Wayfair stock soars, as Wall Street cheers surprise profit and positive cash flow

By Tomi Kilgore

Big improvement in gross margin helps drive swing to first profit in nearly 2 years even as revenue, active customers fell

Shares of Wayfair Inc. soared to a 15-month high Thursday, after the online home-furnishings retailer reported a surprise second-quarter profit, as a jump in gross margins helped offset declines in revenue and active customers.

"While we had a slow start to the spring weather, the outdoor shopping season picked up rapidly as we move through the back part of the quarter and we saw both customers and suppliers leaning into several well-received promotional events," said Chief Financial Officer Kate Gulliver on the post-earnings conference call with customers, according to an AlphaSense transcript.

The stock (W) shot up 16.2% to $84.67, the highest closing price since May 4, 2022. It was also the biggest one-day post-earnings gain since it rocketed 23.7% after first-quarter 2020 results one May 5 of that year.

Trading volume ballooned to 24.5 million shares, or more than five times the full-day average over the past 30 days of about 4.5 million shares.

Wells Fargo analyst Zachary Fadem swung to bullish from bearish after the results, as he doubled upgraded Wayfair to overweight from underweight.

He acknowledged in a note to clients that while "we're late to the party," and despite lingering macroeconomic concerns and a highly promotional, "our [underweight] view has run its course."

Before the opening bell Thursday, the company reported net losses that narrowed to $46 million, or 41 cents a share, from $378 million, or $3.59 a share, in the same period a year ago.

Excluding nonrecurring items, such as taxes related to equity-based compensation, the company reported adjusted earnings per share of 21 cents, which beat the FactSet consensus for a per-share loss of 73 cents.

Revenue fell 3.4% to $3.17 billion but topped the FactSet consensus of $3.10 billion.

Chief Executive Niraj Shah said on the analysts' call that while revenue declined, the company "meaningfully outperformed the competition," as the decline compared with an industry that continues to see sales fall 10% to 20%, based on widely tracked estimates like credit card and email receipt data.

Gross margins, or gross profit as a percentage of revenue, improved to 31.1% from 27.3%, to surpass the 30%-level for the first time since the peak pandemic period of 2020.

This time, however, Shah believes the improvement is "durable," given the work done to cost costs.

Free cash flow swung to positive $128 million from negative $244 million, while the FactSet consensus called for negative $59.5 million.

And while active customers fell 7.6% from a year ago to 21.8 million and orders per customer fell to 1.82 from 1.85, both marked an increase from the first quarter, when active customers totaled 21.7 million and orders per customer were 1.81.

Net revenue per active customer over the last 12 months increased 1.5% from a year ago to $545 as of June 30, but that was down from $552 as of March 31.

"We've been extremely encouraged by the recent data we're seeing on customer behavior, with a noticeable upswing across all of our customer cohorts and sequential growth in our active customer count," Shah said. "It's crucial to know that this improvement in order momentum is not a function of isolated success in any particular class or with a specific group of shoppers, but it's been broad-based across both our customer file and our catalog."

Wayfair's stock has skyrocketed 157.4% year to date, while the Amplify Online Retail ETF IBUY has run up 31.5% and the S&P 500 index SPX has gained 17.3%.

-Tomi Kilgore

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08-04-23 0709ET

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