Wayfair Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Wayfair operates an online home-goods business, with U.S. and International reporting segments. Financial figures below are in U.S. dollars; millions are used unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net revenue | $1,944.8 million | $1,404.3 million | Up 38.5% |
| Gross profit / margin | $470.5 million / 24.2% | $323.8 million / 23.1% | Margin improved about 1.1 percentage points |
| Operating loss / margin | $(193.6) million / (10.0)% | $(103.1) million / (7.3)% | Loss widened |
| Net loss / diluted loss per share | $(200.4) million / $(2.20) | $(107.8) million / $(1.22) | Loss widened |
| Adjusted EBITDA | $(102.2) million | $(50.0) million | Non-GAAP; loss widened |
| Cash from operations | $(81.3) million | $(13.1) million | Cash use increased |
| Free cash flow | $(166.8) million | $(47.6) million | Non-GAAP; reflects higher investment spending |
Business drivers and material changes
- Direct Retail revenue rose 39.0% to $1,931.2 million; Other revenue declined 11.3% to $13.6 million. Management attributed Direct Retail growth primarily to a larger customer base.
- Active customers increased 39.1% to 16.4 million; trailing-12-month revenue per active customer rose 2.3% to $442. Orders delivered increased 38.6% to 8.2 million, while average order value was nearly flat at $237.
- U.S. segment revenue was $1,657.7 million; International revenue was $287.1 million. Segment Adjusted EBITDA losses were $27.8 million and $74.4 million, respectively.
- Cost of goods sold increased 36.5%, slower than revenue growth; it declined to 75.8% of revenue from 76.9%, which management attributed to product mix. Operating expenses rose 55.6% to $664.1 million. Advertising increased to 12.5% of revenue from 11.5%, as the company invested in customer acquisition; selling, operations, technology, general and administrative costs rose to 17.7% from 15.1%.
Financial position, liquidity and debt
- At March 31, 2019, cash and cash equivalents were $722.4 million and short-term investments were $83.3 million, for $805.7 million combined liquidity resources. Cash and cash equivalents were $849.5 million at December 31, 2018.
- Working capital was negative $112.0 million, versus positive $116.7 million at year-end. Total current liabilities were $1,229.8 million; total assets were $2,113.9 million and total liabilities were $2,593.0 million, leaving stockholders’ deficit of $479.1 million.
- Long-term debt carrying value was $750.2 million. Convertible notes had aggregate principal of $1,006.3 million: $431.3 million of 0.375% notes due 2022 and $575.0 million of 1.125% notes due 2024. The company reported no borrowings under its revolving credit facility.
- A revised secured revolving facility provides up to $165 million through February 2022, subject to terms and covenants. The filing says liquidity, including the facility, is expected to meet anticipated needs for the foreseeable future, while cautioning that assumptions could prove incorrect.
- Operating cash use and investment cash use were $81.3 million and $44.7 million, respectively. Property and equipment purchases were $60.6 million and site/software development costs were $24.8 million. Capital expenditures were 4.4% of revenue in Q1.
Outlook, risks and unusual items
- Management expected Q2 2019 capital expenditures of approximately 4%–5% of revenue, as it continued building its logistics network. The filing provides no specific full-year revenue or earnings guidance.
- Wayfair adopted the new lease accounting standard on January 1, 2019. At March 31, operating lease liabilities totaled $668.5 million, and $552.0 million of right-of-use assets were reported. The company also disclosed $558.8 million of additional operating leases, primarily warehouse leases, not yet commenced. Adoption changed balance-sheet presentation; management said it did not materially harm liquidity or debt-covenant compliance.
- Both convertible note series became holder-convertible for Q2 2019 after the share-price conversion condition was met. No notes had been converted through the filing date. Depending on the company’s settlement choice, conversion could require cash and adversely affect liquidity; capped-call transactions are intended to reduce potential dilution or offset certain cash payments, subject to caps.
- Two putative securities class actions filed in January 2019 allege violations related to prior company disclosures. Wayfair intends to defend them; it could not estimate an outcome or potential loss range.
- Management cited customer growth and retention, competition, international expansion, economic and housing-market conditions, currency movements, and legal and regulatory matters as risks. It also noted that it may not fully offset significant inflation in costs through pricing.
Investor verification checklist
- Track whether rapid customer and revenue growth translates into improved operating margins, given higher advertising and overhead spending.
- Assess cash burn, capital expenditures and liquidity against warehouse expansion, lease commitments and potential cash settlement of convertible notes.
- Review the Q2 conversion status and subsequent disclosures concerning the 2022 and 2024 notes, including settlement elections and dilution/cash effects.
- Monitor the securities litigation for developments, as the filing provides no reasonably estimable loss range.
- Distinguish GAAP results from Adjusted EBITDA and free cash flow, both of which are non-GAAP measures.