Company Reports

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 40 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows for faster delivery with fewer touchpoints and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring elevated competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household incomes of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair's second-quarter sales rose 7.5% on order delivery growth of 6% (to 10.6 million) and average order growth of more than 1% (to $332). Its adjusted EBITDA margin of 6.9% (up 60 basis points) was the highest in five years, as the firm tightly managed its fixed costs.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 40 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows for faster delivery with fewer touchpoints and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring elevated competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household incomes of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair delivered first-quarter sales growth of 7% lifted by 3% growth in orders delivered and a 4% rise in average order volume. Adjusted EBITDA margin expanded 130 basis points to 5.2% due to stringent cost management. Wayfair paid down about $300 million in convertibles, reducing dilution risk.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 40 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows for faster delivery with fewer touchpoints and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring elevated competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household incomes of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair's fourth quarter delivered sales growth of 7%, evenly split between increases in orders and average order value. Adjusted EBITDA margin expanded 360 basis points to 6.7%, aided by moderating advertising and selling, operations, technology, and general and administrative costs.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 30 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows faster delivery with fewer touchpoints and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring elevated competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no moat rating.

Wayfair's third-quarter sales growth of 8% handily outperformed the home furnishing market (up midsingle digits), benefiting from strength in higher-end brands and the B2B segment. Adjusted EBITDA of 6.7% was at its highest level since 2020, as stringent cost controls and operating leverage ensued.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 30 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows faster delivery with fewer touchpoints and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring rising competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no moat rating.

Second-quarter sales rose 5%, to $3.3 billion, on a 5% increase in average order value at Wayfair. Sales growth rose at the fastest pace captured since early 2021. An adjusted EBITDA margin expanded 110 basis points to 6.3%, helped by better advertising and operating expense leverage.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 30 million products from around 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which allows faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster innovation and delivery, spurring rising competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it hard to stay top of mind. This, along with no switching costs, underlies our no moat rating.

Wayfair reported first-quarter sales that were flat at $2.7 billion, even with the German business exit. Benefiting from cost-cutting measures the firm was able to put up an adjusted EBITDA margin of 3.9%, a 120-basis-point improvement, displaying the durability of the marketplace model.

Wayfair plays in the fragmented home goods market in North America and the UK (more than $500 billion global opportunity), offering more than 30 million products from more than 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Its largest namesake brand targets a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000, leaving Wayfair competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no moat rating.

Wayfair reported fourth-quarter results that included sales of $3.1 billion, up 0.2%, and adjusted EBITDA margin of 3.1%. The firm's first-quarter outlook includes little change in demand momentum, with projected sales flat to down and EBITDA margin of 2%-4%.

Wayfair is reducing its exposure to the difficult-to-scale German market, which has been running at losses in recent years. This should allow the firm to reinvest in better-yielding opportunities, like B2B and physical locations.

Although we didn’t anticipate any material change to our $91 fair value estimate for no-moat Wayfair after incorporating third-quarter results and an updated fourth-quarter outlook, we are reducing our valuation materially for an adjustment to the way we have accounted for stock-based compensation. We have made this change to conform with the general modeling principles across Morningstar’s equity research platform. As such, beyond 2024 we have eliminated the add-back for stock-based compensation to our model, resetting our new intrinsic value to $70 per share. We have made no other changes to our long-term estimates for Wayfair and still view shares as significantly undervalued at the current level. We surmise investors have shunned shares recently given the difficult housing market, the potential for tariffs, and the uncertain timeline for the restoration of demand.

Wayfair plays in the fragmented home goods market in North America and Western Europe ($800 billion global opportunity), offering more than 30 million products from more than 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000 means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no moat rating.

We were encouraged by the continued stabilization no-moat Wayfair exhibited in its third-quarter results. A 2% decline in sales and 4% adjusted EBITDA margin, in line with second-quarter metrics (2% decline, 5% margin), imply the home furnishing retailer could be finding its new baseline for growth. Additionally, the gross margin showed resiliency, at 30.3%, staying within the 30%-31% range it has tracked over the last year. With an industry that has experienced an average monthly decline of 1.5% through the end of the third quarter, it appears Wayfair is holding its own in a languishing market. Customer metrics support this thesis, with revenue per active customer and orders per customer up 1%, average order value up 4%, and active customers down 3%. Moreover, Wayfair has printed its sixth consecutive quarter of positive EBITDA margin metrics, a function of prudent merchandising, smart marketing, and surgical cost-cuts.

Wayfair plays in the fragmented home goods market in North America and Western Europe ($800 billion-plus global opportunity), offering more than 30 million products from more than 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000 means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no moat rating.

No-moat Wayfair fell around 5% on its second-quarter results, as consumers continue to cautiously spend on home furnishings. Given stubbornly high mortgage rates and low home turnover, Wayfair is facing demand headwinds that are out of its control. However, we think shares have overreacted to commentary around pricing investments, a tool that has been effective in stimulating purchase conversion in the category. Peer no-moat Williams-Sonoma has successfully toggled its spending between pricing and advertising to meet consumer purchase preferences, and we surmise that such a strategy will allow Wayfair to continue to outpace the category. While this means gross margin could be lower than optimal (the firm is targeting the low end of 30%-31% in the back half of 2024), we expect it to limit revenue declines to a low-single-digit percentage range, ahead of the 3.5% average decline seen in the furniture and home furnishings market through June (US Census).