samedi 6 mai 2017

Wayfair


Following the analysis of Overstock, I got interested by Wayfair as Overstock's CEO keeps talking about Wayfair, expecially during the Q4 2016 conference call, highlighting their pretended non sustainable growth. This made me curious to compare both competitors and to follow Wayfair's evolution.

Date of analysis: 06/05/2017
Share price: 48,85$
Number of shares: 50 338 973 of  class A (1 vote per share) and 35 617 581 of class B (10 votes per share)
Market cap: 4 113 m$
Net debt: -348m$ (but this cash would be required for accounts payable, see below)
EV: 3765m$


Interesting discussions are:
https://seekingalpha.com/article/4051586-wayfair-see-80-percent-downside
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/w-wayfair/


Operations/Business


Wayfair is an online retailer for home products with currently 8 millions products offered by 10 000 suppliers. 2016 revenues are 3,8b$ and 90% of revenues are in US, but they are trying to expand in Canada, UK and Germany.

Wayfair wants to address this market for home that it estimates to be a 600b$ market in US/Canada/Europe, for which 9% of the sales are made online. 

Wayfair is currently growing to capture market share to ultimately gain scale economy and be profitable with a 8-10% EBITDA margin (excluding equity based compensation), according to the Q4 2016 presentation. Currently, Wayfair is losing money to fund its growth via marketing spends, capex investments for its logistics operations and customer support. 
Wayfair has been losing money every single year, with a net loss of 194m$, 77m$ and 150m$ in 2016, 2015 and 2014.

The big question is to know if Wayfair can be profitable once it reaches a satisfying scale and can be profitable. If Wayfair cuts its advertising expenses, it will probably reduce the sales.

Moreover, comparing some metrics to Overstock, we can see that the efficiency of operations does not seem to be optimal as Overstock generates much more revenues per employees, spend less to acquire customers and get a higher contribution margin and repeated orders from these customers. However, the more Wayfair scales, the more it should have repeat customers and the less it should spend in advertising as a % of sales. Also, Wayfair has higher gross margin that is explained by Overstock's CEO by higher prices on average from Wayfair according to third parties surveys (as the statement is coming from Overstock, it must be treated as potentially biaised).

The table below shows some elements of comparison with Overstock for 2016:


Google Trends is also interesting to check as we can see that Wayfair is growing on volume searchs while overstock tends to decline over the last five years.



Wayfair is also showing Customer Acquisition Cost in the slide below from the Q4 2016 presentation. 



I see many issues with it. First, the total advertising spend does not include 177m$ of marketing and sales, but let's say that this is the amount needed for the existing customers to keep ordering. So, 398,1m$ is only or new customers acquisition and therefore 66$ is spend to acquire a new customer.

Then, the contribution margin is calculated by the gross margin less Customer Service and Merchant fees. But this calculation completely forgets about the advertising and marketing costs ! Adding these costs would put the contribution margin to a bit less than 3%. At 3%, annual contribution per customer is 395*3%=12$. Moreover, so far, only 58% are repeated customers.

Another aspect to consider is that working capital is negative. It is great as long as they grow, but now, the account payable is greater than the cash, and current ration is less than one. Wayfair could so far pay the suppliers later and later (42 Days Payable Outsanding), but this is not an indefinite proposition and at some points it has to stop, or some cash will be needed to cover the short term expanses, although Wayfair claims that they want to self fund their growth. It will be interesting to follow the working capital in the next quarters as I believe this is not sustainable.


Valuation


Please see the following article for my valuation of Overstock.

As Wayfair is consistently reporting losses, and even sometimes negative cash flow from operations, a way to look at it is to compare Price/sales of both companies. I don't consider EV as cash is probably needed to cover the account payables.
Overstock Price/Sales: 0,22
Wayfair Price/Sales: 1,2


Another way to look at it is to consider the long term goal of 8% EBITDA margin for Wayfair, consider that when it is stable, it would demand a multiple of 8 times EBITDA (arbitrary value I give for a stable profitable retailer). Therefore, the targer EBITDA should be 4113/8 = 514m. With a margin of 8%, revenues should be 514/0.08 = 6,5b$, considering that this margin will be reached. We should also discount this to take into account the time value of money. So, in order to sustain this valuation, the company should at least double its sells and reach an EBITDA margin of 8%, without raising any debto or capital, and within a reasonable time frame (let's say less than 5 years), which seem to be optimistic assumptions. 

According to Dataroma, the management and the co-founders have been selling a lot of shares over the last 12 months.

Conclusion


The valuation of Wayfair seems to be generous, considering it is facing strong online competition (Amazon, Overstock) and it seems that the the growth is not profitable, which could lead to some serious issues. However, I am not ready to short the stock as the timing of the events is really hard to predict. But for sure, I'll follow this interesting situation, still considering being a shareholder of Overstock.






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