Wayfair Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts below are in U.S. dollars. Wayfair operates an online home-goods retail business, reporting U.S. and International segments.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $2,343.3m | $1,655.3m | $4,288.1m | $3,059.5m |
| Gross profit / margin | $559.6m / 23.9% | $385.0m / 23.3% | $1,030.1m / 24.0% | $708.8m / 23.2% |
| Operating loss / margin | $(171.2)m / (7.3)% | $(95.3)m / (5.8)% | $(364.8)m / (8.5)% | $(198.4)m / (6.5)% |
| Net loss / diluted loss per share | $(181.9)m / $(1.98) | $(100.7)m / $(1.13) | $(382.3)m / $(4.18) | $(208.5)m / $(2.35) |
| Adjusted EBITDA | $(70.0)m | $(34.8)m | $(172.2)m | $(84.8)m |
| Free cash flow | $(91.5)m | $(7.5)m | $(258.3)m | $(55.1)m |
Q2 operating cash flow was $(2.7)m, compared with $47.6m provided in Q2 2018. For the first half, operating cash flow was $(84.1)m versus $34.5m provided in 2018. First-half investing cash outflow was $89.3m, mainly reflecting property/equipment purchases and software development.
At June 30, cash and cash equivalents were $675.1m and short-term investments were $39.3m, totaling $714.5m. Working capital was negative $276.6m. Long-term debt carrying value was $761.6m; the convertible notes’ combined principal was $1,006.3m. Operating lease liabilities totaled $754.7m. The company reported no borrowings under its revolving credit facility; availability was up to $165m, subject to terms.
Changes and operating trends
- Q2 revenue increased 41.6% year over year, driven mainly by Direct Retail revenue, up 42.1%. Active customers grew 39.1% to 17.8m; orders delivered rose 42.0%. Revenue per active customer increased 1.6%, while average order value was nearly flat.
- International revenue grew to $342.7m from $243.9m in Q2 2018. International Adjusted EBITDA loss widened to $69.6m from $42.0m; U.S. Adjusted EBITDA was approximately breakeven, versus $7.2m positive.
- Gross margin improved modestly, but operating expenses grew 52.1%, faster than revenue. Selling, operations, technology and G&A rose to 16.3% of revenue from 14.6%; advertising was 11.1% versus 10.7%.
- Cash and short-term investments fell from $963.7m at year-end 2018 to $714.5m. The company’s stockholders’ deficit increased to $605.4m from $330.7m.
Outlook, risks and unusual items
- Management expects capital expenditures to be approximately 4%–5% of revenue in Q3 2019 as it expands its logistics network. It gave no full-year revenue or earnings guidance in the supplied filing text.
- Management said existing cash and investments, expected operating cash generation and the revolving facility should meet anticipated needs for the foreseeable future, while warning liquidity assumptions could prove incorrect. Growth investments include international expansion, logistics and product categories.
- Q2 2019 brought adoption of the lease accounting standard, recognizing $630.7m of operating lease right-of-use assets and $754.7m of lease liabilities at quarter-end. The adoption materially changed balance-sheet presentation; management said it did not materially affect liquidity or debt-covenant compliance.
- Both convertible-note issues had conditional conversion features triggered during Q2. The 2017 Notes remained convertible in Q3; the 2018 Notes were not convertible in Q3 under the stock-price condition. No notes had been converted through the filing date. Cash settlement of conversions could adversely affect liquidity.
- Two putative securities class actions filed in January 2019 relate to earlier company disclosures. Wayfair intends to defend them, but said it could not assess the outcome or estimate potential losses.
- Other stated risks include customer acquisition and growth, competition, international expansion, economic and housing-market conditions, currency movements, and legal or regulatory matters. Management reported no material change to previously disclosed risk factors.
Investor verification priorities
- Track whether customer growth and revenue gains can translate into improved operating margins as advertising and overhead rise.
- Reconcile reported cash, investments, negative working capital, capital spending and the pace of cash burn against management’s liquidity expectations.
- Review convertible-note conversion terms, potential cash settlement exposure, and the secured revolver’s covenants and availability.
- Assess the scale and timing of committed but not yet commenced operating leases, including $498.7m of additional lease commitments disclosed.
- Monitor the securities litigation and any developments that could change the company’s estimate of exposure.