Company Reports

No-moat Wayfair’s fiscal 2024 first-quarter results emphasized continued traces of demand stabilization and ongoing improvements in its cost structure despite a housing market that continues to be characterized by lofty interest rates and a lackluster housing turnover. Critically, its operations, technology, and administrative, or SOTGA, expense leveraged 280 basis points to 22.5% of sales despite the soft sales growth (down 1.6%), aided by the firm’s workforce reductions since mid-2022. Consequently, adjusted EBITDA margin expanded a whopping 320 basis points to 2.7%, giving us confidence in our low-teens adjusted EBITDA margin forecast by fiscal 2033. Longer term, we see higher private-label penetration, higher volume, and lower expenses (both SOTGA and advertising) lifting the firm’s profitability as it enters a more mature business phase.

Wayfair plays in the fragmented home goods market in North America and Western Europe ($800 billion-plus global opportunity), offering more than 30 million products from more than 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000 means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no moat rating.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Despite operating in an industry plagued by high interest rates and a stagnant housing turnover, no-moat Wayfair continues to deliver consistent baseline sales and improving profitability. While seasonally adjusted furniture and home furnishing sales declined an average of 6% in Wayfair's fourth quarter, the firm was able to chalk up flat sales ($3.1 billion), indicating that it is taking share. Moreover, even without sales growth, Wayfair's expense profile continues to improve. Efforts to reduce the workforce since mid-2022 helped lower the fourth quarter's operations, technology, and administrative, or SOTGA, ratio by roughly 200 basis points, to 19.2% of sales. But the ability to manipulate pricing to protect gross margin also helped Wayfair win, resulting in 150 basis points of upside, to 30.3%. As a result, Wayfair printed its third consecutive positive quarterly EBITDA margin, evidencing its ability to generate profitability even in weak macroeconomic conditions.

No-moat Wayfair announced a 13% reduction in its workforce on Jan. 19, which is expected to deliver annualized savings of $280 million (at the expense of $70 million-$80 million in costs), with roughly 45% coming from cash compensation, a move we commend to ensure a path to consistent profitability. Shares jumped around 10% on the news, given that the firm now expects to print 2024 adjusted EBITDA of more than $600 million, ahead of our roughly $400 million estimate and consensus’ $470 million projection (FactSet). However, this is based on a flat revenue environment in 2024, which may or may not come to fruition depending on consumer strength. In fact, adjusted furniture and home furnishing sales (U.S. Census) have averaged a 9% decline over the last six months, implying that Wayfair would have to take massive share if this trajectory continued. Between 2019 and 2022 industry sales grew by 23% (a roughly 7% CAGR), while spending on goods outpaced services for a stretch.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Wayfair plays in the fragmented home goods market across North America and Western Europe (an $800 billion-plus global opportunity), offering more than 40 million products from more than 20,000 suppliers. We think its differentiation comes by way of product breadth and its logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers 25-54 years old with average household income of $80,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Despite operating in an extremely weak home furnishing landscape, no-moat Wayfair was able to eke out top-line growth of 4% in its third quarter (to $2.9 billion), indicating that it’s taking market share in an industry that has trended down at a double-digit clip. Gross margin continues to impress, expanding more than 200 basis points to 31.2%, as improving costs, merchandising, and mix helped. This was the largest contributor to the firm’s 3.4% EBITDA margin, which modestly edged our 3.2% projection. Key metrics signal Wayfair may have found a support level for its demand, with the number of active customers down just 1% (up 2% sequentially), orders delivered up 14%, and customer acquisition costs contracting modestly over the prior quarter (by our math). Moreover, early indications point to further market share gains, with Wayfair calling for gross revenue to end the fourth quarter in a range of flat to up low single digits—a level that could be much better than the market given the weak spending across discretionary consumer categories.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

Wayfair plays in the fragmented home goods market across North America and Western Europe (an $800 billion-plus global opportunity), offering more than 40 million products from more than 20,000 suppliers. We think its differentiation comes by way of product breadth and its logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers 25-54 years old with average household income of $80,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

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).

Wayfair plays in the fragmented home goods market across North America and Western Europe (an $800 billion-plus global opportunity), offering more than 40 million products from more than 20,000 suppliers. We think its differentiation comes by way of product breadth and its logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers 20 to 64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Embedded in a personnel update was no-moat Wayfair’s recognition that the home furnishing environment isn’t as dour as it was just a few weeks ago. When Wayfair reported its first-quarter results on May 4, second-quarter gross revenue was falling at a high-single-digit rate year over year. However, the cadence of gross revenue has already improved, currently falling at a mid-single-digit rate, benefiting from positive order growth. Initially, the firm had anticipated demand improvement in both May and June given easier comparisons, which would imply nearly 10% sequential growth. But the update implies closer to low-teens sequential growth if patterns continue. We don’t plan to alter our $94 fair value estimate despite the modest improvement in demand, as our long-term prognosis for the business remains unchanged. Looking forward, we forecast mid-single-digit sales growth, modestly faster than industry growth, as e-commerce adoption across the home furnishing sector continues to improve. We view shares as attractive at a nearly 50% discount, despite the nearly 60% run up the stock has experienced year to date, particularly with the possibility of consistently positive EBITDA on the brink.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

Wayfair should be able to support market share growth in the fragmented home goods market when housing spend normalizes, increasing its relevance in the more than $800 billion global opportunity between North America and Europe. Wayfair’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than many of its peers. Faster delivery is a function of fewer touch points, reducing damage and improving Wayfair’s brand equity with each positive delivery experience. However, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base with a customer age 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

We don’t plan any material change to our $91 fair value estimate for no-moat Wayfair after incorporating modest first-quarter outperformance into our model and view shares as attractive, even after a double-digit post-print pop. First-quarter sales of $2.8 billion and an adjusted EPS loss of $1.13 bested our $2.7 billion and $2.38 EPS loss estimates. With the firm’s $1.4 billion cost reduction plan well underway, Wayfair was able to post a gross margin that was 110 basis points ahead of our expectation, representing 280 basis points of expansion, to 29.6% (a first-quarter high water mark). Profitability gains were noteworthy, as the U.S. generated positive EBITDA results, while international halved its EBITDA losses sequentially. It would appear we are at a financial turning point for Wayfair, with its second quarter of moderating customer acquisition costs (by our math), slowing active customer and orders delivered declines, and costs that should decline over the rest of 2023. With Wayfair projecting above breakeven EBITDA in the second quarter, efforts to rightsize the cost base are set to pay off.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Wayfair should be able to restore market share growth in the fragmented home goods market when housing spend normalizes. The firm believes this is a more than $800 billion global opportunity between North America and Europe. Wayfair’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than many of its peers. Faster delivery is a function of fewer touch points, reducing damage and improving Wayfair’s brand equity with each positive delivery experience. However, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base with a customer age 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

No-moat Wayfair’s shares fell more than 25% after reporting fourth-quarter results and offering a look into its current quarter. Fourth-quarter sales fell 5%, but a few metrics raised concerns that demand has yet to bottom. The number of active customers sank 19% to 22.1 million, and repeat customer orders fell 8% to 8.5 million, implying customer attrition persisted (the first three quarters of 2022 saw active customer numbers decline more than 20%). Positively, the number of active consumers and sales are still up 9% and 22%, respectively, from the same period in 2019 (prior to the uptick stemming from COVID-19-related demand and the subsequent consumer retreat). However, even with improved scale, Wayfair failed to turn a profit in the quarter, generating a negative 2% adjusted EBITDA margin. More importantly, Wayfair’s first-quarter outlook implies a continuation of current trends, as a high-single-digit percentage sales decline is set to lead to a low-single-digit percentage adjusted EBITDA loss.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.