Wayfair Earnings: Hefty Cost Savings Bear Fruit, Driving Profitability and Customer Investment

We plan to raise our $96 fair value estimate for no-moat Wayfair by a high-single-digit percentage after digesting second-quarter results that exceeded our expectations. Sales of $3.2 billion and adjusted EPS of $0.21 outpaced our $3 billion and $1.00 loss estimates, respectively. Even with a high-double-digit surge in share price, we think Wayfair looks modestly undervalued. We contend sequentially improving sales declines and a stabilizing active customer count (to 21.8 million from 21.7 million), were driven by Wayfair’s breadth of multitiered offerings (coupled with better in-stock levels) and promotional activity, despite a more price-sensitive consumer. Impressively, less than one third of purchases were nonpromoted products, indicating Wayfair’s ability to facilitate conversion sales without ceding margin (gross margin of 31% was a high-water mark for the firm). Additionally, this conversion allowed Wayfair to take share—domestic sales at Wayfair experienced a 0.4% decline in the second quarter, better than the 8% average monthly decline in the U.S. furniture and home furnishing industry over the same period (U.S. Census Bureau).