Betting that shares in pandemic winners will fall is profitable. One has to look no further than shares of Zoom (down 81% from its high), Netflix NFLX (-72%), and Peloton (-89%) to see how profitable it could be to bet on the decline in shares of these companies.
Sadly for Bay State residents — that bad news also extends to online home good retailer Wayfair which reported disappointing first quarter 2022 results.
Wayfair stock trades down about 19% on May 5 after it reported an adjusted quarterly loss of $1.96 per share, 40 cents wider than expected, and a 23.4% decline in its active customer count, according to CNBC.
As I have been doing since August 2020, my conclusion is that Wayfair shares — which trade 78% below their high — have further to fall. The reason is the same — dim growth prospects.
(I have no financial interest in the securities mentioned in this post).
Q1 2022 Results Disappoint
Wayfair shares are dropping today due to disappointing performance and prospects. On top of that, I am alarmed that Wayfair’s chief financial officer is retiring and will be replaced by the company’s chief people officer.
Wayfair met low revenue expectations, and reported a drop in active customers, and larger than expected losses. As analysts expected, Wayfair sales fell almost 14% to $2.99 billion from $3.48 billion a year earlier, according to CNBC.
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Wayfair’s net loss of $319 million was much worse than the $18 million profit analysts expected while its adjusted loss per share of $1.96 was 40 cents worse than analysts were forecasting.
Not surprisingly after gorging during the pandemic, people do not need to replace all their home furnishings that quickly. Wayfair’s active customer count in the first quarter of 2022 declined 23.4% from a year ago to 25.4 million. Orders per customer of 1.87 were 0.11 below a year ago and orders from repeat customers fell 26% to 8.1 million.
What’s more — with people going back to the office, a surge in new demand does not appear likely.
Wayfair co-founder and CEO Niraj Shah said, despite sliding sales, consumer health remains “relatively strong.”
Meanwhile, after Wayfair struggled with supply chain complications that caused order delays and frustrated shoppers, Shah hopes to improve. “The companies that will be most successful in navigating this dynamic environment are those that can act with agility,” he said in a press release.
The biggest shocker to me is that Wayfair is replacing its CFO with its chief people officer. As CNBC noted, CFO Michael Fleisher will stick around until January 2023 and in November chief people officer, Kate Gulliver, will become CFO.
While Gulliver has a tremendously impressive pedigree — with degrees from Yale and Harvard, and stints at McKinsey, and Bain Capital BCSF — I think Wayfair needs a nuts and bolts CFO who can manage costs, tighten operations, and oversee, communicate and deliver quarterly expectations-beating revenue and profit growth while boosting guidance.
It remains to be seen whether Gulliver can do that.
Weak Growth Prospects
Wayfair’s growth prospects do not look great to me. As I wrote in March, investors should avoid catching this falling knife.
In March, I noted that Wayfair’s growth is slowing down and its market share — while tops in the industry — has fallen recently. IBISWorld estimated that Wayfair’s online sales grew at a five year average rate of 36.8% through 2021, its growth rate peaked at 57.4% and in 2021 it eked out 8% growth — which turned negative in the first quarter.
Its market share peaked in 2020 at 9.8% in 2020 and fell to 8.8% in 2021. Meanwhile industry growth is expected to slow down considerably.
In November 2021, IBISWorld forecast 4.8% average annual industry growth to $70.4 billion through 2026 as “stagnant growth in homeownership rates and slower growth in the Consumer Confidence Index slow industry growth slightly.”
That forecast does not take into account the recent spike in inflation and the return of customers to physical stores. In March the Wall Street Journal noted that, Wayfair’s “active customer numbers have dropped about 13% as executives say people are returning to physical stores.” They have since fallen faster.
What’s more, people who gorged on online furniture purchases in 2020 are now no longer receiving stimulus checks and instead are facing inflation — driven in part by soaring gasoline prices — that are crimping their spending. Since then, inflation and gasoline prices have gotten worse.
25% of Wayfair shares are sold short, according to the Journal. Investors betting on a decline in its stock should expect Wayfair stock to fall further in the future.