Wayfair Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Wayfair is an online home-goods retailer offering more than 14 million products from over 11,000 suppliers. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Management describes ongoing investment in international growth, logistics infrastructure, and product categories.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $2,305.5 million | $1,705.6 million | $6,593.6 million | $4,765.2 million |
| Gross profit / gross margin | $539.9 million / 23.4% | $392.8 million / 23.0% | $1,570.0 million / 23.8% | $1,101.6 million / 23.1% |
| Operating loss | $(259.7) million | $(145.3) million | $(624.5) million | $(343.7) million |
| Net loss | $(272.0) million | $(151.7) million | $(654.4) million | $(360.2) million |
| Net loss per diluted share | $(2.94) | $(1.69) | $(7.13) | $(4.04) |
| Adjusted EBITDA, non-GAAP | $(144.2) million | $(76.4) million | $(316.4) million | $(161.2) million |
| Free cash flow, non-GAAP | $(180.9) million | $(58.8) million | $(439.2) million | $(113.9) million |
- Revenue and customer activity: Q3 revenue rose 35.2%; Direct Retail revenue grew 35.9%. Active customers increased 37.6% to 19.1 million, while trailing-12-month revenue per active customer rose 1.4% to $449. Orders delivered increased 31.5% to 9.1 million and average order value rose 3.3% to $252.
- Margins and costs: Cost of goods sold declined to 76.6% of revenue from 77.0% in Q3, which management attributed to product mix. Operating expenses increased to 34.7% of revenue from 31.6%; selling, operations, technology, general and administrative costs and advertising grew faster than revenue.
- Cash flow and liquidity: Nine-month operating cash flow was $(160.5) million, versus positive $42.3 million in 2018. Cash and cash equivalents were $1,295.4 million at September 30; short-term investments were $6.0 million. Working capital was $237.0 million.
- Debt and leases: Long-term debt carrying value was $1,435.9 million. Convertible-note principal totaled $1,955.0 million, due in 2022, 2024, and 2026. Operating lease liabilities totaled $899.9 million, including $86.0 million current; the related right-of-use asset was $756.7 million. No borrowings were outstanding under the $165 million revolving facility.
Material changes versus the prior comparable period
- Growth was led by a larger Direct Retail customer base; Other revenue, including sales through retail partners and media solutions, fell 56.0% in Q3.
- Q3 net loss widened by $120.3 million year over year. Operating expenses rose 48.6%, compared with revenue growth of 35.2%; equity-based compensation and related taxes were $65.3 million for the quarter.
- Nine-month free cash flow deteriorated by $325.2 million year over year as operating cash flow shifted from positive to negative and capital spending increased. Property and equipment purchases were $184.0 million and site/software development costs were $94.7 million.
- Wayfair issued $948.75 million of 1.00% convertible senior notes due 2026 in August. Net proceeds were approximately $935.1 million; $145.7 million was used for capped-call transactions. The notes increased cash and debt, and their carrying value reflects unamortized discounts.
- Adoption of lease accounting in January 2019 recognized operating lease right-of-use assets and liabilities and derecognized certain prior lease-related assets and obligations. This affects balance-sheet comparability with 2018.
Outlook, commentary, risks and unusual items
- Management expects Q4 2019 capital expenditures to be approximately 4%–5% of revenue, continuing investment in the logistics network. It expects advertising spending to increase, with the aim of reducing it as a percentage of revenue over time as repeat-customer mix grows.
- Management believes cash, investments, operating cash generation, and revolver availability will meet anticipated needs for the foreseeable future, while cautioning that liquidity assumptions may prove incorrect. The filing provides no specific revenue or earnings guidance.
- Convertible notes may require cash settlement upon conversion unless Wayfair elects to settle solely in shares; such payments could adversely affect liquidity. Conversion eligibility depends on specified conditions, and no notes had been converted through the filing date.
- Risks include sustaining customer growth and revenue per customer, competition, international expansion, economic and housing-market conditions, foreign-exchange movements, and execution of logistics and growth investments. Management reported no material changes to previously disclosed risk factors.
- Two putative securities class actions filed in January 2019 allege violations relating to prior disclosures and seek damages. Wayfair is defending the cases; it said it could not reasonably assess the outcome or estimate potential losses.
- Wayfair reported $46.4 million of letters of credit, primarily supporting leases, and $332.6 million of additional operating leases not yet commenced. The adoption of lease accounting and the convertible-note issuance are notable balance-sheet items.
Important facts for investors to verify
- Whether rapid customer and revenue growth can translate into improved operating margins, given rising operating expenses and continued net losses.
- Cash burn, capital expenditure levels, and liquidity needs as the logistics network expands; review the company’s non-GAAP free-cash-flow reconciliation alongside GAAP cash flows.
- Convertible-note terms, potential cash-settlement requirements, dilution exposure, capped-call limits, and any future changes in conversion eligibility.
- Lease commitments, including the $332.6 million of leases not yet commenced, and the effect of lease adoption on period-to-period balance-sheet comparisons.
- Developments in the securities litigation and any resulting financial or operational effects.