What Wayfair wants investors to know about soaring expenses – The Motley Fool

Investors reacted harshly to Wayfairof (NYSE: W) third quarter report, sending stocks down sharply this week despite good news on the growth front. Specifically, the e-commerce specialist outperformed management's guidance for the corresponding period for the third consecutive year in its 2018 fiscal year. However, Wall Street professionals were more concerned about rising costs and the potential for growth. An extremely competitive holiday season.

Chief Executive Officer Niraj Shah and his team, during a conference call with analysts, addressed these concerns in the context of Wayfair's broader growth plans. Below are some highlights of this discussion.

Market share growth

"We are excited to see more and more people interested in our offer, with 13.9 million customers who have purchased from us over the past year and [12-month trailing] Net revenue per active customer continues to grow, reaching a record $ 443 this quarter. "- Shah

Sales growth was 43% overall and improved 40% in the major US market. Both of these results were above the top of the guidance range issued by executives and implied strong market share gains.

Other indicators of customer engagement, including the proportion of repeat customers, the active customer base and the average spend per customer, corroborate the idea that Wayfair is creating a position of choice in his niche. "We are excited to see more and more customers buy from us," added CFO Michael Fleisher.

Peak cost

"We think that it would be extremely myopic to give up the high [return on investment] opportunities that we have been able to seize. "- Fleisher

Wayfair reported a surprising increase in its spending rate in two key areas. First, selling and development expenses increased to 12.2% of sales, compared with 11.2% in the previous quarter, despite a 40% increase in sales. Leaders have blamed the vast opportunities they have identified for capturing growth in markets such as Germany and new categories of shopping such as mattresses. They have not hesitated to allocate funds to these causes, including hiring people in the fields of engineering, merchandising and logistics.

The most worrying advertising costs are advertising, which accounted for 11.9% of sales, compared to 10.7% in the previous quarter. Management said the outbreak did not indicate increased competition, but instead reflected interesting trade-offs for faster sales growth. "As the third quarter progressed," said Fleisher, "we have seen exciting opportunities to leverage our advertising investments and invest more in advertising while strengthening our customer's strength. [spending]. "

Look to the front

"We are forecasting gross margins up to 23% in the last few quarters, but we will stay [price competitive] to serve our customers and as such, there is a risk on the profit margins could fall below this level [in the fourth quarter]. "- Fleisher

Wayfair issued cautious growth prospects for the holiday season that left room for the negative impact of a potential change in consumer confidence. The company also noted that she had bought many discounted products for the fourth quarter, but that she could still be forced to cut prices if traditional retailers chose this route.

At the same time, costs, including for advertising, should be high during the holidays. As a result, adjusted losses are likely to accumulate as was the case in the last quarter.

The good news is that these expenses are primarily under the control of the company and therefore reflect the growing confidence of management in its ability to conquer a larger share of the $ 600 billion home furnishings market. The bad news is that these spending trends suggest that it could be a while before Wayfair's growth starts to generate tangible benefits.