Wayfair Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollar amounts in millions unless stated otherwise.
Business context and performance
Wayfair operates online home-goods sites in the U.S. and internationally. Management attributed Q3 revenue growth to higher order volume, partly offset by lower average order value as supply-chain inflation normalized. At quarter-end, Wayfair reported 22 million active customers; 79.7% of Q3 orders came from repeat buyers.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $2,944 | $2,840 | $8,889 | $9,117 |
| Gross profit | $917 | $824 | $2,723 | $2,523 |
| Gross margin | 31.1% | 29.0% | 30.6% | 27.7% |
| Operating loss | $(152) | $(372) | $(641) | $(1,054) |
| Net loss | $(163) | $(283) | $(564) | $(980) |
| GAAP diluted loss per share | $(1.40) | $(2.66) | $(4.99) | $(9.28) |
| Adjusted EBITDA | $100 | $(124) | $214 | $(345) |
| Operating cash flow | $121 | $(431) | $191 | $(772) |
| Free cash flow | $42 | $(538) | $(64) | $(1,113) |
Adjusted EBITDA and free cash flow are non-GAAP measures; Wayfair cautions they have limitations and should be considered alongside GAAP results.
Revenue, costs, and material changes
- Q3 revenue rose 3.7% year over year: U.S. revenue increased 5.4% to $2,572, while International revenue fell 7.0% to $372. For the first nine months, revenue declined 2.5%; U.S. revenue was nearly flat and International revenue fell 16.6%.
- Q3 delivered orders increased to 10 million from 9 million, while average order value fell to $297 from $325. Active customers were 22 million versus 23 million; LTM revenue per active customer was $538 versus $547.
- Gross margin improved, with management citing product mix, operational efficiencies, and lower logistics costs. Q3 operating expenses declined 10.6% year over year, reflecting lower personnel and technology costs and advertising spend; equity-based compensation increased.
- Nine-month results include a $100 gain on extinguishment of debt. Without that gain, reported net loss would have been higher. Q3 had no debt-extinguishment gain, unlike the $96 gain in Q3 2022.
Liquidity, debt, and capital resources
- At September 30, cash and cash equivalents were $1,281; short-term investments were zero, compared with $228 at year-end 2022. Cash, cash equivalents, and restricted cash totaled $1,291.
- Long-term debt carrying value was $3,207, with no short-term debt. The $600 revolving credit facility had no borrowings; $76 of letters of credit reduced availability. Management said liquidity, operating cash generation, and revolver availability should meet anticipated needs for the foreseeable future, while cautioning that assumptions may prove incorrect.
- In May 2023, Wayfair issued $690 principal amount of 3.50% convertible notes due 2028. It used $514 of transaction proceeds to repurchase $83 principal of 2024 notes and $535 principal of 2025 notes, recording a $100 accounting gain. The 2028 notes became convertible in Q4 2023 under a stock-price conversion condition; conversion could require cash settlement and affect liquidity.
- Wayfair reported compliance with debt-agreement terms at quarter-end. The revolver includes a 4.0-to-1.0 consolidated senior secured debt-to-EBITDA covenant, subject to specified terms.
Outlook, risks, and unusual items
- No specific revenue, profit, or cash-flow guidance is provided in the filing. Management said the long-term opportunity in online home shopping remains, but it is monitoring inflation, interest rates, geopolitical developments, and consumer behavior and may limit or delay spending to preserve liquidity.
- In January 2023, Wayfair announced a workforce reduction of approximately 1,750 employees and recorded $65 of related nine-month restructuring charges. It does not expect further material charges for this reduction.
- A Canada Border Services Agency review produced an estimated $10 potential liability, recorded in other current liabilities. Wayfair disputes certain elements; the estimate may change in the near term and the change could be material.
- Other risks include consumer demand and customer-acquisition costs, competition, execution of restructuring and growth initiatives, technology and cybersecurity disruptions, and legal or regulatory proceedings. The filing states there were no material changes to previously disclosed risk factors and no significant changes in market-risk exposure.
- Equity-based compensation was $447 for the first nine months, up from $355; unrecognized RSU compensation expense was $409 at quarter-end. This is excluded from Adjusted EBITDA and is a recurring expense, according to the filing.
Important facts for investors to verify
- Whether Q3 order growth and improving gross margin persist, especially given lower average order value and continued weakness in International revenue.
- Whether positive quarterly operating cash flow and Adjusted EBITDA translate into sustained positive free cash flow after capital spending.
- Debt maturities, potential dilution or cash settlement from convertible notes, and remaining revolver availability and covenant headroom.
- Developments in the CBSA review and whether the estimated $10 liability changes materially.
- The impact of recurring equity compensation and workforce reductions on reported profitability and share count.