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Why Is Wayfair (W) Down 13% Since Last Earnings Report?

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A month has gone by since the last earnings report for Wayfair (W - Free Report) . Shares have lost about 13% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Wayfair due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Wayfair Q2 Loss Narrower Than Anticipated, Revenues Beat

Wayfair Inc. reported non-GAAP loss of $1.35 per share in second-quarter 2019, narrower than the Zacks Consensus Estimate of a loss of $1.36.However, the figure is wider than the year-ago loss of 77 cents.

Total second-quarter revenues came in at $2.34 billion, up 41.6% year over year. The figure also outpaced the Zacks Consensus Estimate of $2.26 billion.

The year-over-year increase in revenues was driven by strengthening of the company’s direct retail business across international regions.

Direct retail net revenues from the international segment in Canada, U.K. and Germany increased 41% year over year to $343 million (or up 47% on a constant-currency basis).

Although the Canadian business has been facing headwinds due to exchange rate and weaker consumer spending, management expects growth to accelerate in the near term due to logistics operations, allowing Wayfair to reduce the cost structure.

Quarter in Detail

Direct retail net revenues, which include sales generated primarily through Wayfair’s sites, were $2.3 billion in the second quarter, increasing 42.1% year over year.

Active customers increased 39% from the prior-year quarter to 17.8 million. Also, LTM net revenues per active customer increased 1.6% year over year to $447 million.

Total number of orders delivered in the reported quarter was 9.2 million, up 42% year over year. In addition, orders per customer in the quarter were 1.86 million, reflecting an increase of 2.2% from the year-ago period. Further, repeat customers placed 6.2 million orders in the second quarter, up 46.1% year over year.

Operating Results

In the second quarter, Wayfair’s gross margin was 23.9%, up 60 basis points on a year-over-year basis.

Adjusted EBITDA margin was (3%) compared with (2.1%) in the year-ago quarter. This was led by increasing investments, mainly in international regions.

The company’s operating expenses of $730.8 million increased 52.1% year over year. Operating loss was $171.2 million, wider than the prior-year loss of $95.3 million.

Balance Sheet & Cash Flow

At the end of the second quarter, cash, cash equivalents and short-term investments were $714.5 million, down from $805.7 million in the comparable year-ago period. Accounts receivables were $77.3 million, up from $60.6 million in the first quarter.

Cash from operations was ($2.7) million and capital expenditure totaled $54.7 million. Free cash flow was ($91.5) million compared with ($166.8) million in the first quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -22.71% due to these changes.

VGM Scores

At this time, Wayfair has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Wayfair has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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