Wayfair Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; fourth-quarter figures below are unaudited. Financial amounts are in U.S. dollars.
Business context
Wayfair operates an online home-goods retail platform across five brands, offering products from more than 7,000 suppliers. Its supplier-direct fulfillment model supports broad product selection with limited inventory. The company reported one operating and reportable segment. Direct Retail sales through its own sites accounted for most revenue; “Other” principally includes retail-partner sales and advertising.
Key financial and operating metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $2,249.9 million | $1,319.0 million | +70.6% |
| Direct Retail revenue | $2,040.2 million | $1,101.7 million | +85.2% |
| Gross profit / margin | $540.7 million / 24.0% | $311.1 million / 23.6% | Margin +0.4 pts |
| Operating loss | $(81.4) million | $(147.8) million | Loss narrowed |
| Net loss | $(77.4) million | $(148.1) million | Loss narrowed |
| Adjusted EBITDA | $(15.9) million | $(62.5) million | Loss narrowed |
| Operating cash flow | $135.1 million | $4.1 million | Increased |
| Free cash flow | $72.9 million | $(41.9) million | Turned positive |
Revenue growth reflected a 66.6% increase in active customers to 5.36 million and an 11.4% increase in trailing-twelve-month Direct Retail revenue per active customer to $381. Orders delivered were 9.17 million, up from 5.24 million; average order value rose to $222 from $210. Other revenue declined 3.5% to $209.6 million.
Advertising expense rose 45.5% to $278.2 million, but declined as a share of revenue to 12.4% from 14.5%. Total operating expenses increased 35.6% to $622.1 million, while falling to 27.6% of revenue from 34.8%. FY2015 operating margin was approximately (3.6%), versus (11.2%) in FY2014; net margin was approximately (3.4%), versus (11.2%).
Fourth quarter
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Net revenue | $739.8 million | $408.6 million |
| Gross profit | $175.7 million | $98.4 million |
| Operating loss | $(16.0) million | $(72.5) million |
| Net loss | $(15.5) million | $(72.6) million |
| Adjusted EBITDA | $2.8 million | $(7.2) million |
| Free cash flow | $78.0 million | $50.8 million |
Liquidity and capital
At December 31, 2015, cash and cash equivalents were $334.2 million, short-term investments $51.9 million and long-term investments $79.9 million, totaling $466.0 million. Working capital was $95.3 million, down from $254.3 million a year earlier; current assets were $492.3 million and current liabilities $397.0 million. The company reported no borrowings under its credit agreement. A revolving line and credit-card program were available under a facility with a stated maximum commitment of $45 million for October 2015 through February 2016, including $10 million for revolving credit and letters of credit.
Operating cash flow benefited substantially from changes in operating assets and liabilities, including accounts payable and accrued expenses. Capital expenditures were 2.8% of revenue in 2015. Management expected 2016 capital expenditures of approximately 3%–4% of revenue.
Material changes, outlook and commentary
- Direct Retail growth more than offset lower revenue from retail partners and other sources. Direct Retail rose 85.2%; Other revenue fell 3.5%.
- Management attributed improved losses and Adjusted EBITDA primarily to revenue growth and operating leverage, while continuing significant investment in advertising, personnel, technology and operations.
- Management expected operating losses and negative cash flow to continue in the near term, with higher operating expenses as the company invests for growth. The filing does not provide specific revenue, earnings or profitability guidance.
- International revenue was $114.4 million, or 5.1% of total revenue. The company sold its Australian business in July 2015, recognizing a $3.0 million gain.
- Liquidity includes significant investments, but working capital declined materially year over year. Management believed existing cash and cash equivalents and operating cash generation would meet anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
Risks, contingencies and unusual items
- The company had a history of losses and stated that profitability was not assured. Customer acquisition costs, advertising effectiveness, repeat purchasing, competition and the ability to scale operations are significant uncertainties.
- Cash-flow performance can be volatile and depends on working capital movements. FY2015 operating cash flow included a large contribution from operating assets and liabilities.
- Several states asserted sales-tax collection claims totaling approximately $12.9 million, excluding later periods, interest and penalties. Wayfair disputed the claims, intended to defend its position and recorded no liability because management did not consider a loss probable.
- Two putative class actions were disclosed: a securities case seeking unspecified damages and a California case alleging deceptive “original” or “regular” price advertising. Management considered losses not probable and intended to defend both.
- Lease commitments totaled $240.6 million. Additional leases entered after year-end carried aggregate future minimum commitments of $12.7 million.
- Founders and affiliates held approximately 89.1% of voting power at year-end through the dual-class share structure, concentrating control. Equity-based compensation was $33.0 million in 2015; unrecognized compensation expense on expected-to-vest RSUs was $91.0 million.
- The filing describes substantial risks from data security and privacy, third-party delivery and suppliers, technology interruptions, international expansion, regulatory changes and e-commerce taxation.
Important facts for investors to verify
- Whether customer growth and higher revenue per active customer persist, and whether customer acquisition spending generates attractive returns.
- Whether positive FY2015 operating and free cash flow are repeatable, given the material working-capital contribution and continuing investment needs.
- Progress toward profitability, including gross margin, advertising intensity and operating expense growth.
- Resolution and potential exposure from the $12.9 million sales-tax assessments and the disclosed lawsuits.
- Liquidity, lease obligations, capital expenditure plans and compliance with the credit facility’s covenants.
- Effects of founder voting control, potential share dilution and remaining equity-compensation costs.