Thus, Wayfair is now a major player in the Retail Apocalypse. Apocalypse is an accurate description of the situation because more US stores closed in the first three months of 2019 than all of 2018, Coresight Research estimates.

There were 5,994 American store closings in 1st Quarter 2019 and 5,864 store closings in all of 2018, Business Insider calculates. Moreover, retailers seem to be closing under-performing locations faster.

Some of those brands; including department store zombie JC Penney (NYSE: JCP), are direct competitors to Wayfair. Business Insider reports JC Penney plans to close 27 stores in 13 states in 2019.

Penney’s locations closing; include furniture and home stores in St. Louis and Springfield, Missouri. Thus, it looks as if you cannot compete with Wayfair in home furnishings.

How Wayfair Profits from the Retail Apocalypse

Strangely, Wayfair profits from the retail apocalypse because people have fewer places to shop for home furnishings. Moreover, less stores is one more reason not to go the mall.

Thus, Wayfair could soon find that Amazon and Walmart (NYSE: WMT) are its only serious competitors. That development will drive charges of monopoly against all three companies and calls to break them up.

Will the Boycott Hurt Wayfair?

Finally, we need to ask if the boycott will hurt Wayfair (NYSE :W). My prediction will not hurt Wayfair.

Historically, such boycotts generated a lot of publicity but did little damage to companies. For example, the 1965-1970 Delano Grape Strike and Boycott made Cesar Chavez a household name but had little practical effect on retail or agriculture.

Moreover, the British sugar boycott kick-started the abolitionist movement in the 18th and 19th centuries. Thus, the boycott is not likely to hurt Wayfair; but it could harm President Donald J. Trump (R-New York) and Republicans with bad publicity.

Under these circumstances, Wayfair is a stock to watch but not buy. However, I advise those looking for stocks to short to identify Wayfair’s brick and mortar competitors. My prediction is Wayfair will experience dramatic growth at brick and mortar stores’ expense.