Wayfair Inc. — Q3 2018 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2018, compared with the same 2017 periods. Wayfair operates U.S. and International online home-goods businesses, selling more than 10 million products from over 10,000 suppliers. Management said it was investing in international expansion, logistics and product categories.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $1,705.6 | $1,198.2 | $4,765.2 | $3,281.9 |
| Gross profit | $392.8 | $280.3 | $1,101.6 | $786.7 |
| Gross margin | 23.0% | 23.4% | 23.1% | 24.0% |
| Operating loss | $(145.3) | $(74.0) | $(343.7) | $(167.7) |
| Net loss | $(151.7) | $(76.4) | $(360.2) | $(171.8) |
| Diluted loss per share | $(1.69) | $(0.88) | $(4.04) | $(1.98) |
| Adjusted EBITDA (non-GAAP) | $(76.4) | $(22.7) | $(161.2) | $(45.8) |
| Free cash flow (non-GAAP) | $(58.8) | $(18.5) | $(113.9) | $(114.7) |
- Revenue and operating trends: Q3 revenue rose 42.4% year over year, led by Direct Retail revenue growth of 43.3%; nine-month revenue rose 45.2%. Active customers increased 35.2% to 13.86 million and trailing-twelve-month revenue per active customer rose 8.6% to $443. Q3 orders delivered grew 47.0%, while average order value fell 2.4% to $244.
- Margins and expenses: Cost of goods sold increased to 77.0% of Q3 revenue from 76.6%, and to 76.9% for the nine-month period from 76.0%. Operating expenses grew faster than revenue in Q3, rising 51.9%; management cited investment in personnel, operations, technology and marketing. Advertising was 11.9% of Q3 revenue, broadly similar to 2017.
- Cash flow and investment: Nine-month operating cash flow was positive $42.3 million, versus $(3.2) million in 2017, supported in part by working-capital inflows and noncash expenses. Capital spending on property, equipment, site and software development totaled $156.3 million for the nine months. Cash and cash equivalents were $488.6 million at September 30, down from $559.0 million at year-end.
- Liquidity and obligations: Cash and short- and long-term investments totaled $525.2 million. Working capital was negative $239.1 million, versus positive $77.1 million at December 31, 2017. The balance sheet reported $346.6 million of long-term debt and $184.1 million of long-term lease financing obligations; total liabilities were $1.612 billion and stockholders’ equity was negative $312.2 million. The company reported no revolver borrowings and compliance with its covenants.
Changes, outlook and risks
- Compared with 2017, losses widened substantially even as revenue expanded. Q3 gross margin declined 0.4 percentage points, while the nine-month margin declined 0.9 points. Q3 Adjusted EBITDA loss also widened; nine-month free cash flow was similar to the prior year.
- International revenue increased to $232.4 million in Q3 from $147.6 million; the International segment’s Adjusted EBITDA loss widened to $50.4 million from $27.2 million. U.S. segment Adjusted EBITDA was a loss of $26.0 million, compared with income of $4.5 million.
- Management expected Q4 2018 capital expenditures to be approximately 3.0%–4.0% of revenue as it continued expanding its logistics network. It did not provide specific revenue or earnings guidance in the supplied filing text. Management said existing liquidity, operating cash generation and revolver availability should cover anticipated needs for the foreseeable future, while cautioning that assumptions could prove wrong.
- Wayfair recorded $101.0 million of additional property and lease financing obligations from warehouse arrangements completed in Q3 that did not qualify for sale-leaseback accounting. Future minimum payments on financing obligations were $20.2 million principal and $76.2 million interest through September 2023. The company also disclosed substantial future lease commitments, including $231.8 million of additional commitments entered into after year-end 2017.
- The company adopted the new revenue standard on January 1, 2018 using the modified retrospective approach, recording a $4.7 million cumulative adjustment to accumulated deficit. It planned to adopt the new lease standard on January 1, 2019 and expected a material balance-sheet impact, but could not yet estimate its amount.
- Following the U.S. Supreme Court decision in South Dakota v. Wayfair, several jurisdictions had presented or indicated they might present sales-tax assessments. Assessments received by September 30 were described as not material, and the company did not expect a significant business impact. Other ordinary-course legal matters were not expected by management to materially harm results or financial condition.
- Key risks include sustaining customer growth, competition, international expansion, customer spending and currency movements, cost pressures, legal and regulatory developments, and the company’s ongoing losses and investment needs. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor verification priorities
- Check whether customer growth and higher revenue per active customer can support improved gross and operating margins as shipping, fulfillment and operating costs rise.
- Assess cash conversion and funding needs alongside capital spending, negative working capital, lease commitments and continuing losses.
- Review the convertible notes’ terms and carrying value: $431.25 million principal, 0.375% coupon, due 2022, with an initial conversion price of about $104.06 per share; potential dilution and capped-call limits may matter.
- Monitor the scale of sales-tax assessments and the quantified balance-sheet effects of adopting the lease standard in 2019.
- Confirm whether the authorized $200 million share-repurchase program remains unused: the filing reports no repurchases during Q3 2018.