Wayfair Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited results for the fourth quarter ended December 31, 2018. Amounts below are in U.S. dollars.
Business context
Wayfair operates an online home-goods retail business, offering more than 14 million products from over 11,000 suppliers. Its U.S. and International segments serve customers primarily through its own retail sites; the U.S. generated 86% of 2018 revenue. The company holds relatively little inventory and is expanding its CastleGate warehousing and Wayfair Delivery Network logistics capabilities.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Q4 2018 | Q4 2017 |
|---|---|---|---|---|
| Net revenue | $6.779bn | $4.721bn | $2.014bn | $1.439bn |
| Gross profit | $1.587bn | $1.119bn | $485.1m | $332.2m |
| Gross margin | 23.4% | 23.7% | 24.1% | 23.1% |
| Operating loss | $(473.3)m | $(235.5)m | $(129.6)m | $(67.7)m |
| Net loss | $(504.1)m | $(244.6)m | $(143.8)m | $(72.8)m |
| Adjusted EBITDA | $(215.0)m | $(67.0)m | $(53.8)m | $(21.2)m |
| Operating cash flow | $84.9m | $33.6m | $42.5m | $36.9m |
| Free cash flow (non-GAAP) | $(137.1)m | $(113.2)m | $(23.2)m | $1.4m |
At year-end, cash and cash equivalents were $849.5m; short- and long-term investments totaled $120.8m, for combined cash and investments of $970.3m. Working capital was $116.7m, versus $77.1m a year earlier. Long-term debt carrying value was $738.9m; total liabilities were $2.222bn and stockholders’ deficit was $330.7m.
Direct Retail revenue was $6.718bn, up 44.7%. Active customers reached 15.155m, up 37.9%; trailing-twelve-month revenue per active customer rose 5.0% to $443. Orders delivered were 28.084m, while average order value was $239, unchanged from 2017.
Material changes versus comparable periods
- FY revenue increased 43.6%, while net loss more than doubled to $504.1m. Operating expenses rose 52.1% to $2.060bn, faster than revenue growth.
- Cost of goods sold rose 44.2%; as a share of revenue it increased to 76.6% from 76.3%, with management citing product mix. Gross margin consequently declined to 23.4% from 23.7%.
- Advertising expense rose 40.8% to $774.2m but declined as a percentage of revenue to 11.4% from 11.6%. Selling, operations, technology, general and administrative expense rose 61.6% to $1.026bn, reflecting personnel, rent, IT, and depreciation and amortization costs.
- International revenue increased to $966.1m from $567.8m, while International Adjusted EBITDA loss widened to $195.9m from $102.9m. U.S. Adjusted EBITDA moved from $35.9m income to a $19.0m loss.
- Q4 revenue rose about 40% year over year, but quarterly net loss widened to $143.8m from $72.8m; Q4 free cash flow was negative versus slightly positive a year earlier.
Outlook, risks, contingencies, and unusual items
- The filing gives no numerical full-year 2019 revenue or earnings guidance. Management expects to keep investing in international expansion, logistics, technology, employees, brands, and product categories. It expected capital expenditures to be about 5% of revenue in Q1 2019; FY 2018 capital expenditures were 3.3% of revenue.
- Management said the 2018 net loss was primarily driven by international expansion and described logistics investment as intended to improve delivery and, over time, reduce per-order costs. These expected benefits are not assured; the company reported a history of losses and expects operating expenses to increase.
- Convertible notes: $431.25m principal of 0.375% notes due 2022 and $575m principal of 1.125% notes due 2024. In February 2019, after year-end, Wayfair entered a secured revolving facility with borrowing capacity of up to $165m, subject to terms and conditions. The notes and revolver carry conversion, repayment, covenant, liquidity, and potential dilution risks.
- Lease obligations totaled $1.204bn in undiscounted future payments as of year-end. Adoption of the new lease accounting standard in 2019 was expected to add approximately $0.5bn in operating lease right-of-use assets and $0.6bn in liabilities, while removing about $0.2bn of certain lease-financing assets and obligations.
- Two putative securities class actions filed in January 2019 concerning disclosures and stock purchases from August 2 to October 31, 2018; the company said it could not estimate potential losses. Sales-tax assessments following the 2018 Supreme Court decision were described as not material as of year-end.
- Other notable risks include intense competition, customer-acquisition costs, supplier and delivery dependence, seasonal operating strain, cybersecurity and privacy exposure, international and currency risks, and discretionary consumer spending. A one-time $1.7m gain from terminating a warehouse lease was recorded in Q4 2018; the filing also reports $136.4m of 2018 equity-based compensation and related taxes.
Most important facts for investors to verify
- Whether customer growth and repeat purchasing can continue to support revenue growth without further deterioration in losses, margins, and free cash flow.
- How quickly International and U.S. segment economics improve, particularly given the widening International Adjusted EBITDA loss and the U.S. segment’s 2018 loss.
- Whether logistics investment improves delivery quality and unit costs, and how capital spending and lease commitments affect liquidity.
- The carrying value, terms, conversion exposure, and potential dilution from both note issues, along with availability and conditions of the post-year-end revolving facility.
- Developments in the securities litigation and sales-tax assessments. The filing reports an unqualified audit opinion on the financial statements and effective internal control over financial reporting.