Wayfair Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; Q4 figures are included below where useful. Amounts are in U.S. dollars.
Business context
Wayfair operates online home-goods retail sites, offering products from more than 10,000 suppliers while holding relatively little inventory. Its reportable segments are U.S. and International. The U.S. generated 88% of FY2017 revenue. The company was investing in international expansion, new product categories, technology and its CastleGate and Wayfair Delivery Network logistics capabilities.
Financial and operating metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $4,720.9 million | $3,380.4 million |
| Direct Retail revenue | $4,643.2 million; +42.5% | $3,258.9 million |
| Gross profit / gross margin | $1,118.8 million / 23.7% | $807.8 million / 23.9% |
| Operating loss / operating margin | $(235.5) million / (5.0)% | $(196.2) million / (5.8)% |
| Net loss | $(244.6) million | $(194.4) million |
| Adjusted EBITDA (non-GAAP) | $(67.0) million | $(88.7) million |
| Cash from operating activities | $33.6 million | $62.8 million |
| Free cash flow (non-GAAP) | $(113.2) million | $(65.3) million |
| Cash, cash equivalents and investments | $641.6 million | $379.6 million |
| Working capital | $77.1 million | $(80.1) million |
At year-end, total assets were $1,213.4 million and current liabilities were $739.8 million. Long-term debt carrying value was $332.9 million, reflecting the $431.25 million principal amount of 0.375% convertible senior notes issued in September 2017. The company reported no borrowings under its $100 million revolving credit facility and was in covenant compliance. Lease obligations totaled $783.7 million.
Direct Retail active customers increased 33.2% to 11.0 million; trailing-twelve-month revenue per active customer rose 6.8% to $422. Orders delivered increased to 19.4 million from 14.1 million, and average order value was $239 versus $232.
Q4 2017 snapshot: Revenue was $1,439.0 million, compared with $984.6 million in Q4 2016. Net loss was $72.8 million, versus $44.0 million. Adjusted EBITDA was $(21.2) million; free cash flow was $1.4 million.
Material changes versus prior year
- Revenue rose 39.7%, driven by customer growth and higher spending per active customer. International revenue more than doubled to $567.8 million, while U.S. revenue reached $4,153.1 million.
- Gross margin edged down from 23.9% to 23.7%, which management attributed primarily to product mix. Operating expenses grew 34.9%, below revenue growth; advertising declined to 11.6% of revenue from 12.1%.
- Net loss widened by $50.2 million, while Adjusted EBITDA loss narrowed by $21.7 million. International Adjusted EBITDA loss increased to $102.9 million; U.S. Adjusted EBITDA was positive $35.9 million.
- Operating cash flow fell $29.2 million and free cash flow worsened, reflecting investment and spending needs despite positive operating cash flow. Capital expenditure and site/software development spending totaled $146.9 million.
- Cash and investments increased primarily following the convertible-note issuance. The balance sheet moved from positive stockholders’ equity of $79.4 million to a deficit of $48.3 million.
Outlook, risks and unusual items
- The filing provides no specific full-year 2018 revenue or earnings guidance. Management expected Q1 2018 capital expenditures to be approximately 4% of revenue and described continued spending on technology, logistics, international growth and new categories.
- Management said the FY2017 net loss was primarily driven by international expansion and anticipated operating expenses would continue to increase. It expects advertising expense to rise in dollars but decline as a percentage of revenue over time; these are expectations, not quantified guidance.
- A warehouse vacated in July 2017 generated $9.6 million in one-time charges, including $8.8 million for estimated remaining lease commitments net of expected sublease income and $0.8 million of accelerated depreciation.
- The company highlighted sustained losses and possible negative cash flow, customer acquisition costs, intense competition, delivery and supplier execution, international expansion, cybersecurity and privacy, and sales-tax uncertainty as significant risks. The U.S. Supreme Court granted review of South Dakota v. Wayfair in January 2018; Wayfair disputed collection obligations and said potential losses were then believed immaterial, while acknowledging possible significant additional liabilities.
- The 2017 tax provision was $0.5 million despite the pretax loss; management maintained valuation allowances against U.S. and Irish net deferred tax assets and had not completed its accounting for the December 2017 U.S. tax-law changes.
- After year-end, the board authorized a stock repurchase program of up to $200 million; the company had no obligation to repurchase shares. A Quebec consumer-protection class-action settlement was approved in February 2018 and was not expected to have a material adverse effect.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether rapid revenue and active-customer growth can be maintained while improving gross margin and achieving profitability, particularly as international losses persist.
- How customer acquisition spending, repeat purchasing, logistics investment and fulfillment costs affect contribution economics and cash generation.
- Cash burn, capital expenditure plans and liquidity needs relative to the $641.6 million cash-and-investment balance, convertible-note terms and substantial lease commitments.
- The outcome and potential financial impact of the South Dakota sales-tax litigation and related state assessments, along with the evolving privacy and tax compliance burden.
- The timing, accounting and potential dilution or cash-settlement effects of the convertible notes, and whether the authorized repurchase program is implemented.