Wayfair Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 2, 2018. Wayfair is an online home-goods retailer offering more than 10 million products from over 10,000 suppliers. It reports U.S. and International segments and said it was investing in international growth, logistics infrastructure, and product categories.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $1.655 billion | $1.123 billion | $3.060 billion | $2.084 billion |
| Gross profit | $385.0 million | $269.5 million | $708.8 million | $506.3 million |
| Gross margin | 23.3% | 24.0% | 23.2% | 24.3% |
| Operating loss | $95.3 million | $37.6 million | $198.4 million | $93.8 million |
| Net loss | $100.7 million | $38.9 million | $208.5 million | $95.4 million |
| Adjusted EBITDA (non-GAAP) | $(34.8) million | $(2.2) million | $(84.8) million | $(23.1) million |
| Operating cash flow | $47.6 million | $18.1 million | $34.5 million | $(28.0) million |
| Free cash flow (non-GAAP) | $(7.5) million | $(27.2) million | $(55.1) million | $(96.2) million |
Q2 net loss per share was $1.13, compared with $0.45 a year earlier. For the first half, it was $2.35 versus $1.10. Q2 operating expenses rose 56.5% to $480.3 million; advertising was $177.6 million and selling, operations, technology, general and administrative expenses were $241.0 million.
Liquidity, debt, and financial position
- At June 30, cash and cash equivalents were $529.5 million; short- and long-term investments totaled $55.7 million. Combined cash and investments were $585.2 million.
- Working capital was negative $96.3 million, versus positive $77.1 million at December 31, 2017. Total current liabilities were $890.3 million and current assets were $794.0 million.
- Long-term debt was $342.3 million on the balance sheet. The company’s $431.25 million principal amount of 0.375% convertible notes is due in 2022; the notes are unsecured. Lease financing obligations were $141.0 million, excluding the current portion.
- Wayfair reported no borrowings under its $100 million revolving credit facility and was in compliance with its covenants. The facility matures in February 2020.
- First-half investing cash outflow was $63.3 million, including $61.1 million for property and equipment and $28.6 million for site and software development, partly offset by investment maturities. Property and equipment, net, increased to $468.4 million from $361.1 million.
Changes versus prior comparable periods
- Q2 revenue rose 47.4%; Direct Retail revenue increased 48.8%. First-half revenue grew 46.8%, with Direct Retail up 48.3%.
- Management attributed Direct Retail growth principally to a larger customer base: active customers increased 34.0% to 12.8 million. Q2 orders delivered rose 50.8%; trailing-twelve-month revenue per active customer increased 9.5% to $440.
- Other revenue, including retail-partner sales and media solutions, declined 29.7% in Q2 and 27.3% for the first half. Management cited lower partner sales and a strategic focus on Direct Retail.
- Gross margin declined year over year, which the company attributed to product mix. Operating losses widened as expenses grew faster than revenue; management cited personnel, rent, technology, logistics, and depreciation costs. Adjusted EBITDA also deteriorated.
- First-half operating cash flow improved from an outflow to an inflow, while free cash flow remained negative. Working-capital movements contributed materially to operating cash flow.
Outlook, risks, and notable items
- Management expected Q3 2018 capital expenditures of approximately 3%–4% of revenue as it continued expanding its logistics network. It stated that cash, investments, operating cash generation, and available revolver capacity should meet anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect. No full-year revenue or earnings guidance is provided in the filing text.
- The company adopted the new revenue recognition standard on January 1, 2018 using the modified retrospective method, recording a $4.7 million cumulative adjustment to reduce accumulated deficit; prior periods were not restated.
- Following the Supreme Court’s June 2018 South Dakota v. Wayfair decision, states may require certain out-of-state sellers to collect sales taxes. Wayfair said assessments received to date were not material and it did not expect a significant business impact, but future requirements and assessments remain an area to monitor.
- Lease commitments expanded: Wayfair entered into additional U.S. non-cancelable leases with $218.8 million of future minimum commitments after year-end 2017. It also reported $783.7 million of future minimum rental commitments as of December 31, 2017, before those additional leases.
- A $200 million Class A share repurchase authorization was announced in February 2018; no shares were repurchased in Q2. The company said the board may suspend or terminate the program and Wayfair has no obligation to repurchase shares.
- Key disclosed risks include sustaining customer and revenue growth, competition, international expansion, foreign-exchange exposure, customer spending, and legal or regulatory developments. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether rapid customer and revenue growth can translate into improving gross margins, operating losses, and Adjusted EBITDA.
- How fulfillment, shipping, advertising, technology, and logistics investment affect unit economics and free cash flow.
- Liquidity and working-capital trends alongside lease commitments, capital spending, and the 2022 convertible notes; distinguish the notes’ principal amount from their balance-sheet carrying value.
- The practical effect of sales-tax collection requirements, including any subsequent assessments or compliance costs.
- Progress and returns on international expansion and logistics investments, and whether management’s Q3 capital-spending outlook changes.