Wayfair Inc. — Q1 2020 Form 10-Q
Business context and period: Wayfair operates an online home-goods business, offering more than 18 million products from over 12,000 suppliers. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $2.330 billion | $1.945 billion | +19.8% |
| Gross profit / gross margin | $579.1 million / 24.9% | $470.5 million / 24.2% | Margin +0.7 percentage points |
| Operating expenses | $841.2 million | $664.1 million | +26.7% |
| Operating loss / margin | $(262.1) million / (11.2)% | $(193.6) million / (10.0)% | Loss widened |
| Net loss / diluted loss per share | $(285.9) million / $(3.04) | $(200.4) million / $(2.20) | Loss widened |
| Adjusted EBITDA | $(127.3) million | $(102.2) million | Loss widened |
| Cash used in operating activities | $(256.3) million | $(81.3) million | Cash use increased |
| Free cash flow | $(354.6) million | $(166.8) million | Cash use increased |
Revenue growth reflected a 28.6% increase in active customers and a 1.6% rise in trailing-twelve-month revenue per active customer. U.S. revenue rose 19.1% to $1.975 billion; International revenue rose 23.7% to $355.1 million (25.5% constant-currency growth). Direct Retail orders delivered increased to 9.876 million from 8.163 million; average order value declined to $235 from $237.
Cash and cash equivalents were $624.5 million and short-term investments were $266.5 million at quarter-end, totaling approximately $891.0 million. Working capital was negative $215.7 million. Long-term debt carrying value was $1.577 billion; total liabilities were $3.923 billion, and stockholders’ deficit was $1.171 billion. The company reported $100 million drawn on its revolving credit facility at March 31.
Material changes and unusual items
- Revenue increased, but operating expenses grew faster, particularly selling, operations, technology, general and administrative costs (+38.5%). That expense increase included higher personnel, rent, technology, depreciation and amortization costs.
- Advertising rose 13.0% in dollars but fell to 11.8% of revenue from 12.5%; management attributed the lower ratio partly to repeat-customer leverage. Gross margin improved modestly, while operating and net losses widened.
- Operating cash outflow increased, including a $114.6 million cash use from accounts payable and accrued expenses. Capital expenditures and site/software development totaled approximately $98.3 million.
- Q1 included $4.0 million of severance costs from February workforce reductions. Adoption of the new credit-loss accounting standard resulted in a $5.5 million opening accumulated-deficit adjustment.
Outlook, liquidity, and risks
Management said that, in the short term, it had generally seen increased sales and order activity and lower advertising costs since the COVID-19 outbreak, and was hiring frontline workers to support orders. The company emphasized that the pandemic’s effects remained uncertain and that Q1 trends might not persist. Risks include supplier and logistics disruption, changing consumer demand, higher operating costs, cybersecurity exposure associated with remote work, and volatility or reduced access to capital markets.
Management expected Q2 capital expenditures, in absolute dollars, to be materially consistent with Q1 as it continued investment in technology and logistics. It stated that cash, investments, operating cash generation and borrowing availability, together with subsequent financing transactions, were expected to cover anticipated needs for the foreseeable future, while cautioning that liquidity assumptions could prove incorrect. On April 8, 2020, Wayfair issued $535 million of 2.50% accreting convertible notes due 2025, generating approximately $528.4 million net proceeds; on April 23, it repaid the $100 million revolver borrowing. These transactions occurred after quarter-end.
A securities class action remained unresolved; the company said it could not reasonably estimate potential losses. The filing states that disclosure controls were effective and that no material change in internal control over financial reporting was identified.
Key facts for investors to verify
- Whether pandemic-driven order growth continued, and how it affected revenue, gross margin, fulfillment capacity and advertising costs in subsequent quarters.
- Whether operating losses and negative free cash flow narrowed or worsened, particularly as operating expenses and capital investment grew.
- Post-quarter liquidity and debt after the $535 million note issuance and repayment of the revolver; also review the new notes’ conversion and dilution terms.
- The scale and duration of supplier, carrier, labor and warehouse disruption, and the effect of the company’s logistics expansion and lease commitments.
- Developments in the securities litigation and any resulting financial exposure.