Furniture retailer Wayfair’s CEO, Niraj Shah, made an unfortunate word choice at a September 19 conference. But that’s no reason to sell its stock. However, a recent analyst downgrade makes me wonder whether the cash-flow burning company will ever make a profit.
And that strikes me as a reason to avoid its shares. (I have no financial interest in the securities mentioned here).
Let’s start with Shah’s unfortunate word choice. At a September 19 conference in Boston that was part of Babson Connect, an event sponsored by the college where I teach, Shah highlighted two things he looks for in people that Wayfair recruits, according to Boston Business Journal.
Shah Should Have Said ‘Collaborative’ Rather Than ‘Non-Political’
Specifically, he wants to hire people who are intelligent and quantitative with the confidence to succeed. No problem there. But he also said that he wants employees who are ‘non-political’ – which to him means that they collaborate well with other people. In my view, he meant this term as the opposite of someone who backstabs other employees to try to advance their career.
But it also seems to me that Shah’s choice of that phrase revealed a bit of blind spot on his part. That’s because he used the term “less than three months after hundreds of employees walked out in Copley Square to protest the company’s sale of furniture to operators of migrant detention camps along the U.S. southern border,” according to the Boston Business Journal.
The blowback was due to the mis-interpretation of “non-political” to mean that he wanted to hire people who did not have strong political opinions that would cause them to walk out of work to protest the company’s business practices. Wayfair later issued a statement saying that his comments were “misinterpreted and inaccurately positioned in this story.”
Wayfair’s Financial Performance and Prospects
Wayfair’s financial performance has been mixed. The good news is that its revenues are rising – up 39% to $4.3 billion in the first half of 2019, according to its latest quarterly statement.
But the less good news is that it loses money ($382 million during the period), burns through cash ($84 million worth from operations) and its shares are 28% below their all-time high of $174.
One analyst thinks that Wayfair’s prospects are so bleak that he initiated coverage with a sell and set a $100 price target. According to TheStreet.com, Berenberg analyst Graham Renwick’s bleak outlook is due to competition that he believes is eroding Wayfair’s first mover advantages. Renwick argues that Wayfair does not outperform its rivals on factors – such as price, selection or convenience – that customers use to choose among competing suppliers.
Renwick says that Wayfair’s best sellers – of its daunting selection of 14 million products – are frequently available on Amazon at lower prices. Renwick concludes that Wayfair will become more unprofitable as those cheaper prices erode brand loyalty while the company makes “big capital outlays for fulfillment and to acquire customers,” according to TheStreet.com.
For its part, Wayfair sounds bullish about its prospects. As CFO Michael Fleisher explained in an August 1 investor conference call, Wayfair expects its third quarter consolidated revenue to rise to a range between $2.23 billion and $2.28 billion up between 30% and 33% compared to its $1.71 billion in Q3 2018 revenue while “consolidated adjusted EBITDA [margin] will range from negative 6% to negative 6.5%.”
Sure Shah could have made a better word choice yesterday – but that does not concern me nearly as much as its eroding competitive advantage and the spiking losses that it will need to incur if it wants to keep growing faster than 30%.