Wayfair Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; comparisons are with the same periods in 2019. Amounts below are in U.S. dollars.
Business context
Wayfair operates an online home-goods retail business, offering more than 18 million products from over 12,000 suppliers. Its reportable segments are U.S. and International. Management said the pandemic coincided with increased sales and order activity, while its longer-term effects remained uncertain.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $3.840bn | $2.305bn | $10.474bn | $6.594bn |
| Gross profit | $1.147bn | $540m | $3.048bn | $1.570bn |
| Gross margin | 29.9% | 23.4% | 29.1% | 23.8% |
| Operating income (loss) | $222m | $(260)m | $260m | $(625)m |
| Net income (loss) | $173m | $(272)m | $161m | $(654)m |
| Diluted EPS | $1.67 | $(2.94) | $1.64 | $(7.13) |
| Adjusted EBITDA | $371m | $(144)m | $684m | $(316)m |
| Free cash flow | $255m | $(181)m | $954m | $(439)m |
Q3 operating margin was 5.8%, versus negative 11.3% a year earlier; net margin was 4.5%, versus negative 11.8%. For the nine-month periods, operating margin was 2.5% versus negative 9.5%, and net margin was 1.5% versus negative 9.9%.
Q3 revenue increased 66.5% year over year: U.S. revenue rose 66.5% and International revenue 66.7% (63.9% International constant-currency growth). Active customers were 28.8 million, up 50.9%; orders delivered increased to 15.8 million from 9.1 million. Average order value declined to $243 from $252, while trailing-12-month revenue per active customer was $451 versus $449.
Cash, debt and liquidity
- Cash and cash equivalents were $2.443bn at September 30, 2020; short-term investments were $114m. Together they totaled approximately $2.558bn, compared with cash of $583m and short- and long-term investments totaling $560m at December 31, 2019.
- Working capital was $826m, versus negative $234m at year-end 2019. Current liabilities were $2.217bn.
- Long-term debt carrying value was $2.862bn. The company had no borrowings outstanding on its $200m revolving facility at quarter-end.
- Nine-month operating cash flow was $1.210bn, compared with cash used of $161m in 2019. Free cash flow, a company-defined non-GAAP measure, was $954m after $256m of property, equipment and software-development spending.
Material changes and unusual items
- In August, Wayfair issued $1.518bn principal amount of 0.625% convertible notes due 2025. It also issued $535m principal amount of 2.50% accreting convertible notes in April. The 2020 notes and other financing actions contributed to the substantial increase in cash and debt.
- Wayfair used approximately $1.0bn to repurchase $343.4m principal amount of 2017 notes; an additional $60.6m principal was converted into shares. The extinguishment resulted in a $12.6m loss.
- The company repurchased $280.2m of Class A shares during the nine months and authorized a new repurchase program of up to $700m. It paid $255m for capped-call transactions associated with the 2020 notes.
- Q3 operating expenses were 24.1% of revenue, down from 34.7% a year earlier. Advertising was 9.0% of revenue versus 12.2%; management cited advertising efficiencies, alongside continued investment for customer growth. Cost of goods sold grew 52.5%, slower than revenue growth, with shipping efficiencies partly offsetting higher order volume.
- October subsequent events: Charlesbank converted $253.1m of accreted principal on the 2020 Accreting Notes into approximately 3.49m Class A shares; the revolving credit commitment was increased to $200m through an October 30 joinder.
Outlook, commentary and risks
- No revenue or earnings guidance is provided in the filing. Management forecast Q4 2020 capital expenditures of $75m–$85m, primarily for technology and logistics-network expansion.
- Management said existing cash, investments, operating cash generation and revolving-credit availability should cover anticipated needs for the foreseeable future, but cautioned liquidity assumptions could prove incorrect.
- COVID-19-related demand, customer behavior, supplier availability, logistics capacity and the duration of disruptions remained uncertain. The company warned that demand could fluctuate or decline, while supply constraints, delivery surcharges, higher operating costs and reduced efficiency could pressure results. Peak-season carrier surcharges could affect Q4.
- Convertible-note conversions may require cash settlement at Wayfair’s election and could affect liquidity; conversions into shares could dilute shareholders. The company also cited capital-market access, consumer spending, competition, supply-chain disruption, foreign exchange and legal/regulatory matters as risks.
- A securities class action concerning earlier disclosures was dismissed with prejudice on July 8, 2020. Management reported no material adverse effect expected from other ordinary-course legal matters.
Most important facts for investors to verify
- Whether exceptional 2020 demand and customer growth persist after pandemic-related conditions change.
- Whether gross-margin and expense-ratio improvements are sustainable as shipping, fulfillment, advertising and labor costs evolve.
- The quality and repeatability of operating cash flow, including the contribution from working-capital movements and increased unearned revenue.
- The terms, potential dilution and possible cash-settlement requirements of the convertible notes, including the October 2020 conversion.
- Actual repurchases under the $700m authorization, remaining liquidity, and planned Q4 capital spending.