Wayfair Inc. — Q2 2021 Form 10-Q
Business context and period: Wayfair operates online home-goods marketplaces in the U.S. and internationally. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Management cautions that interim results are not necessarily indicative of full-year results.
Financial and operating results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $3.858B | $4.305B | $7.335B | $6.635B |
| Gross profit / margin | $1.128B / 29.2% | $1.321B / 30.7% | $2.131B / 29.1% | $1.900B / 28.6% |
| Operating income / margin | $145.2M / 3.8% | $300.0M / 7.0% | $171.5M / 2.3% | $37.9M / 0.6% |
| Net income (loss) | $130.4M | $273.9M | $148.7M | $(12.0)M |
| Diluted EPS | $1.14 | $2.54 | $1.33 | $(0.13) |
| Adjusted EBITDA | $310.8M | $439.8M | $516.6M | $312.5M |
| Operating cash flow | $275.4M | $1.135B | $452.0M | $879.0M |
| Free cash flow | $206.9M | $1.054B | $318.1M | $699.0M |
At June 30, cash and cash equivalents were $2.078B and short-term investments were $523.4M, totaling about $2.602B. Working capital was $908.2M. Long-term debt carrying value was $3.048B; total liabilities were $6.223B, and stockholders’ deficit was $1.542B. The new $600M secured revolving facility matures in 2026; $60.2M of letters of credit reduced availability. Wayfair reported covenant compliance.
Material changes and management commentary
- Q2 revenue fell 10.4% year over year, which management attributed chiefly to fewer orders as consumer behavior normalized against the surge at the onset of COVID-19 in 2020. U.S. revenue declined 15.2%; reported international revenue rose 16.3%, but international constant-currency growth was 3.2%.
- For the first half, revenue grew 10.6%; U.S. revenue rose 5.2% and international revenue 40.5% (27.6% on a constant-currency basis). Active customers were 31.1M, up 19.6% year over year; Q2 orders delivered fell to 13.9M from 18.9M, while average order value increased to $278 from $227.
- Q2 gross margin contracted to 29.2% from 30.7%, with management citing lower operational efficiencies and product-mix changes. Advertising expense decreased, but operating expenses as a share of revenue rose to 25.4% from 23.7%. Adjusted EBITDA fell to $310.8M from $439.8M.
- First-half operating cash flow declined $426.9M year over year, primarily due to a substantially less favorable contribution from operating assets and liabilities. First-half free cash flow was $318.1M. Cash and investments were broadly stable versus year-end, while the company repurchased $300.2M of stock during the first half.
- Management said liquidity, operating cash generation and revolver availability should cover anticipated needs for the foreseeable future, while warning that liquidity assumptions could prove incorrect. The filing provides no revenue or earnings guidance. It expects Q3 2021 capital expenditures of $70M–$80M.
Outlook, risks, contingencies and unusual items
- COVID-19 effects remain uncertain. Management noted demand remained above pre-pandemic levels but emphasized that prior-year comparisons included exceptional pandemic-driven demand. Risks include consumer spending and housing conditions, competition, customer growth, supply-chain and delivery disruptions, inflation, foreign exchange and further pandemic effects.
- Three note series became convertible in Q3 under their share-price conditions. If holders convert, Wayfair may need to use cash unless it elects to settle in shares; conversions may therefore affect liquidity and dilution. Convertible debt totaled $3.048B carrying value, and outstanding notes include maturities from 2022 through 2026.
- The company recorded $12.2M of first-half customer-service-center consolidation charges, including non-cash impairment and accelerated depreciation, as it shifted toward virtual service models. It also adopted ASU 2020-06, reducing reported interest expense and changing diluted EPS calculations; management said adoption did not materially affect cash flows or debt-covenant compliance.
- A shareholder derivative suit concerning the 2025 Accreting Notes issuance was pending; the company said it could not reasonably estimate the outcome or potential loss. Management did not believe other ordinary-course legal matters would materially harm results or financial condition. No material changes to previously disclosed risk factors were reported.
- Wayfair committed to $20M of impact-related equity investments and received vendor warrants estimated at $5.8M. A $5M initial partnership investment occurred after quarter-end.
Important facts for investors to verify
- Whether revenue and order trends stabilize after the unusually strong 2020 comparison, particularly in the U.S., and whether international growth persists on a constant-currency basis.
- Whether gross margin recovers amid product-mix, fulfillment, shipping and operational-efficiency pressures, and how customer-service and other operating costs evolve.
- Cash conversion and working-capital trends, remaining revolver availability, and potential cash settlement or dilution from convertible-note conversions.
- The amount and pace of remaining stock repurchases, equity-compensation expense and associated dilution.
- Developments in the derivative litigation and the costs or consequences of customer-service-center consolidation.