Wayfair Stock Tanks over Growth Concerns

Wayfair (W) stock was down 18.9% at 3:36 PM EDT on October 31. A wider-than-expected loss in the third quarter and a weak outlook caused a significant fall in the stock. Today’s drop in Wayfair stock wiped away its 12.2% year-to-date gain through October 30.  Wayfair’s revenue grew 35.2% year-over-year to $2.31 billion in the third quarter. Moreover, the top line of the online home furnishing retailer came ahead of analysts’ forecast of $2.27 billion.

However, Wayfair reported adjusted earnings per share of -$2.23, a larger loss than the analysts’ estimate of -$2.10. The company’s losses widened compared to its adjusted EPS of -$1.28 in Q3 2018. Tariffs, higher advertising spend, and a rise in interest expense impacted the company’s bottom line.

Ahead of its third-quarter results, Wayfair stock declined 7.5%, 7.1%, and 0.4%, respectively, on October 28, 29, and 30. The plunge in the stock before its Q3 results reflected investors’ concerns about the company’s profitability and a possible slowdown in its sales growth rate.

Etsy (ETSY) stock was down 16.4% today in reaction to its third-quarter results. Etsy’s revenue grew 31.6% to $197.9 million compared to analysts’ estimate of $193.5 million. Its earnings per share of $0.12 were in line with expectations. However, investors were disappointed with a contraction of 360 basis points in its gross margin.

Wayfair’s revenue growth in Q3

Wayfair’s revenue growth of 35.2% in the third quarter reflected a deceleration over its 41.5% growth rate in the second quarter. Also, the company’s growth rate was lower than its 42.4% growth in Q3 2018.

Its Direct Retail net revenue, which is generated mainly through Wayfair’s site, grew 35.9% to $2.3 billion. Wayfair also sells its products through other sites, including Joss & Main, Birch Lane, AllModern, and Perigold. Direct Retail revenue from the US market increased by 34%. Its International Direct Retail net revenue grew 46% on a reported basis and 50% on a constant currency basis.

Wayfair experienced a 37.6% rise in the number of active customers to 19.1 million in the third quarter. Aside from a larger customer base, higher net revenue per active customer also benefited the company’s top line. Notably, net revenue per active customer grew by 1.4% to $449.

Repeat customers accounted for 67.3% of overall orders in the third quarter of 2019 compared to 66.3% in the third quarter of 2018. This improvement reflects the company’s efforts to enhance customer engagement.

Outlook disappoints

Wayfair expects net revenue of $2.48 billion–$2.525 billion in the fourth quarter. This guidance was below analysts’ revenue expectation of $2.67 billion during the holiday season quarter.

Further, Wayfair expects its Direct Retail revenue to grow 24%–26% to $2.475 billion–$2.515 billion. The company anticipates US Direct Retail revenue growth of 23%–25%, and it expects International Direct revenue growth of 27%–30%.

The company is optimistic about its growth prospects in the US and international markets. However, it expects tariffs to cause disruption. Wayfair plans to improve its performance through various initiatives, including enhancing its logistics infrastructure and global expansion. Plus, the company is investing in additional home goods product categories and services to penetrate its addressable market further.