Analyst Note| Jaime M. Katz, CFA |
We plan to raise our $112 fair value estimate for no-moat Wayfair by a mid-single-digit clip after incorporating sales that fell 10% (to $3.9 billion) and an adjusted EBITDA margin of 8% (down from 10.2% in the year-ago period). In our opinion, these metrics are far from disappointing, marking a 64% increase in sales over the second quarter of 2019 and significantly improved profitability (the second quarter 2019 adjusted EBITDA margin was negative 3%). The current period displayed mean reverting behavior with respect to spend across categories (away from furniture and back to travel and leisure), which we expected to occur as the economy reopened, and guidance implies such trends may continue. In particular, Wayfair offered third-quarter projections that included sales below first- and second-quarter levels (implying another double-digit decline), a gross margin of 27%-28% (versus 29% in the past three quarters), and a low-single-digit EBITDA margin (versus 10% in the third quarter of 2020).