Wayfair Trends on the Upswing Despite Recent Angst in the Housing Markets; Shares Undervalued

Embedded in a personnel update was no-moat Wayfair’s W 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.

With the business update, Wayfair noted that long-time chief commercial officer Steve Oblak would be retiring. As a result, Jon Blotner will be filling the role in the third quarter. Given that Blotner has been with Wayfair for the last seven years, working with multiple brands in the Wayfair portfolio, the media, and merchandising teams, as well as supplier-focused groups, we contend he has a solid handle on the commercial side of the organization to complete the transition smoothly. Furthermore, we don’t expect any change to the long-term strategy of the business and plan to maintain our Standard capital allocation rating.