Wayfair Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results; comparisons are with the corresponding 2020 periods. Wayfair operates U.S. and International e-commerce segments.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.121B | $3.840B | $10.456B | $10.474B |
| Gross profit | $882.7M | $1.147B | $3.014B | $3.048B |
| Gross margin | 28.3% | 29.9% | 28.8% | 29.1% |
| Operating income (loss) | $(69.8)M | $221.9M | $101.8M | $259.8M |
| Net income (loss) | $(78.0)M | $173.2M | $70.6M | $161.2M |
| GAAP diluted EPS | $(0.75) | $1.67 | $0.65 | $1.64 |
| Adjusted EBITDA | $101.1M | $371.1M | $617.7M | $683.6M |
| Operating cash flow | $(130.8)M | $331.0M | $321.2M | $1.210B |
| Free cash flow | $(203.2)M | $255.0M | $115.0M | $954.0M |
- Q3 revenue fell 18.7% year over year: U.S. revenue declined 20.8% and International revenue declined 6.8%. Management attributed the decrease primarily to fewer orders as consumer behavior normalized against the prior-year pandemic demand surge; higher average order value partly offset the decline.
- Q3 orders delivered fell to 11.0M from 15.8M, while average order value increased to $283 from $243. Active customers were 29.2M versus 28.8M, and trailing-12-month revenue per active customer was $484 versus $451.
- Q3 cost of goods sold was 71.7% of revenue versus 70.1%, reflecting lower operational efficiency and product-mix changes. Operating expenses rose to 30.5% of revenue from 24.1%; lower revenue and higher personnel, technology, depreciation and equity-compensation costs contributed. Advertising expense declined in dollars but increased as a share of revenue.
- At September 30, cash and cash equivalents were $1.865B and short-term investments were $528.4M, totaling $2.393B. Working capital was $924.7M. Long-term debt carrying value was $3.049B, up from $2.659B at year-end 2020; stockholders’ deficit was $1.530B.
- Nine-month cash flow from operations fell to $321.2M from $1.210B, chiefly reflecting a much smaller cash contribution from operating assets and liabilities, including accounts payable and other current liabilities. Q3 capital expenditures and software development costs totaled $72.3M; nine-month capital expenditures and software development costs totaled $206.2M.
Material changes and unusual items
- Q3 results shifted from substantial GAAP profit in 2020 to a GAAP net loss in 2021. Nine-month revenue was nearly flat, but operating income, net income, Adjusted EBITDA and free cash flow were all lower year over year.
- Wayfair adopted ASU 2020-06 for convertible debt on January 1, 2021. The adoption increased reported debt carrying value and changed interest expense and earnings per share; it did not materially affect cash flows or debt-covenant compliance. Management reported Q3 2021 GAAP diluted EPS of $(0.75); under legacy accounting, it would have been $(1.03). Prior periods were not restated.
- A $12.2M first-quarter charge related to consolidating certain U.S. customer service centers included $6.3M of non-cash lease-asset impairment and $5.0M of accelerated depreciation. The company said the consolidation supports a shift toward virtual service models.
- During the first nine months, Wayfair repurchased $300.2M of stock. No shares were repurchased in Q3. A new $1.0B repurchase authorization was approved in August, to begin after the prior program is completed.
- Great Hill converted $253.1M of accreted principal of the 2025 Accreting Notes into approximately 3.49M Class A shares during the first nine months. The notes were issued in a related-party transaction; a shareholder derivative suit concerning their issuance was awaiting a court decision, and the company could not estimate potential losses.
Liquidity, outlook and risks
- Wayfair reported a new $600M senior secured revolving credit facility maturing in March 2026, with no revolving loans outstanding at September 30. Approximately $59.7M of letters of credit reduced availability. The company said it was in compliance with debt covenants.
- Management said cash, investments, operating cash generation and revolver availability should cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove wrong. The filing provides no revenue or earnings guidance. It expects Q4 2021 capital expenditures to be $65M–$75M.
- Management said sales and order activity remained above pre-pandemic levels, but described the outlook as uncertain due to normalization in consumer behavior and the evolving COVID-19 situation. Risks cited include supply-chain and logistics disruption, carrier capacity, inflation, labor-market developments, interest rates, housing conditions, consumer spending, foreign exchange, competition and legal or regulatory matters.
- The company stated there were no material changes to its previously disclosed risk factors, no significant change in market-risk exposures, and no material change to contractual obligations. It reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether order volumes, revenue and gross margin stabilize as pandemic-related comparisons and consumer demand normalize.
- Whether operating cash flow and free cash flow recover, given the sharp year-over-year decline and Q3 cash outflow.
- Debt maturities, potential cash settlement or dilution from convertible-note conversions, and the impact of the ASU 2020-06 accounting change.
- Progress and spending under the repurchase programs, alongside liquidity needs and the stated Q4 capital expenditure range.
- Developments in the shareholder derivative litigation concerning the 2025 Accreting Notes and any resulting financial exposure.