Wayfair Inc. annual report, FY2019

Wayfair Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results; Q4 comparisons below are year over year. Amounts are in U.S. dollars.

Business context

Wayfair operates an online home-goods marketplace, primarily through direct retail, with U.S. and International reportable segments. Its model emphasizes broad selection, supplier-direct fulfillment, and investments in its CastleGate and Wayfair Delivery Network logistics operations. The U.S. generated 85% of FY 2019 revenue.

Financial and operating metrics

MetricFY 2019FY 2018
Net revenue$9.127 billion$6.779 billion
Gross profit / gross margin$2.147 billion / 23.5%$1.587 billion / 23.4%
Operating loss / operating margin$(929.9) million / (10.2)%$(473.3) million / (7.0)%
Net loss / diluted loss per share$(984.6) million / $(10.68)$(504.1) million / $(5.63)
Adjusted EBITDA (non-GAAP)$(496.5) million$(215.0) million
Operating cash flow / Free Cash Flow (non-GAAP)$(196.8) million / $(597.7) million$84.9 million / $(137.1) million
Cash, cash equivalents, and short- and long-term investments$1.143 billion$970.3 million
Working capital$(234.4) million$116.7 million

FY 2019 capital expenditures, including site and software development, were $400.9 million. At year-end, long-term debt carrying value was $1.456 billion; outstanding convertible-note principal totaled approximately $1.955 billion. Operating lease liabilities totaled $913.7 million. The $165 million revolving credit facility was undrawn.

Direct Retail active customers reached 20.29 million, up 33.9%; trailing-12-month revenue per active customer rose 1.1% to $448. Orders delivered totaled 37.64 million and average order value was $241.

Fourth-quarter results

MetricQ4 2019Q4 2018
Net revenue$2.533 billion$2.014 billion
Gross profit / gross margin$577.4 million / 22.8%$485.1 million / 24.1%
Operating loss$(305.4) million$(129.6) million
Net loss$(330.2) million$(143.8) million
Adjusted EBITDA (non-GAAP)$(180.2) million$(53.8) million
Free Cash Flow (non-GAAP)$(158.5) million$(23.2) million

Material changes and management commentary

  • FY revenue grew 34.6%; U.S. revenue grew 33.6% and International revenue 41.0% (45.7% on a constant-currency basis). Management attributed growth principally to customer-base expansion and modestly higher customer spending.
  • Operating expenses rose 49.4% to $3.077 billion, increasing from 30.3% to 33.7% of revenue. Advertising increased 41.5%, and selling, operations, technology, general and administrative expense increased 58.4%. Management cited marketing, headcount, technology, logistics, rent, and depreciation investments.
  • Net loss widened to $984.6 million from $504.1 million. Management attributed the losses primarily to international expansion, logistics build-out, and investment in broader home-goods categories. The company stated it expected operating losses and negative cash flow to continue as it expanded.
  • Operating cash flow moved from positive $84.9 million in 2018 to negative $196.8 million in 2019; Free Cash Flow declined to negative $597.7 million, reflecting higher losses and capital spending.

Outlook, risks, and unusual items

  • Management gave no specific revenue or profitability guidance in the supplied filing text. It expected Q1 2020 capital expenditures to be approximately 5.5% of revenue and said existing liquidity, operating cash generation, and available revolving-credit capacity should cover anticipated needs for the foreseeable future, while cautioning that assumptions could prove incorrect.
  • Key risks include continued losses and cash use; the cost-effectiveness of customer acquisition; competition; execution and returns on logistics and international investments; supplier, shipping, and product-quality disruptions; technology outages and cybersecurity; foreign-exchange movements; and regulatory, privacy, tax, and litigation exposure. The filing specifically noted that the then-recent COVID-19 outbreak in China could disrupt suppliers.
  • The company issued $948.75 million of 1.00% convertible notes due 2026 in 2019, receiving approximately $935.1 million net proceeds and paying $145.7 million for capped-call transactions. Conversions could require cash settlement or dilute shareholders, subject to the terms of the notes and capped calls.
  • A securities class action concerning prior company disclosures remained pending; Wayfair said it could not reasonably estimate potential losses. Sales-return reserves were $38.0 million at year-end. Adoption of the new lease standard resulted in recognition of lease assets and liabilities; the auditor identified lease accounting, sales-return reserves, and allocation of convertible-note proceeds as critical audit matters.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end.

Important facts for investors to verify

  • Confirm the distinction between FY 2019 and Q4 2019; the filing is an annual report, and Q4 figures are unaudited quarterly data.
  • Review cash burn and capital spending alongside the $1.143 billion of cash and investments, negative working capital, debt maturities, lease commitments, and unused revolver capacity.
  • Assess the drivers of worsening operating losses and margins, including marketing intensity, stock-based compensation, and logistics and technology investment; Adjusted EBITDA and Free Cash Flow are non-GAAP measures.
  • Check the terms, conversion conditions, potential dilution, and capped-call protections for the $1.955 billion of convertible-note principal.
  • Monitor customer growth and spending, International segment losses, supplier and delivery performance, the securities litigation, and the potential effects of COVID-19-related supply disruption.