I have followed the highs and lows of the online retailer for years. I’ve never been a fan of Wayfair’s (W) stock because it never seemed to generate profits consistently, which is a significant criterion for any investment I make.
On Tuesday, it hit its 28th 52-week low of the past 12 months, but more importantly, it is mere pennies from its 5-year low and not too far off its all-time low of $16.74, just weeks after its October 2014 IPO at $29.
I continue to see Wayfair ads on TV, reminding me why I’ve always stayed away from its stock: its marketing costs are significant.
However, I don’t know if this is one of those times when stocks get oversold, but I’m willing to keep an open mind by exploring the subject.
Ultimately, I will answer whether I believe Wayfair is oversold and offer up a potential options play or two for those aggressive investors willing to buy this falling knife.
Why Is W Stock Down 50% Over Past Year?
Forget the recent tariff issues--its shares are down 38% since Trump first mentioned tariffs on Canada, Mexico, and China on Nov. 25, 2024--and focus on its recent financial results.
It’s not as if the company hasn’t delivered decent results in the past year. In May 2024, it reported Q1 2024 results that exceeded Wall Street’s expectations. Its shares gained over 18% on the news, ultimately hitting a 52-week high of $76.18 before shedding 50% of its value over the summer.
The results in question: Net revenues were $2.73 billion, 1.6% lower than a year earlier, but $90 million higher than the consensus analyst estimate, while its adjusted loss per share was 32 cents, 12 cents better than expected.
Of course, it was still a loss.
In 2024, its net revenues were $11.9 billion, 1.3% lower than a year earlier, with an adjusted earnings per share profit of 13 cents, considerably better than the $1.13 loss in 2023.
“The fourth quarter was a strong conclusion to the year across multiple fronts. From a topline performance perspective, we ended 2024 on a high note - with net revenue showing positive year-over-year growth,” stated CEO and co-founder Niraj Shah in Wayfair’s February press release.
“These results enabled us to drive nearly $100 million dollars of adjusted EBITDA in the quarter, and deliver on our goal of approximately 50% year-over-year dollar growth for 2024.”
Shah put a very positive spin on the company’s business in 2024.
Sure, it had 21.4 million active customers at the end of December, and they spent an average of $555, up 3.4% from a year ago.
Despite all the good news, its share price has fallen nearly 40% since Feb. 20. Much of that could be due to tariff concerns. However, this is not a business that can afford a protracted global trade war.
It finished the year with an accumulated deficit of $4.51 billion. It can throw out all the non-GAAP numbers it wants, but it will take years to erase this giant hole its business model’s dug for itself.
Brick and Mortar Is Expensive
On March 14, Wayfair announced it would open its second large-format store in Atlanta in 2026. It will be 150,000 square feet, providing homeowners with everything they need to furnish their homes. It follows the opening of its first large-format store in Wilmette, Illinois, in May 2024.
Opening stores of this size costs significant sums. At the very least, millions would be involved.
The CEO spoke in the Q4 2024 press release about the company’s ability to tap into the high-yield markets for its borrowing needs in 2024, putting its balance sheet in the best position it’s been in many years.
Let’s consider the balance sheet.
According to S&P Global Market Intelligence, it finished 2024 with $4.22 billion in total debt, of which $1.1 billion was for operating leases, and the other $3.12 billion was for short- and long-term borrowings. That’s 1.1 times its market cap.
It did have $1.37 billion in cash and short-term investments on its balance sheet, reducing its net debt to $2.85 billion, with EBITDAR (earnings before interest, taxes, depreciation and amortization and net rental expense) of $-6.0 million. I’m sure Wayfair has a non-GAAP metric to make that positive.
The problem is two-fold.
First, as it adds large-store formats, its lease obligations move higher, increasing the odds it will face bankruptcy proceedings down the road. Its current Altman Z-score, which predicts the likelihood of bankruptcy proceedings in the next 24 months, is 1.39, which is considered distressed. Still, it’s not the worst you’ll see for publicly traded retail businesses.
Secondly, the costs above and beyond the initial store openings--the company spent $644 million on leasehold improvements in 2024--will be significant. In the past year, it spent $3.41 billion on advertising, selling, and marketing expenses.
That’s $159.35 per active customer, effectively reducing the $555 in revenue generated per active customer by nearly 30%.
One thing I’m having a hard time with is the net interest expense reported in 2024 of $29 million. That’s something on $3.12 billion in debt. However, I note that the cash paid for interest on long-term debt was $63 million, up from $53 million in 2023. That’s bound to move higher in 2025.
For example, the $800 million 2029 secured notes it issued last October carry a fixed rate of 7.25%. The interest expense on those alone should be what it paid in cash interest in 2024.
I Wouldn’t Buy, But If You Must
I continue to remain a skeptic of Wayfair’s business model. It’s too marketing-driven to generate an appropriate return on invested capital. But there are always going to be bottom feeders looking for cigar butts like Wayfair.
For you, I suggest the following option play.
While there is no chance of being in the money come Christmas time, the delta of 0.05892 means you could double your money by selling before expiration if the shares appreciate by $7.81 (26%).
It’s done it before.
