How Wayfair Made a Comeback

In this edition of MarketFoolery, Mac Greer chats with Motley Fool analyst Jason Moser about the latest news from the markets. They discuss the earnings results of a home furniture and home decor e-commerce retailer, an online education company, and a restaurant chain. Learn how online education is evolving, what's taking a toll on restaurants, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 5, 2020.

Mac Greer: It's Tuesday, May 5^th. Welcome to MarketFoolery. I'm Mac Greer, and joining me from his home in Northern Virginia is Jason Moser. Jason, happy Cinco de Mayo.

Jason Moser: Happy Cinco de Mayo indeed. I think, man, I might make some enchiladas tonight; I'm not sure. What are you guys going to do?

Greer: You know, I think that's the move. And I was also thinking about maybe picking up some margarita mix from one of our local establishments. That way, you support the struggling local restaurant, and you know, you get a good margarita out of it, so win-win.

Moser: Yeah, I love that, that's a good idea.

Greer: Well, a little later we're going to talk some Shake Shack (SHAK -0.45%), and we will also talk about Chegg (CHGG -1.94%), which is in the business of education. And online and educational technology business is good for Chegg, not so much for Shake Shack; and we'll get to that.

But let's kick things off with Wayfair (W 1.62%), the home furniture and home decor e-commerce retailer. Shares of Wayfair are up 20% on better than expected revenues. Now, Jason, they are doing a big business in office furniture, perhaps not surprisingly, and cookware. Now, they reported 21.1 million active customers, that's up 29% from a year ago. So, that all sounds good. And so, it's a bit surprising, Jason, for I think a lot of people when they discovered that Wayfair is actually losing money. So, unpack all of that for us.

Moser: Yeah, I mean, well, [laughs] Wayfair losing money is not really anything new, that's what they've been doing pretty much ever since they've been in existence, but it's all for a longer-term goal. A time like this is shining a light on the advantages of the market that Wayfair is pursuing. They aren't closed for business, a lot of their competitors are and they will be for a while, and when they reopen, their competitors are going to be very limited to the traffic they can take in and they're going to be limited by the willingness of consumers to constantly go out and shop for furniture and household items in crowded spaces.

So, we're definitely seeing a lot of the tailwinds that are coming into play for a business like Wayfair. But to go to those numbers that you were talking about at the beginning there. Across the board, again, the metrics that matter continue to all head in the right direction. So, total revenue of $2.3 billion, up 19.8% from a year ago. Gross margin actually ticked up 70 basis points from a year ago, and that's important, because those shipping and fulfillment costs are included there in that gross margin, and that's one of the bigger challenges for a business like this. Active customers; 21.1 million versus 16.4 million from a year ago. Orders delivered; 9.9 million, up 21% from a year ago.

But the key metric here, and the one we talk about every time we talk about Wayfair, is earnings. Repeat customers placed 69.8% of total orders in the first quarter, and that compares to 66% from the first quarter of 2019. Now, the reason why that matters, it costs a lot of money to acquire those customers, OK? Once they get those customers in, they want to keep selling those customers more stuff. And so, the more they can get those repeat customers, the less they have to pay for those acquisition costs. And down the road, that ultimately results in profitability for the business. They're not there yet, but they're certainly getting closer.

Greer: Okay. So, I want to talk about another metric, and that is the stock. The stock chart for Wayfair is just amazing. I would encourage everyone, and I don't think I've ever done this on the show, but I would encourage everyone to look at the year-to-date Wayfair stock chart.

So, at the beginning of the year, in January, Jason, shares trading around $93, by mid-March shares down to $23, which was around a five-year low. $93 to $23. Now, seven weeks later, shares are at $160. How is that happening? What is going on with the stock that goes from $23 to $160 in around seven weeks?

Moser: [laughs] Yeah. You're exactly right. I mean, it's been a phenomenal ride in a very short period of time. And I think there are a lot of factors at play here. Primarily, so I think when you look at Wayfair, we think about before even the coronavirus concerns. We go back even pre-COVID-19, Wayfair, along with a lot of other companies, they were dealing with, you may remember those China trade issues that we were batting around in the headlines, seemingly, every day. And that was something that was along for, seemingly, I think around 18 months or something. So, they were dealing with that China trade problem.

And that matters because a lot of the Wayfair supply chain really does come out of China. So, that was a headwind. And then, in the beginning of the year, obviously, the coronavirus concerns developed and we entered this bear market. And that killed everything, Wayfair notwithstanding, and that was really where you saw Wayfair just get shellacked.

Now, we're seeing, not only with the results that the company is turning in, but the general market's turn, it's clear that, actually, Wayfair's market opportunity is accelerating, and that kind of goes back to what I was talking about before. With all of their competition, a lot of their competition, they're closed for business, right? And even furthermore, when they reopen, they're going to face myriad challenges just to get business back to the way it was.

And so, I think along the way here, Wayfair did some pretty good things. They raised some capital, they were able to pull in some money from some investors to strengthen their balance sheet through a private placement. They did have to let-go of some employees; I think, somewhere in the neighborhood of 600 people or so. Now, that's obviously, not good for people losing their jobs, but ultimately for a business that was arguably bloated, it rightsized the business.

And then, finally, going to the results today, there were some key points that management made in the call that I think are really leading to some of the enthusiasm. The one thing that stood out to me, they said -- I'll read this quote to you -- they said "Starting in mid-March, we saw a pick-up in, both, traffic and conversion with increasingly strong repeat behavior coupled with an acceleration in new customer orders."

And so, that's like, the opposite of everything we've been hearing to this point. We're hearing about how businesses were doing fine in January and February, and then March, business fell off a cliff. Wayfair is basically witnessing the opposite, and further, they're seeing that acceleration going into this quarter here. So, now we've got a business that's inching its way closer to profitability and that profitability is based on some pretty conservative top-line assumptions. So, couple all that together and it's easy now to see the market's enthusiasm for this business, because the investments that they've been making, much like Amazon did in its early days, it's becoming a little bit more obvious why they made them.

Greer: And, Jason, that mid-March timeframe, that makes sense to me though, because that's when I sprung for the office-type chair for at-home, because that's when I realized, you know what, I need essentially a home-office. I'm going to be working from home, and that's when it really, kind of, sunk through. And when you look in that Wayfair stock chart, it looks like in mid-March that's when a lot of people are like, "Uh-oh! I'm going to be working from home, I got to get it together."

Moser: Yeah, well, I think you're right. And I think that like a lot of things, even when we get back to normal, there's going to be a bit of a new normal. I think people are probably realizing they can get a lot done from home, and maybe don't necessarily have to go to the office. I have to believe there are some tailwinds forming there. But, yeah, I think it's just been a fascinating story to watch play out.

I do understand why the market is receiving this report so positively today, even though the business still isn't profitable. I mean, to their credit, they did note that this progress puts them on the trajectory to positive adjusted EBITDA margin in Q2. Now, I mean, adjusted; yeah, we always talk about that. I have always made the argument that we just live in an adjusted world now.

Clearly, the market is OK with adjusted EBITDA in regard to a lot of businesses. But I mean, Wayfair is just developing a long track record of success. And, again, we go back to those metrics that matter. All of those metrics that matter: the top-line, the margins, the repeat customers, they're all going in the right direction, and that is really what matters. So, if you can take that long-term view, like we do, I think the case for Wayfair is becoming abundantly clear, and they've got a lot of opportunity ahead.

Greer: Okay, Jason, well, speaking of the new normal and speaking of success shares of the education technology company Chegg, up 30% on better than expected earnings and strong growth. Now, Chegg rents digital and physical textbooks, offers online tutoring and offers other student services. So, Jason, feels like a really good time to be in that business.

Moser: Yeah, again, I think with your online businesses, like, Wayfair or your e-commerce businesses, Chegg is, I think, taking advantage of what will, kind of, become a new normal in a lot of cases. I mean, this is a business that, in all likelihood, should continue to exploit a pretty compelling value proposition in the coming years as we see higher education continue to evolve.

And ultimately, they call what they have a direct-to-student learning platform. And so, for a long time, they were in the business of basically renting textbooks to students. And if you look at the graphs, if you look at the economic data throughout time, it's actually pretty amazing to see how expensive textbooks are. But, you know, we went to college, you remember that, I'm sure. College textbooks [laughs] cost a lot of money. And so, for a while they were renting the books. And then they got into digital books as Kindles came online. And then ultimately, they grew this business into a student services business, and now, they make most of their money via subscriptions. Students who subscribe to their services, like, Chegg Study, Chegg Writing, Math Solver, Tutors. That service's income is the majority of the business. They grew the subscriptions to 2.9 million students for the quarter, up 35%. Revenue grew at the same rate. COVID-19 has certainly been a challenge for everyone, but I think it's serving as a tailwind for this company as education continues to move beyond the physical location.

And I think, CEO, Dan Rosensweig, said something important on the call; it was a great quote, I love it. He said, "Crisis often accelerates the inevitable." And that is what we're seeing happening now in higher education. And I think he said right, I mean, crisis typically does accelerate the inevitable. We're seeing that play out in a few different markets and education is definitely one of them. But renewals are up, cancellations are down, they continue to grow, there's a big market opportunity of students out there beyond even the domestic market here.

And I think we can all agree that higher education is a market that is ready for disruption to bring those costs down for students and bring better results, and that's really what Chegg is all about. So, I've been following this company for a long time, not surprised to see them doing really well. And again, it's I think a five- or six-bagger here over the last five years or so. So, investors who've held on, they're feeling pretty good about it.

Greer: Yeah, so let's talk more about that, because the stock is up more than 5X in value over the past five years. Shares up more than 40% this year. So, when you think about that quote about a crisis accelerating the inevitable, are we still in the early stages of, kind of, this accelerated adoption of Chegg technology? And if so, is there still plenty of room to run for the stock?

Moser: Yeah, I do. I think we're still in the early days and I think, when you look at the overall opportunity, you know, they'll quote somewhere in the neighborhood of 56 million students in the markets that they serve, and that's the United States, that's Canada, England, Australia. So, some of the major markets out there. And around 3 million subscribers today. I mean, you can see there is that opportunity to continue to grow. They have a great brand awareness among students.

And they are doing a very good job of getting into students' lives before higher education even really becomes the lifestyle. Like, if you're a junior or a senior in high school and you're trying to make sense of exactly how you apply to college, how to do it the right way, scholarships and grants that are available, I mean, Chegg has all of that as well. So, they're doing a good job of establishing the relationship with students earlier when they're juniors and seniors, so that when they get to college, students are already very much aware of Chegg and the services they have to offer.

And again, we go back to this whole idea, that higher education certainly is ready to be disrupted in a lot of different ways, because the costs are astronomical, and it's not necessarily clear that the benefits actually outweigh those costs in a lot of cases. And so, if Chegg can make it more efficient and ultimately produce better outcomes, I mean, that's a great thing. And they continue just a message -- you know, the company's purpose is, it's a student-driven company, they're there for students, so I mean, you got to like that message.

Greer: Well, speaking of being there for students, let's talk Shake Shack. I love me some Shake Shack and it is hard times for Shake Shack right now, Jason. Shares down around 4% on earnings. Same-store sales falling. They call it same-shack sales; I just can't go there, I'm sorry, I'm going to call them same-store sales falling around 12.8%. Higher beef prices taking their toll.

Now, Jason, around 78 of Shake Shack's 287 restaurants are temporarily closed entirely. So, 78 out of 87. And New York is Shake Shack's biggest market; so, this is tough times for Shake Shack.

Moser: Yeah, it is. It's kind of like Tiffany in that regard, very levered to New York; and so, when New York has problems, Shake Shack has problems. And I think this is another point in time where we're seeing that play out.

And to your point about same-shack sales and all that. I mean, this is one of those companies where you need, actually, a multipage appendix to actually parse through what they're referring to in the earnings release. I feel, you know, it's exhausting just to even read through their little clever puns and whatnot. So, piece of advice to management, why don't you just clean that up a little bit? Just talk normal.

But yeah, tell me if you've heard this one before. Restaurant reports mixed quarter, sales fall off a cliff in March, company withdraws guidance for the rest of the year. That's exactly what is happening with Shake Shack. It is a very difficult time for a lot of these restaurants.

But they turned in, I think, a respectable quarter given that. I mean, total revenue was up 8%, comps for company-operated domestic stores fell almost 13%; that's that same-shack sales number. And to your point there --

Greer: ... but I would think that would even be worse though. I mean, to your point, that surprised me in this climate. I'm like, "You know what, that feels like that could be a lot worse."

Moser: It could be a lot worse and I think it's a testament to how strong and how important the months of January and February were, because if you look at some of these numbers going into March and entering this coronavirus crisis, I mean, sales in the comp base averaged down 73% across the portfolio later in the month, compared to the same period last year. In the most recent fiscal week, the week ended April 29^th, those same-shack sales were down 45%, compared to the same period last week. And so, you definitely are seeing a lot of headwinds that this company -- it feels like they're just, kind of, entering this period of really strong headwinds and it's not entirely clear how quickly they'll be able to get out of it.

Now, they continue to invest in things like delivery, they're no longer just exclusively Grubhub, which I think that makes a lot of sense, I mean, you got to really open that channel up to as many delivery options that are out there. It's a bit of a double-edged sword, because I mean, obviously, they're lower-margin sales, but you're ultimately keeping traffic moving and selling products, and in these times that's a net win.

They did tap the markets for some additional capital, they are in cash conservation mode, which means they're going to be limiting the number of stores that they're opening and they had some stores that are getting ready to open, they've put all that on pause.

I must say, I like Shake Shack, I think it's perfectly fine food, but that's just it, it's fine, it's a burgers place, it's just one of many.

Greer: It's kind of a tepid endorsement, perfectly fine. So, I mean, that's something I would expect you to say about Wendy's.

Moser: Well, I think that, you know, Shake Shack is probably on par with Wendy's to be quite honest with you. It's a decent burger, I don't think it's anything -- and that to me is just, I don't think they're doing for the burger, like, what Chipotle did for the burrito. I think those are two very -- I don't think they're doing for the burger what Chipotle did for the burrito. And so therefore, I have to wonder why would the market continue to give a restaurant like this such an astronomical multiple.

A part of that is because they think there's a lot of growth opportunity there, plenty of brand awareness, it's a strong brand. And, again, it's a good product, I think it's perfectly fine. I just don't think it's earth shattering. And when you look at the struggles that the business is going through now, it makes sense that the stock has been cut in half since the middle of last year.

I don't know what necessarily sends this back in the right direction anytime soon, because of one of the bigger headwinds that they are going to be running into here, and a lot of other restaurants, is not only the price of beef, but just the accessibility of beef. I mean, we are running into, I think, potentially a beef shortage here. And I saw an interesting note earlier from an analyst who had been out there looking at this market and was focused on Wendy's in particular. And after going through online menus, I think, came to the conclusion that one-fifth of Wendy's restaurants out there actually are out of beef completely. And so, for a burger place, you know, I mean, Shake Shack sells more than burgers, but that's a good one-third of its basket.

Greer: I'm not going to make the where's the beef joke.

Moser: [laughs] I was waiting for that.

Greer: Oh, you're just teeing me up, but you know --

Moser: ... you made it by acknowledging that you weren't going to make it.

Greer: I'm trying to be better than that, but I can hear the quote, I can hear her saying it right now, it's killing me. Did you do that intentionally?

Moser: I'm hearing it too. No, you know, I didn't do it intentionally, but I am hearing it too. I heard it play in my mind when I was reading through the call.

Greer: [laughs] Okay. So, as we wrap up there, though, I've got to ask you, burgers aside, I'm going to give you a choice, you've got a Shake Shack shake or you have a Wendy's frosty, what are you going with?

Moser: Man, that's a pretty good one.

Greer: You are debating.

Moser: Yeah. I mean, you know, I grew up on Wendy's frosty, but I'm not going to dismiss the delight from consuming a Shake Shack shake; and I have had one. I mean, I think if you're giving me the choice, I'm going Shake Shack shake. 10 times out of 10. I love a frosty, don't get me wrong, but --

Greer: ... yeah, it's a subjective question but there is a right answer, and Shake Shack is the correct answer. I love me some Wendy's --

Moser: Yeah, I think there's a good market for Shake Shack. You said, 287 stores, 167 of them are company-owned, 120 of them are licensed. I mean, they'll kind of continue to go through that. And a bit of a bad look there in the middle of the quarter, as they took money from that Payroll Protection Program, but they did return that money. And they did demonstrate that they could raise some capital. So, it's nice to hear that they're in cash conservation mode and they'll do fine. I mean, I just don't know that I'd put this at the top of the list of compelling investments.

Greer: Okay. Time for the desert island question. You're on a desert island and over the next five years you have to buy one of these stocks and you have to hold it, what are you going with? Wayfair, Chegg or Shake Shack?

Moser: Wayfair, easily. Wayfair is the one that I do own out of all of them, but I think that Wayfair is the biggest market opportunity, it's the market opportunity that is growing most quickly. Yeah, Wayfair.

Greer: Okay. And let me ask you a question on the furniture issue. I have this nice little chair that I assembled and I bought it on Amazon not on Wayfair, OK. But the wheels are really cheap, right? And I've got the hardwood floor under it. The floor is not scratched noticeably, but do I need to get the plastic mat to make the sliding easier? Is that where I am now or do I just say, you know what, I'm just going to roll or in this case, not roll with it, what's my move here?

Moser: So, probably, the first thing I would look at is, what is your wife's reaction to all of this? Because if your wife is really hammering you about little scratches on the floor, then the answer is very clear.

Greer: She asked me if the floor was scratched and I will say from my vantage point, it doesn't look to be that scratched, but I'm not sure I have that keen of an eye.

Moser: No, you probably don't; [laughs] regardless, perception is reality, but your wife's perception is really reality. So, I think that I would rather avoid that argument and I would make the investment in the plastic protection mat to go on the floor, just to avoid having that argument down the road. Because at some point or another, there's going to be discussion of having those floors refinished. And, Mac, you know, I'll gladly come over there and help you do that.

Greer: I may need your help, because I never felt like I was going to be the guy that was going to get a plastic protection mat under my desk chair at home; I don't know why, it just feels like -- and now I will say, they appear to have them at Costco, so that excites me. I'm not sure they carry them at Teladoc, but you know, Costco.

Moser: [laughs] That's a new line of business for sure.

Greer: [laughs] Okay. I think you're a wise man. I think I'm going to give myself a plastic mat. So, there you go. Jason Moser, thanks as always for joining me.

Moser: Yes, Sir, thank you.

Greer: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer, thanks for listening and we will see you tomorrow.