Wayfair Inc. (Wayfair LLC) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited statements primarily report Wayfair LLC, the operating entity before its October 1, 2014 reorganization as a subsidiary of Wayfair Inc. Comparisons are with the corresponding 2013 periods.
Business context and financial performance
Wayfair operated an e-commerce business selling home goods through five brands and more than 7,000 suppliers. Revenue came from Direct Retail sales on its sites and Other revenue, primarily third-party retail partners and advertising.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $336.2m | $237.3m | $910.3m | $620.5m |
| Gross profit | $79.0m | $58.6m | $212.7m | $153.5m |
| Gross margin | 23.5% | 24.7% | 23.4% | 24.7% |
| Operating loss | $(23.9)m | $(3.7)m | $(75.3)m | $(11.6)m |
| Net loss | $(24.1)m | $(3.0)m | $(75.5)m | $(11.4)m |
| Adjusted EBITDA (non-GAAP) | $(18.3)m | $(0.2)m | $(55.3)m | $(2.3)m |
| Free cash flow (non-GAAP) | $(22.4)m | $(4.0)m | $(92.6)m | $(17.3)m |
Q3 Direct Retail revenue rose 57.1% to $285.5m; Other revenue declined 8.9% to $50.7m. For the nine months, Direct Retail revenue rose 67.8% to $755.0m, while Other revenue fell 8.9% to $155.3m. Q3 active customers increased 61.0% to 2.858m, orders delivered rose 48.6% to 1.314m, and average order value increased 5.3% to $217. Nine-month orders delivered increased 65.2% to 3.536m.
Liquidity, cash flow and debt
- At September 30, cash and cash equivalents were $30.3m, short-term investments $100.1m, and working capital $38.0m. Total current assets were $194.6m against current liabilities of $156.6m.
- For the first nine months, operating cash use was $50.8m, investing cash use $94.9m, and financing cash provided $110.7m. Cash declined by $35.0m to $30.3m. Investing outflows included $31.2m of property and equipment, $10.6m of site and software development, and net purchases of short-term investments.
- The company reported no borrowings under its credit agreement. The facility provided up to $25m, including a $10m revolving line; the company reported covenant compliance. It reported no debt or material capital lease obligations.
- After quarter-end, the October IPO generated approximately $282.7m of net proceeds to the company. The pro forma September 30 balance sheet shows $266.0m of cash and $273.7m of working capital, reflecting IPO-related adjustments. The company also disclosed $24.5m distributed to Series A holders and approximately $22.6m used for minimum tax withholding related to equity vesting.
Material changes, outlook and unusual items
- Revenue growth was accompanied by greater losses and cash consumption. In Q3, sales and marketing expense rose 66.2% to $77.4m and general and administrative expense rose 62.4% to $25.2m. Advertising expense increased to $49.8m from $28.4m.
- Cost of goods sold rose faster than revenue in both comparison periods; management attributed the margin pressure to product mix, shipping costs, and expanded, more favorable return policies. For Q3, cost of goods sold was 76.5% of revenue versus 75.3% a year earlier.
- Management said it expects operating expenses to increase substantially as it invests in advertising, personnel, technology, and infrastructure. It expects near-term losses to increase and cited no specific revenue, earnings, or margin guidance in the provided filing text. Management believed cash, IPO proceeds, and operating cash generation would meet anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
- The October IPO and corporate reorganization converted the LLC equity structure into public-company stock. Class B shares carry ten votes per share versus one vote for Class A; the filing said founders and affiliates retained substantial voting control. The IPO also triggered recognition of approximately $48.6m of equity-based compensation in Q4 2014 for provisionally vested awards.
Risks and contingencies
- Several states asserted that Wayfair should have collected and remitted sales or similar taxes; claims totaled approximately $11.7m. The company disputed the obligation, intended to defend its position, and had not accrued a liability because management did not consider a loss probable. An adverse outcome could add taxes, interest, penalties, or future collection obligations.
- Wayfair disclosed continuing losses, negative cash flow, and significant planned growth spending. It warned that customer acquisition costs may not be recovered, growth may not continue, and the company may never achieve profitability.
- Other material risk areas include competition, supplier and delivery dependence, returns and fulfillment costs, international expansion, technology outages and cybersecurity, privacy and regulatory requirements, and reliance on marketing channels including search, email, and social platforms.
- New Boston office and Utah warehouse leases added $52.1m and $9.1m, respectively, of operating lease obligations payable through 2024 and 2022. Management reported no other legal matters believed likely to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective as of period-end and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether customer acquisition and advertising spending produce durable repeat purchases and improved profitability; validate the economics behind rapid customer and revenue growth.
- Monitor gross margin, shipping and fulfillment costs, and the effect of return policies and product mix.
- Reconcile post-IPO cash and working capital with actual cash uses, ongoing operating and investing cash burn, and the company’s liquidity outlook.
- Follow the $11.7m sales-tax assessments and any additional jurisdictions, claims, interest, or penalties.
- Assess dilution and compensation expense from equity awards, potential post-lockup share sales, and the governance implications of the dual-class voting structure.