Wayfair Inc. — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Wayfair operates an online home-goods business, offering more than eight million products from over 10,000 suppliers. Management cited investments in international expansion, logistics and product categories.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenue | $960.8 million | $747.3 million |
| Gross profit | $236.9 million; 24.7% margin | $179.1 million; 24.0% margin |
| Operating loss | $56.2 million | $42.1 million |
| Net loss | $56.5 million; $0.66 per share | $41.2 million; $0.49 per share |
| Adjusted EBITDA loss | $20.9 million | $21.0 million |
| Cash used in operating activities | $46.1 million | $51.2 million |
| Free cash flow | $(69.0) million | $(80.6) million |
Revenue grew 28.6%; Direct Retail revenue rose 32.1% to $940.4 million, while Other revenue declined 42.3% to $20.5 million. Active customers increased 45.8% to 8.855 million and orders delivered rose 40.6% to 4.213 million; average order value fell 6.3% to $223. Advertising was 12.3% of revenue versus 13.1%. Total operating expenses increased 32.5% and reached 30.5% of revenue, versus 29.7%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $212.4 million at March 31, down from $279.8 million at year-end; short- and long-term investments totaled $97.5 million. Working capital was negative $134.2 million, versus negative $80.1 million at December 31.
- Operating, investing and financing activities used $46.1 million, $20.8 million and $0.5 million, respectively. Capital spending on property, equipment, sites and software totaled $22.9 million.
- Wayfair entered a $100 million secured revolving credit facility, with a $40 million letter-of-credit sublimit, maturing February 2020. No amounts were borrowed under the new or prior facility during the quarter; the company reported covenant compliance. Lease financing obligations were $41.5 million.
Outlook, commentary and risks
- Management expects 2017 capital expenditures of approximately 3.0% of net revenue; Q1 spending was 2.4%, below its 4.0%–5.0% forecast, primarily due to timing of technology and logistics build-outs. Management said existing cash, investments, operating cash generation and facility availability should cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
- Management expects advertising to rise in dollars but decline as a share of revenue over time, and expects merchandising, sales, operations, technology and general and administrative expenses to increase as the business grows. No specific revenue or earnings guidance was provided.
- States have assessed approximately $21.9 million of alleged sales and similar taxes, excluding later periods, interest and penalties. Wayfair disputes the obligation and intends to defend its position; management believed potential losses would be immaterial but gave no assurance. A Quebec consumer-protection class action seeks damages; the company could not estimate its outcome or potential loss.
- Future minimum non-cancelable lease commitments were $568.7 million at December 31, 2016, with an additional $50.2 million entered into afterward; future payments include $9.3 million of expected sublease rentals. The company also disclosed lease financing obligations and related future payments.
- Adoption of stock-compensation guidance on January 1, 2017 resulted in an $8.7 million cumulative adjustment to retained earnings. Management expects new lease accounting guidance to have a material impact, primarily on the balance sheet and disclosures. Revenue-recognition guidance was expected to have no significant impact, subject to ongoing assessment.
Important facts for investors to verify
- Whether customer and order growth can continue to offset lower average order value and the decline in Other revenue.
- Whether operating-expense growth, particularly operations, technology and general and administrative costs, moderates relative to revenue.
- Cash consumption, negative working capital, planned capital spending and available liquidity, including compliance with credit-facility covenants.
- Developments in the sales-tax assessments and Quebec litigation, and the scale and timing of lease commitments.