Will Wayfair Stock Recover?

Wayfair Inc. (NYSE:W) has grown over the decades to be a popular digital store concentrating on home furnishings and decor but it really captured the public’s imagination during the 2020-21 era.

The good times for Wayfair shareholders didn’t last long and just as fast as its share price rose so too did it fall. With the company attempting to rebuild, is it wise to invest in the stock now in the hopes of a recovery? 

To Know Where Wayfair Is Going, Look Back

When lockdown restrictions took effect, the demand for home furnishings and decorations increased. Home dwellers sought a way to give their houses more comfort and functionality so online retailers, including Wayfair, experienced a surge in website traffic and sales volume.

Wayfair seized on this trend by stocking up on a broad assortment of goods at various price points. They also featured a comprehensive online shopping experience and made deliveries easy.

The company’s logistics were flexible enough to make product lines changes based on new consumer behaviors and demands.

As the pandemic hastened the migration of buyers to online selling of home items, Wayfair was well positioned to benefit from that surge.

Sales skyrocketed and bottom-line growth soared too. Total net revenue came in at $14.1 billion for the year 2020, the pandemic peak, marking a solid increase of 55% from the year prior.

Both the U.S. and the international markets experienced strong sales. For example, net income was $185 million, while adjusted earnings per share came in at $5.04, reflecting a substantial improvement from a loss of $8.03 per share in the prior year. All of a sudden, Wayfair went from posting in the red to the black yet the gravy train didn’t last long.

When The Tide Turned, Profits Followed

As the tide turned and demand lessened, the good times at Wayfair stopped rolling. A natural tapering off of demand for home furnishings and decor set in and trouble loomed thereafter.

As brick-and-mortar retailers started operating again and customers began shopping in person, the competitive landscape intensified. Plus, offline retailers embarked on beefing up their e-commerce stores as they sought a portion of the rising online marketplace for household goods.

Those factors in conjunction with supply chain disruptions and higher shipment costs impaired the company’s ability to sustain the growth to which it been accustomed. Total net revenue decreased by 3.1% year-over-year to $13.7 billion in 2021, while net losses came in at $131 million, translating to a loss per share of $1.26.

The dismal performance led the company to plan a restructuring in 2022. As part of the process, Wayfair announced a layoff of 13% of the workforce, mainly at the managerial and top-level positions. The goal of the move is to optimize Wayfair’s processes and reduce costs as a response to pandemic challenges. This marks the third restructuring since 2022 and is expected to lower costs by about $280 million.

Amidst the decline in demand in the sector, CEO Niraj Shah is focused heavily on resource allocation to cope with the challenges. Just as management had to boost hiring to cope with the surge in demand a few years ago so too has it had to take swift action to lay workers off. Longer term, the plan is to regain the lost headcount, but the goal will be filling the execution posts rather than leadership roles.

On a positive note, management expects to see an adjusted EBITDA of $600 million, even if revenue remains flat in 2024. Adding to the positive news, the company is set to open its first physical furniture store for shoppers on May 23.

The turnaround plan by the company has been proving fruitful, which is apparent from consecutive quarterly sales improvements for the last couple of quarters following a decline over the prior couple of quarters.

Total net revenue of $3.1 billion reflected 0.4% year-over-year growth rate but the bottom line remained in the red, with a loss per share of $1.49 and an adjusted loss per share of $0.11 per share.

For the year, total net revenues fell by 1.8% year-over-year to $12 billion while the adjusted loss per share was $1.13.

Will Wayfair Stock Recover?

If analysts are correct, Wayfair stock is likely to recover further with 15 analysts revising their estimates higher for the stock.

As a result of the recent positive business developments, Wayfair share price is up by about 26% over the past month. 

Analysts forecast that profitability will continue this year, a noteworthy forecast given how the firm had been posting losses prior to the 2020 period.

On a multiples basis, the stock is relatively cheap, trading at just 0.71x sales, which is roughly 40% lower than its industry average.

It’s noteworthy also that the surge in share price recently may have captured a good chunk of the potential gains given that fair value based on a discounted cash flow forecast analysis is around $75 per share.

So, while Wayfair is showing good progress with measures like expense containment and staffing programs, its return to sustained profitability remains a looming question mark. The consensus recommendation among analysts is to Hold the stock and perhaps that’s the fairest assessment near-term.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.