Wayfair Earnings: Path to Profitability Shortened Thanks to Robust Cost-Savings Initiatives

Wayfair Stock at a Glance

• Fair Value Estimate: $91
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Wayfair Earnings Update

We don’t plan any material change to our $91 fair value estimate for no-moat Wayfair W 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.

While home-related stocks have been plagued by near-term concerns around interest rates, slowing turnover, and general macro unease, we don’t expect negative sentiment to persist indefinitely. As the sales cadence normalizes, costs should be better in line with top-line growth, resulting in profit margin expansion.

We had already built mid-single-digit adjusted EBITDA margins into our 2024-25 forecast and expect to keep such projections intact. Longer term we have no reason to alter our forecast, which includes double-digit EBITDA margins that benefit from mid-single-digit sales growth (hence our static fair value). We surmise that continued reinvestment in the customer experience will drive repeat business for Wayfair, which should lead to lower customer acquisition costs, as existing clientele continue to purchase from within the Wayfair ecosystem.