Wayfair Inc. — Q2 2017 Form 10-Q Summary
Business and period: Online home-goods retailer offering more than eight million products from approximately 10,000 suppliers. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $1,122.9 million | $786.9 million | $2,083.7 million | $1,534.3 million |
| Gross profit | $269.5 million | $188.5 million | $506.3 million | $367.6 million |
| Gross margin | 24.0% | 24.0% | 24.3% | 24.0% |
| Operating loss | $37.6 million | $48.7 million | $93.8 million | $90.8 million |
| Net loss | $38.9 million | $48.3 million | $95.4 million | $89.5 million |
| Adjusted EBITDA (non-GAAP) | $(2.2) million | $(24.9) million | $(23.1) million | $(45.8) million |
| Operating cash flow | $18.1 million | $24.9 million | $(28.0) million | $(26.3) million |
| Free cash flow (non-GAAP) | $(27.2) million | $(19.4) million | $(96.2) million | $(100.0) million |
- Q2 operating expenses were $307.0 million, up 29.4%; they declined to 27.4% of revenue from 30.1%. Advertising was 11.1% of revenue, down from 12.0%.
- At June 30, cash and cash equivalents were $203.8 million, short-term investments $52.1 million, and long-term investments $26.8 million. Working capital was negative $181.3 million, versus negative $80.1 million at year-end 2016.
- Total liabilities were $739.5 million and stockholders’ equity was $11.9 million. The balance sheet included an $82.7 million lease financing obligation. The $100 million secured revolving credit facility was undrawn; the company reported covenant compliance.
- Cash and cash equivalents fell $76.0 million during the first half. Investing cash outflow was $47.5 million and financing cash outflow was $1.1 million.
Material changes and operating trends
- Q2 revenue rose 42.7%; Direct Retail revenue increased 45.9%, while Other revenue declined 34.8% as the company shifted focus from retail partners toward Direct Retail. For the first half, total revenue grew 35.8% and Direct Retail revenue grew 39.2%.
- Active customers increased 43.1% to 9.547 million, and Q2 orders delivered increased 46.0%. LTM revenue per active customer was $402, down 0.5%; Q2 average order value was $258, flat year over year. First-half average order value declined 2.8% to $241.
- U.S. segment Adjusted EBITDA was positive $20.4 million in Q2; International segment Adjusted EBITDA was negative $22.7 million. Consolidated Adjusted EBITDA remained negative.
- Property and equipment, net, increased to $295.4 million from $239.4 million at year-end, reflecting continued investment in technology and logistics infrastructure.
Outlook, commentary and risks
- Management said it was investing in international expansion, its proprietary logistics network, and product categories. It expected advertising expense to rise in dollars but decline as a share of revenue over time; operating, technology, general and administrative costs were expected to increase as the business grew.
- Management expected 2017 capital expenditures of approximately 3.0% of net revenue; Q2 capital expenditures were 4.0% of revenue. The filing provides no specific revenue or earnings guidance.
- Management believed cash, investments, operating cash generation and available revolving credit would cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect.
- Several states had asserted sales-tax collection claims totaling approximately $30.6 million, excluding later periods, interest and penalties. Wayfair disputed the obligation and intended to defend its position; management considered potential losses immaterial, but the outcome was uncertain.
- A Quebec consumer-protection class action settlement was subject to court approval, expected to be presented in September 2017; management did not expect a material adverse effect. The filing reported no material change to previously disclosed risk factors.
- The company expected the new lease accounting standard to have a material impact primarily on its balance sheet and related disclosures. It generally did not expect adoption of the new revenue recognition standard to have a significant impact, subject to ongoing assessment.
Important facts for investors to verify
- Whether rapid customer and revenue growth can improve profitability and cash generation, particularly given persistent net losses and negative first-half free cash flow.
- How international expansion and logistics investments affect segment losses, capital needs, and margins.
- The drivers and sustainability of negative working capital and the decline in cash and investments.
- Developments in the disputed sales-tax assessments and court approval of the Quebec settlement.
- The effect of lease financing obligations, future lease commitments, and adoption of the new lease accounting standard.
- Non-GAAP measures are management-defined and should be considered alongside GAAP results; the filing notes that Adjusted EBITDA and free cash flow have limitations.