Wayfair Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results; Q4 comparisons below are year over year. Amounts are in U.S. dollars.
Business context
Wayfair operates an online home-goods marketplace, primarily through direct retail, with U.S. and International reportable segments. Its model emphasizes broad selection, supplier-direct fulfillment, and investments in its CastleGate and Wayfair Delivery Network logistics operations. The U.S. generated 85% of FY 2019 revenue.
Financial and operating metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $9.127 billion | $6.779 billion |
| Gross profit / gross margin | $2.147 billion / 23.5% | $1.587 billion / 23.4% |
| Operating loss / operating margin | $(929.9) million / (10.2)% | $(473.3) million / (7.0)% |
| Net loss / diluted loss per share | $(984.6) million / $(10.68) | $(504.1) million / $(5.63) |
| Adjusted EBITDA (non-GAAP) | $(496.5) million | $(215.0) million |
| Operating cash flow / Free Cash Flow (non-GAAP) | $(196.8) million / $(597.7) million | $84.9 million / $(137.1) million |
| Cash, cash equivalents, and short- and long-term investments | $1.143 billion | $970.3 million |
| Working capital | $(234.4) million | $116.7 million |
FY 2019 capital expenditures, including site and software development, were $400.9 million. At year-end, long-term debt carrying value was $1.456 billion; outstanding convertible-note principal totaled approximately $1.955 billion. Operating lease liabilities totaled $913.7 million. The $165 million revolving credit facility was undrawn.
Direct Retail active customers reached 20.29 million, up 33.9%; trailing-12-month revenue per active customer rose 1.1% to $448. Orders delivered totaled 37.64 million and average order value was $241.
Fourth-quarter results
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Net revenue | $2.533 billion | $2.014 billion |
| Gross profit / gross margin | $577.4 million / 22.8% | $485.1 million / 24.1% |
| Operating loss | $(305.4) million | $(129.6) million |
| Net loss | $(330.2) million | $(143.8) million |
| Adjusted EBITDA (non-GAAP) | $(180.2) million | $(53.8) million |
| Free Cash Flow (non-GAAP) | $(158.5) million | $(23.2) million |
Material changes and management commentary
- FY revenue grew 34.6%; U.S. revenue grew 33.6% and International revenue 41.0% (45.7% on a constant-currency basis). Management attributed growth principally to customer-base expansion and modestly higher customer spending.
- Operating expenses rose 49.4% to $3.077 billion, increasing from 30.3% to 33.7% of revenue. Advertising increased 41.5%, and selling, operations, technology, general and administrative expense increased 58.4%. Management cited marketing, headcount, technology, logistics, rent, and depreciation investments.
- Net loss widened to $984.6 million from $504.1 million. Management attributed the losses primarily to international expansion, logistics build-out, and investment in broader home-goods categories. The company stated it expected operating losses and negative cash flow to continue as it expanded.
- Operating cash flow moved from positive $84.9 million in 2018 to negative $196.8 million in 2019; Free Cash Flow declined to negative $597.7 million, reflecting higher losses and capital spending.
Outlook, risks, and unusual items
- Management gave no specific revenue or profitability guidance in the supplied filing text. It expected Q1 2020 capital expenditures to be approximately 5.5% of revenue and said existing liquidity, operating cash generation, and available revolving-credit capacity should cover anticipated needs for the foreseeable future, while cautioning that assumptions could prove incorrect.
- Key risks include continued losses and cash use; the cost-effectiveness of customer acquisition; competition; execution and returns on logistics and international investments; supplier, shipping, and product-quality disruptions; technology outages and cybersecurity; foreign-exchange movements; and regulatory, privacy, tax, and litigation exposure. The filing specifically noted that the then-recent COVID-19 outbreak in China could disrupt suppliers.
- The company issued $948.75 million of 1.00% convertible notes due 2026 in 2019, receiving approximately $935.1 million net proceeds and paying $145.7 million for capped-call transactions. Conversions could require cash settlement or dilute shareholders, subject to the terms of the notes and capped calls.
- A securities class action concerning prior company disclosures remained pending; Wayfair said it could not reasonably estimate potential losses. Sales-return reserves were $38.0 million at year-end. Adoption of the new lease standard resulted in recognition of lease assets and liabilities; the auditor identified lease accounting, sales-return reserves, and allocation of convertible-note proceeds as critical audit matters.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of year-end.
Important facts for investors to verify
- Confirm the distinction between FY 2019 and Q4 2019; the filing is an annual report, and Q4 figures are unaudited quarterly data.
- Review cash burn and capital spending alongside the $1.143 billion of cash and investments, negative working capital, debt maturities, lease commitments, and unused revolver capacity.
- Assess the drivers of worsening operating losses and margins, including marketing intensity, stock-based compensation, and logistics and technology investment; Adjusted EBITDA and Free Cash Flow are non-GAAP measures.
- Check the terms, conversion conditions, potential dilution, and capped-call protections for the $1.955 billion of convertible-note principal.
- Monitor customer growth and spending, International segment losses, supplier and delivery performance, the securities litigation, and the potential effects of COVID-19-related supply disruption.