Will 2024 be the year for the turnaround you're hoping for? Some companies, like Carnival, made a huge comeback already last year. However, others are still feeling the impacts of inflation and waiting for strategic changes to show up in their sales and earnings.
Online furniture giant Wayfair (W +0.51%) is in that boat. Its business soared early in the pandemic, but it lost its momentum and has been reporting heavy declines over the past two years. In that process, shares are down 82% from their all-time high in 2021.
That's despite an 88% gain for the stock in 2023. Management has taken important steps to get back on track and become profitable again, and if it comes through with its performance in 2024, the stock could go even higher.
Getting back on track
Wayfair's sales skyrocketed early in the pandemic, leading to record profitability. But what you'll notice from the chart below is that prior to the pandemic, it had a scaling problem. The key to a viable business is turning sales into profits. That almost always comes with extra expenses, but for a company trending in the right direction, the emerging profits will outstrip the investments and expenses it takes to grow.
Data by YCharts.
Since it wasn't able to grow without bleeding cash, it isn't surprising that it couldn't keep up profitability when sales began to decline.
However, the good news for investors is that management has taken the situation seriously. Since there hasn't been easy money to funnel into making the platform bigger, it's been doing the hard work of becoming more efficient. As sales seem to be stabilizing, net losses have been improving too.
Will 2024 look different?
Wayfair has already turned a new leaf, ending a run of nine consecutive quarters of year-over-year sales declines. Management unveiled a cost restructuring plan in 2022, and last year, it added job cuts to the plan. These moves are starting to demonstrate results.
In the 2023 third quarter, sales increased 3.7%, and the good news is that sales are still ahead of pre-pandemic levels. It was the second quarter of positive free cash flow, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $100 million. More than 80% of its orders came from repeat customers, indicating that previous customers are coming back to the platform. If Wayfair can reach more consumers, it has the opportunity to win them over as repeat customers.
Pulling it off in a tough environment
Part of the problem is the market environment. It's a hard time to get started on a turnaround plan when your core customers are delaying big purchases for things like furniture and home goods. Although Wayfair operates through several websites and reaches different markets, its main target is mass market customers who are currently more careful with their spending due to the inflationary environment.
Interest rates are also impacting the real estate industry. Lower home sales mean reduced demand for Wayfair's offerings as there are fewer people furnishing new homes. But if inflation is indeed under control and interest rates start to come down, improvements across the real estate and consumer discretionary markets could play important roles in Wayfair's turnaround story.
A large market opportunity
In theory, Wayfair's platform business should be very profitable. Instead of buying goods and reselling them for a profit, it works as a dropship platform for suppliers. There are several key differences Wayfair has from other companies of this nature. One is its logistics business, which picks up items from suppliers and gets them to buyers quickly. Another is its heavy investments in its digital platform, which provides a seamless experience for shoppers and offers tools like digital renderings.
Management sees its total addressable market growing to $1 trillion by 2030 with low online penetration. E-commerce is expected to grow at a faster pace than total retail over the next few years, and Wayfair sits at the intersection of a high-opportunity industry and a robust e-commerce platform. It's well positioned to grow if it continues to manage its costs effectively.
NYSE: W
Key Data Points
Anyone watching the stock will want to see Wayfair report continued revenue growth over the next few quarters while keeping expenses in check. That could be the fuel needed to give Wayfair another incredible run in 2024. However, even though things are looking up right now, Wayfair remains a risky buy at this stage.
