Business context and reporting period
Wayfair Inc. is an e-commerce retailer of home goods operating five brands. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Revenue is primarily from direct retail sales, recognized upon delivery.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $861.5m | $594.0m | $2,395.8m | $1,510.1m |
| Gross profit / margin | $201.7m / 23.4% | $141.4m / 23.8% | $569.2m / 23.8% | $365.0m / 24.2% |
| Operating loss | $(61.6)m | $(18.6)m | $(152.5)m | $(65.4)m |
| Net loss / diluted loss per share | $(60.9)m / $(0.72) | $(15.5)m / $(0.18) | $(150.4)m / $(1.77) | $(61.9)m / $(0.74) |
| Adjusted EBITDA, non-GAAP | $(30.8)m | $(1.4)m | $(76.7)m | $(18.8)m |
| Operating cash flow / free cash flow, non-GAAP | $15.6m / $(14.0)m | $51.5m / $35.3m | $(10.7)m / $(114.0)m | $44.8m / $(5.0)m |
At September 30, 2016, cash and cash equivalents were $208.3m, short-term investments $84.5m and long-term investments $41.7m. Working capital was negative $56.9m, versus positive $95.3m at December 31, 2015. Total liabilities were $573.6m; these included a $28.9m lease financing obligation. The company reported no borrowings under its credit agreement. Property and equipment, net, was $211.3m, up from $112.3m at year-end.
Material changes versus prior periods
- Q3 revenue increased 45.0%; direct retail revenue rose 52.7%, while other revenue fell 40.6%. For nine months, revenue increased 58.7%, led by 69.8% direct retail growth; other revenue declined 38.3%.
- Direct retail growth reflected more customers and higher spend: active customers rose 60.4% to 7.36m and trailing-twelve-month revenue per active customer increased 9.4% to $406. Q3 orders delivered rose 47.1%; average order value increased 3.8% to $244.
- Gross margin declined 0.4 percentage points in both comparisons, which management attributed to product mix. Operating expenses grew faster than revenue: 64.5% in Q3 and 67.7% for nine months. Advertising was lower as a percentage of revenue, but merchandising, sales, and operations/technology/general and administrative costs increased as a share of revenue.
- Cash and cash equivalents fell $125.8m from year-end. Nine-month operating cash flow turned negative, and free cash flow declined substantially, reflecting losses and higher investment in property, equipment, and software.
Outlook, commentary, and risks
- Management expects operating expenses to continue increasing as it invests in advertising, personnel, technology, and operations; it expects near-term losses and says returns on these investments are not assured. It expects 2016 capital expenditures to be approximately 4% of revenue.
- Management stated that cash, investments, and anticipated operating cash generation should cover foreseeable needs, while cautioning liquidity assumptions could prove incorrect. The filing gives no specific revenue or earnings guidance.
- New leases entered into after year-end carried aggregate future minimum rental commitments of $358.5m. A warehouse build-to-suit arrangement was accounted for as a financing obligation; future principal and interest commitments through September 2021 were $2.1m and $12.0m, respectively.
- States had asserted sales-tax claims of approximately $28.2m, excluding later periods, interest, and penalties. Wayfair disputed the obligation and recorded no liability because it did not consider a loss probable; the outcome is uncertain. A Quebec consumer-protection class action filed in September 2016 seeks monetary and other relief; the company could not estimate potential losses.
- Other risks include execution and return on growth investments, working-capital and cash-flow volatility, international expansion and foreign-exchange exposure, and litigation or uncertain sales-tax obligations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether direct retail growth and customer metrics can translate into improved gross and operating margins as costs rise.
- Review cash burn, capital expenditure needs, negative working capital, lease commitments, and available liquidity; distinguish cash from investments and restricted cash.
- Track the status and potential exposure of the sales-tax assessments and Quebec litigation, neither of which has a recorded estimated liability.
- Consider the scale of equity compensation: nine-month expense was $35.2m, and unrecognized compensation expense on expected-to-vest RSUs was $148.1m.
- Evaluate non-GAAP Adjusted EBITDA and free cash flow alongside GAAP results; the company notes these measures have limitations and may not be comparable across companies.