Wayfair Inc. — Q2 2020 Form 10-Q
Business context and period. Wayfair operates an online home-goods marketplace. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Management said COVID-19 coincided with increased sales and order activity and lower advertising costs, but cautioned that the outlook was unusually uncertain.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $4.305bn | $2.343bn | $6.635bn | $4.288bn |
| Gross profit | $1.321bn | $560m | $1.900bn | $1.030bn |
| Gross margin | 30.7% | 23.9% | 28.6% | 24.0% |
| Operating income (loss) | $300m | $(171)m | $38m | $(365)m |
| Net income (loss) | $274m | $(182)m | $(12)m | $(382)m |
| Adjusted EBITDA | $440m | $(70)m | $313m | $(172)m |
| Free cash flow | $1.054bn | $(91)m | $699m | $(258)m |
Q2 revenue grew 83.7% year over year: U.S. revenue rose 82.5% and International revenue 90.5% (96.9% constant currency). For the first half, revenue grew 54.7%. Active customers increased 46% year over year to 26.0 million; Q2 orders delivered more than doubled to 18.9 million, while average order value declined to $227 from $255. Q2 operating margin was 7.0%, versus negative 7.3% a year earlier; first-half operating margin was 0.6%, versus negative 8.5%.
Cash, liquidity and debt
- Cash and cash equivalents were $2.181bn at June 30, up from $583m at year-end; short-term investments were $193m. Management reported $2.4bn in cash and investments and working capital of $596m, compared with negative $234m at year-end.
- First-half operating cash flow was $879m, versus cash use of $84m in 2019. The filing attributes much of the improvement to operating assets and liabilities, including accounts payable, accrued expenses and unearned revenue. Q2 operating cash flow was $1.135bn.
- Long-term debt carrying value was $1.988bn, primarily convertible notes; the revolving credit facility had no balance at quarter-end after $200m borrowed and repaid during the half. Convertible notes had aggregate principal of approximately $2.490bn before unamortized discounts.
- First-half capital expenditures were $180m, comprising property and equipment and site/software development. Operating lease liabilities totaled $961m; an additional $168m of leases, primarily warehouse leases, had not yet commenced.
Material changes and unusual items
- Revenue growth and improved gross margin drove a sharp Q2 shift to GAAP profitability. First-half results remained slightly loss-making despite the strong second quarter.
- In April, Wayfair issued $535m principal amount of 2.50% accreting convertible notes due 2025, receiving $527m net proceeds. Investors included Great Hill, Charlesbank and Spruce House; the filing identifies the transaction as related-party due to investor/director and founder connections. The notes accrete interest into principal rather than paying cash interest.
- Q2 advertising expense rose 61% in dollars but fell to 9.7% of revenue from 11.1%; total operating expenses fell to 23.7% of revenue from 31.2%. Management cited advertising efficiencies and shipping efficiencies from its logistics network.
- Equity-based compensation was $127m in first-half cash-flow adjustments; the filing reports $134m of equity-based compensation and related taxes for segment reconciliation. First-half Adjusted EBITDA excludes a $4m severance charge related to February workforce reductions.
- Adoption of the credit-loss accounting standard resulted in a $5.5m cumulative reduction to accumulated deficit. A consolidated securities class action was dismissed with prejudice on July 8, 2020.
Outlook, commentary and risks
Management said existing liquidity, operating cash generation and available revolving-credit capacity should cover anticipated needs for the foreseeable future, while warning that assumptions could prove wrong. It forecast Q3 2020 capital expenditures of $95m–$105m for technology infrastructure and logistics expansion. No revenue or earnings guidance was provided in the filing text.
Management emphasized that pandemic-related demand may be temporary, fluctuate or reverse, and that reported results may not predict future periods. Key risks include supplier and carrier disruption amid surging demand, labor and fulfillment costs, weaker consumer spending, cybersecurity exposure from remote work, and uncertainty around access to capital markets. The 2017 and 2018 convertible notes became convertible in Q3 2020; conversions could require cash settlement unless Wayfair elects to settle solely in shares, potentially affecting liquidity. The 2020 notes are convertible at any time and settle in shares.
Most important facts for investors to verify
- Whether the exceptionally strong Q2 revenue, margin and cash-flow performance persisted after pandemic-related restrictions and demand patterns changed.
- How much first-half operating cash generation depended on working-capital movements, particularly higher payables and unearned revenue, and whether that level is repeatable.
- The potential cash or share dilution from convertible-note conversion, especially the 2017 and 2018 notes becoming convertible in Q3, and the related-party nature and terms of the 2020 issuance.
- Whether warehouse capacity, supplier availability, delivery performance and planned capital spending can support elevated order volumes without eroding margins.
- The costs and obligations associated with $961m of operating lease liabilities and $168m of leases not yet commenced, alongside the company’s stated liquidity outlook.