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Robert Stephens, CFA
Robert Stephens, CFA
Articles (214) 

Wayfair: A Long-Term Turnaround Opportunity

The retailer’s strategy could catalyze its financial prospects

September 13, 2019 | About:

Online furniture retailer Wayfair Inc. (NYSE:W) has had a disappointing year as its stock has fallen12% over the past 12 months.

Although it faces weak consumer sentiment in its key markets, the company’s focus on efficiency and diversification into fast-growing markets could produce a recovery in its stock price.

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Outdoor furniture opportunity

Wayfair’s continuing investments in the outdoor furniture category could lead to an increase in its market share in an industry that is currently worth $5 billion per annum in the U.S. The lack of brick-and-mortar stores that sell outdoor furniture out-of-season should mean the company’s year-round outdoor furniture inventory resonates with consumers.

The business is differentiating itself from other outdoor furniture retailers through its visual merchandising. This includes the company’s dynamic imagery that showcases its products in an appropriate context given the time of year. This should increase customer conversion rates.

The retailer is broadening its range of outdoor furniture to include higher and lower price points. This should provide it with access to a larger total addressable market since its products will fit a wide range of budgets.

Logistics network

The company’s expansion of its U.S. logistics footprint should make the business more efficient. It is on track to add 5 million square feet of space to its logistics footprint in 2019, which should reduce delivery times. This has the potential to improve its customer service levels and increase the size of its economic moat through greater customer loyalty.

In Canada, the company’s strategy of inducting a larger proportion of its products directly into its existing facilities, as opposed to importing them from the U.S., could reduce costs. Passing lower costs on to customers could give Wayfair a competitive advantage.

Premium brand

Wayfair’s ongoing investments in its luxury home products brand, Perigold, could lead to it having a greater share of the $70 billion high-end home goods market. It is using premium visualization tools and uniquely-tailored digital assets that utilize 3-D technology to attract customers.

Perigold targets the top 5% of U.S. households in terms of income, with its concierge service having the potential to deliver high customer conversion rates. The company’s concierge guides its customers through their purchasing decisions, while providing a point-of-contact for delivery enquiries and future purchases. This should help to differentiate Wayfair from peers and could lead to it achieving higher levels of brand loyalty.

Potential threats

Wayfair reported revenue growth headwinds in Canada in the second quarter. This was due to macroeconomic challenges that could persist over the medium term. The outlook for the retailer’s wider international business could deteriorate as, according to the GfK consumer sentiment index, confidence among U.K. shoppers is at its lowest level since 2013. Similarly, U.S. consumer confidence reached its lowest level in almost three years in August, which may slow down the company’s near-term sales performance.

In response to weak trading conditions in Canada, the company is seeking to reduce its costs through increasing investments in its supply chain. This caused an improvement in its sales performance in the second quarter versus the first quarter. This trend is expected to continue for the remainder of the year.

Although consumer confidence in the U.K. is low at the moment, wage growth is at its highest level since 2008. This should help to support demand for the company’s products, with the retailer’s second-quarter results highlighting that its U.K. operations are performing in line with its own previous guidance. In addition, the region contributed to a 47% increase in international revenue in the second quarter.

Outlook

Analysts forecasted Wayfair will narrow its loss per share from $6.50 in fiscal 2019 to $5.77 in fiscal 2020. The stock offers recovery potential following its 15% underperformance of the S&P 500 over the past year.

Disclosure: The author has no positions in any companies mentioned.

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