EUR 850.00 For Business Accounts Only

Morningstar | Wayfair's Spending to Build Out Infrastructure Continues to Weigh on Profit Growth in 2019

Wayfair continues to take share in the fragmented home goods market, which it believes represents a $300 billion opportunity in North America and another $300 billion addressable market in Europe. 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. Faster delivery is a function of fewer touch points, reducing damage and improving Wayfair’s brand equity with each positive delivery experience. However, we think competitors will continue to attempt faster delivery, spurring increasing competition. Targeting a broad consumer base with a core customer who is female, 35-65 years old, with household income of $50,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay front of mind perpetually. This, along with no switching costs, underlies our no-moat rating.We think the inventory-light model positively affects inventory turns but can risk control of the brand at times. This strategy has freed up capital to spend on customer acquisition and retention, leading to nearly 15 million active users at the end of 2018 who spend an average of $440 per year (versus 1.3 million users who spent $300 in 2012). This implies its product mix and marketing are resonating with end users. In our view, negative working capital should lead to positive free cash flow by 2021, with Wayfair beginning to generate positive adjusted earnings per share in 2023, as near-term profitability remains weighed down by spending to build out infrastructure in Europe and drive continuous improvement in IT capabilities.Considering Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains, we expect returns on invested capital to be volatile. We think Wayfair can hit some of its long-term goals, but the duration of execution to achievement is trickier. We don’t have the firm reaching 25% gross margins (versus its 25%-27% target) until 2023 and forecast operating expenses won’t fall in the long-term range of 15%-19% of sales until 2027.