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November 4, 2015

Idea Of The Week: Will Wayfair’s Online Furniture Business Take A Seat Or Take Off?

by Steven Carroll.

Analysts and investors aren’t sitting around when it comes to online home furnishings retailer Wayfair Inc. (W.N). The Boston-based company has been rapidly gaining traction as customers increase their Internet purchases. Let’s see what’s on the table.

Since Wayfair’s Oct. 2, 2014 IPO, shares have increased 25% to an Oct. 3, 2015 close of $45.14. With bullish signals from analysts and good momentum, investors may want to take notice when this $3.78 billion market cap retailer reports earnings on Nov. 11.

EXHIBIT 1: Analyst Revisions Model Components for Wayfair

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Source: Thomson Reuters Eikon StarMine

Positive sentiment

The StarMine Analyst Revisions Model (ARM) measures analyst sentiment and revision momentum. Wayfair has an ARM score of 100 out of 100, indicating that analysts are becoming more bullish on the company’s fundamentals.  Analysts expect Wayfair to report strong revenue growth — with reinvestment in growth.  As a result, analysts have increased revenue, EBITDA, and EPS estimates over the past three months.

Analysts expect a third quarter loss of $0.24 per share, however, this is an improvement over the prior year’s loss of $0.41 per share. The SmartEstimate, which puts more weight on the most recent estimates and the most accurate analysts, is now at a loss of $0.23 cents a share, which translates to a Predicted Surprise of 2.5%.

Historically, when the Predicted Surprise is greater than 2%, the company beats estimates 70% of the time. History also shows that being able to predict correctly the direction of future earnings revisions and earnings surprises gives investors a good chance of predicting the direction of a company’s stock price.

EXHIBIT 2:  Wayfair’s quarterly revenue history
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Source: Thomson Reuters Eikon StarMine

Top line acceleration

Last quarter, Wayfair reported that direct retail represented 90% of its $491.8 million revenue, which means sales are flowing through the e-commerce channels. Active customers grew 53.5% from the prior year to four million and repeat customers represented 56.6%. Analysts expect these trends to continue and for Wayfair to report revenue of $521.6 million, a 55% increase from the prior year’s $336.2 million. This would be the sixth sequential quarterly increase.

EXHIBIT 3: StarMine Price Momentum Model Components for Wayfair
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Source: Thomson Reuters Eikon StarMine

Solid price trend

Wayfair scores a 99 out of a possible 100 on Thomson Reuters StarMine’s Price Momentum (Price Mo) model, which indicates the stock may continue on its upward trajectory. Wayfair closed at $45.14 on Nov. 3 and has seen its trailing six-month average close of $36.97 increase 18.4% over its 12 month average close of $31.23. This leads to a long-term component score of 88.

Investors seem to be behind the idea that Wayfair will continue to increase brand recognition along with active and repeat customers and that this momentum will result in lower costs. When the company reports, it will be important to see how it reinvests to improve its customer experience and provide infrastructure to keep up with revenue acceleration particularly going into the holiday season.

 

 

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