Wayfair Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with the same period in 2015. Wayfair operates an e-commerce home-goods business across five brands, selling directly and through third-party retail partners.
Financial and operating highlights
Amounts in millions except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $747.3 | $424.4 | +76.1% |
| Gross profit / margin | $179.1 / 24.0% | $102.8 / 24.2% | Margin down 0.2 pts |
| Operating expenses | $221.2 | $130.1 | +70.0% |
| Operating loss / margin | $(42.1) / (5.6%) | $(27.2) / (6.4%) | Loss increased |
| Net loss / diluted EPS | $(41.2) / $(0.49) | $(27.1) / $(0.33) | Loss increased |
| Adjusted EBITDA | $(21.0) | $(12.3) | Loss increased |
| Cash used in operating activities | $(51.2) | $(35.2) | Use increased |
| Free cash flow | $(80.6) | $(51.4) | Use increased |
- Direct Retail revenue rose 92.7% to $711.8 million; Other revenue fell 35.4% to $35.5 million. Management attributed Direct Retail growth to a larger customer base and higher customer spend.
- Direct Retail active customers increased 68.9% to 6.074 million; LTM revenue per active customer rose 13.3% to $392; orders delivered increased 66.7% to 2.996 million; average order value rose 15.5% to $238.
- Advertising expense rose 68.4% to $97.7 million, but declined to 13.1% of revenue from 13.7%. Cost of goods sold increased to 76.0% of revenue from 75.8%, reflecting product mix and shipping costs.
- At March 31, cash and cash equivalents were $248.8 million, short-term investments $60.7 million, and long-term investments $70.3 million. Working capital was $36.1 million, down from $95.3 million at year-end 2015. Total liabilities were $462.4 million and stockholders’ equity $205.0 million.
- Cash and cash equivalents declined $85.4 million during the quarter. Capital expenditures and site/software development costs totaled $29.4 million; investing cash outflow was $28.2 million, including investment purchases and maturities.
Changes, outlook, and risks
- Revenue growth did not translate into improved absolute profitability: net loss rose $14.1 million and Adjusted EBITDA loss rose $8.6 million. Management attributed the losses primarily to increased advertising investment, including in Europe and Canada.
- Management expects operating expenses to continue increasing as the company invests in advertising, personnel, technology, and operations; it expects near-term losses and notes there is no guarantee these investments will generate returns. It expects capital expenditures to be approximately 4% of 2016 revenue, with Q2 capital expenditures approximately 6% as a new data center comes online and supply-chain investment continues.
- Management believed existing cash, investments, and operating cash flows would meet anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect. The $35 million credit facility was undrawn; it included a $10 million revolving line and credit-card support, and was scheduled to expire July 31, 2016 unless renewed. The company reported compliance with covenants.
- Additional non-cancelable lease commitments entered into after year-end totaled $216.7 million. Lease letters of credit were approximately $7.0 million.
- States had asserted approximately $12.9 million of sales-tax claims, excluding certain later taxes, interest, and penalties. Wayfair disputed the assessments, considered a loss not probable, and recorded no liability.
- Two putative class actions were pending: a securities-related case awaiting a decision on Wayfair’s motion to dismiss, and a case alleging deceptive reference pricing. The company said losses were not probable and intended to defend both.
- International operating expenses expose the company to currency movements, particularly the British pound and euro; it reported no currency hedging. Management said risk factors were not materially changed from the 2015 Form 10-K.
Important facts for investors to verify
- Whether rapid Direct Retail growth can improve gross margin and reduce losses while customer-acquisition and infrastructure spending remains high.
- Cash burn, working-capital movements, capital spending, and liquidity relative to planned data-center, warehouse, and international investments.
- Progress and potential financial exposure in the sales-tax assessments and pending lawsuits.
- Renewal or replacement of the credit facility scheduled to expire July 31, 2016, and the effect of substantial lease commitments.
- Share-based compensation and dual-class governance: Class B shares carried ten votes each versus one vote for Class A; 6.17 million RSUs were outstanding at quarter-end.