The 25% rise in Wayfair Inc.'s (W, Financial) stock price over the last year could continue. The company is making investments in a wide range of areas that could ultimately lead to improved customer loyalty and a more concrete competitive advantage.
Although Wayfair remains a loss-making company, it is increasing its market share in a growing industry. Greater scale and investments in its operational capacity could lead to growth opportunities in adjacent product areas over the long run.
Customer loyalty
Improving customer loyalty is a key part of the company’s growth strategy. Its private-label credit card, the Wayfair card, now has over 1 million cardholders, who are expected to spend $900 million on an annual run-rate basis in fiscal 2019. Cardholders visit the site more frequently than non-cardholders, and spend around 200% more in their first two years of membership versus non-cardholders. The company plans to implement greater customization into its credit card, which is expected to drive further penetration in its various brands.
The introduction of MyWay, which allows members who pay $29.99 per year to gain exclusive discounts, insider deals, assembly services and expanded free shipping, is expected to kickstart further investments in its loyalty program. With over 30 staff members added to its customer loyalty team in the last 18 months, investments in boosting customer loyalty could produce a wider economic moat for the business over the long term.
Investment in growth
Investing in new technology could help to differentiate Wayfair’s offering from sector peers. It has become the first e-commerce business to partner with Magic Leap, a mixed reality in spatial computing company. Through this partnership, the Wayfair Spaces app is now available, enabling customers to visualize the products within their own living spaces. This will provide them with a realistic sense of how the company’s products could look alongside their existing furniture. This is expected to allow them to find the right products more quickly, as well as provide them with greater confidence when making purchases.
The company is also investing in its logistics capabilities. As part of this initiative, it has expanded its proprietary logistics network so that it covers 66% of U.S. large parcel home deliveries. This reduces its reliance on third parties and will potentially increase delivery speeds over time. This could lead to greater customer satisfaction as well as a more efficient business model that can generate higher margins over the long term.
Profitability
A lack of profitability could become an increasing concern for investors, and may lead to disappointing stock returns. Wayfair is persisting with a strategy of increasing sales and market share at the expense of profitability. In the last quarter, for example, advertising costs increased to 11.9% of sales from 10.7% in the prior quarter. In 2019, the company’s loss per share is expected to increase from $4.24 to $4.37.
So far, investors do not appear to be concerned about the company’s rising costs and increasing losses. Its strategy is building scale in an attractive industry that continues to grow. Its shipping and marketing investments may also create an opportunity in adjacent markets such as bathroom accessories, which has been a recent area of growth for Wayfair. It is also seeing a rise in customer engagement metrics, such as the proportion of repeat business and average spending per customer, which suggests it is on the road to capturing a larger slice of the $582 billion global home furnishings market pie.
Verdict
Further stock price growth could be ahead for Wayfair. The company is improving its economic moat through investmentd in new technology as well as putting additional resources into its loyalty program.
The company’s sales growth is expected to increase, but higher investments are due to squeeze margins over the next fiscal year. This could lead to declining earnings per share – especially if the company is forced to discount in order to compete with sector peers.
With increased scale, there are opportunities to expand into new product areas. Its operational capacity is increasing, which could catalyze its growth within the wider home furnishings market. Having outperformed the S&P 500 in the last year, the stock could have investment appeal.
Read more here:
