Wayfair’s tagline is “a zillion things home.” But investors would prefer a few million in profit.
The Boston-based furniture and housewares retailer on Thursday posted a wider-than-expected fourth-quarter loss, sending its shares down 23 percent, the biggest one-day decline since the company went public in 2014.
The sell-off was part of a familiar pattern: With each successive quarter’s earnings report, investors have increasingly shown concern about Wayfair’s outsize spending on operations and advertising without demonstrating an obvious path to profitability.
A study from professors at the Wharton School at the University of Pennsylvania and Emory University recently estimated that Wayfair’s stock price was overvalued by as much as 84 percent, in part due to the company’s high acquisition costs to bring in new shoppers. The academics’ number-crunching suggested that Wayfair loses $10 on every sale.
“I felt deja vu,” Daniel McCarthy, one of study’s authors and a marketing professor at Emory University, said after hearing the numbers in the earnings report. He said that the company’s stock price has taken a hit after every report released for over a year. The problem, he said, is that Wayfair is spending an inordinate amount of money to acquire repeat customers, while the nature of the furniture business isn’t built on repeat sales. After all, how many times a decade you need to buy a lamp or a couch?
“It’s not a fault of the company, it’s a fault of the category,” McCarthy said. “You just can’t say you’re going to be the Amazon of furniture. You need a way to make the model work.”
Wayfair fell $21.74 to $73.95 on Thursday. Despite the tumble, the stock is up 84 percent in the past year.
The company chose to focus on the positive in its report, with its chief executive, Niraj Shah, citing the company’s “incredible growth” in 2017, with net revenue rising 40 percent to $4.7 billion. Shah said the company’s decision to spend nearly $550 million last year on advertising has resulted in “significant market share,” and that an emphasis on technology has allowed them to redefine “what is possible in the home category.”
The company has recently rolled out augmented reality tools to help customers envision how products will fit in their homes, and an Uber-like service that lets them track deliveries.
“Technology, combined with continuous testing and innovation, allows us to constantly enhance the shopping experience while quickly scaling our operations,” Shah said.
Wayfair has also made major investments in infrastructure and operations, and has expanded to the United Kingdom, Germany, and Canada. All told, the company reported it has 11 million customers, a 33 percent growth over last year.
All the spending comes at a cost. The company saw a net loss of $72.8 million in the fourth quarter, up from a loss of $44 million during the same period in 2016. Excluding some items, the per-share loss was 58 cents, compared with the average analyst estimate of 53 cents.
Revenue for the quarter rose 46 percent to $1.44 billion.
Meanwhile, competition is getting stiffer. Walmart announced this week that it was launching a new home decorating experience on its website, with curated collections that borrow from home magazines and focus on trends. The company has nearly doubled its assortment of home goods in the last year, including a line of Scandinavian furniture for kids and more mid-century modern pieces.
Investors are also worried that Amazon will get into the home decor business.
Peter Cohan, a management professor at Babson College, said that competition isn’t going away, as more companies look to compete in the housewares space. “The uniqueness of their business is becoming less of an advantage,” he said.
There are other economic factors to consider, Cohan added. Wealthy homeowners who see their tax rates rise may feel like they have less disposable income for big-ticket items like furniture, and rising interest rates and the possibility of a recession could stall the housing market.
But Sucharita Kodali, a retail analyst at Forrester, said hand-wringing responses to the earnings report were overwrought. Wayfair is an e-commerce brand, she said, and “these are companies that are trying to take a page from the Amazon playbook. It’s always supposed to be about higher than industry growth and profit is a total crapshoot. These are not businesses you’re investing in because they’re throwing off a ton of cash.”
She said that Wayfair’s marketing expenses could easily be pulled back if needed, and it’s still out way ahead in serving an industry that is notoriously frustrating for customers. “Furniture and home, the number of errors in the category is just unbelievable,” Kodali said, while Wayfair takes “a very Amazon approach to quality control and getting products to customers.”
“A lot of this is coming down to how well you execute,” she said. “I think customers are generally pretty satisfied with Wayfair.”