Business Strategy and Outlook

Wayfair continues to take share in the fragmented home goods market. The firm’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than most of its peers. Targeting a wide consumer base with a customer aged 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair’s inventory-light model benefits inventory turns, a strategy has freed up capital to spend on customer acquisition and retention, leading to 27 million active users as of December 2021 who spend around $500 per year (versus 1.3 million users who spent $300 in 2012). This implies its product mix and marketing are resonating with end users. The pandemic pulled forward the capture of positive free cash flow to 2020, and scale should allow Wayfair to generate positive free cash flow to equity over our forecast, even with constraints from infrastructure spend in Europe and IT investment.

Given Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains, we expect ROICs to be volatile. We think Wayfair can hit some of its long-term goals, but the duration of execution to achievement is trickier. While it should exceed its prior 25%-27% gross margin target longer term (we forecast reaching 29% due to higher private label mix), we don’t see operating expenses in management’s targeted range 15%-19% of sales until beyond 2031. We plan to watch post pandemic customer acquisition cost trends to determine whether Wayfair could develop a network effect.

Financial Strength 

Wayfair carries modest levels of debt, keeping its financial profile stable as it grows into a more mature business. It carried about $3 billion in long-term debt at competitive rates on its balance sheet as of Dec. 30, 2021, after executing a $535 million convertible raise in April 2020 and another $1.5 billion convertible raise in August 2020. The firm also has access to liquidity through its $600 million credit facility, which matures in 2026. There is cash and marketable securities ($2.4 billion at the end of December) to help cover expenses like operating lease obligations.Over the past two fiscal years, the company has turned free cash flow positive (CFO minus capital expenditures plus site and software development costs). Free cash flow has averaged about 1% of revenue during the past five years, a metric that should average a mid-single-digit rate over the next decade benefiting from increasing scale. Capital expenditures have averaged 2% of sales over the last five years, which we consider a reasonable run rate as the brand invests back into the business to further support top line growth and improving profitability. Morningstar analysts don’t expect the board to initiate a dividend in the near term, given the volatile cash flow pattern that Wayfair has generated in recent years and the need for the firm to continue to invest heavily in technology and customer acquisition. However, in August 2021 it authorized a $1 billion share buyback program, which we would expect to at least partially be deployed in 2022 after shares declined nearly 16% during calendar 2021.

Bull Says

• Different brands in the Wayfair portfolio cater across income and age demographics, offering some resiliency in cases of macroeconomic cyclicality and economic uncertainty. 
• Over the last five years, the company has expanded into untapped markets such as Canada, the United Kingdom, and Germany. Additionally, international opportunities could provide location and revenue growth and improved brand awareness. 
• B2B represents around 10% of sales and targets a $200 billion total addressable market in the U.S. and Europe. This opportunity could grow materially faster than we anticipate.

Company Profile

Wayfair engages in e-commerce in the United States and Europe. At the end of 2021, the firm offered more than 33 million products from 23,000-plus suppliers for the home sector under the brands Wayfair, Joss & Main, AllModern, DwellStudio, Birch Lane, and Perigold. This includes a selection of furniture, decor, decorative accent, housewares, seasonal decor, and other home goods. Wayfair was founded in 2002 and is focused on helping people find the perfect product at the right price.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.