Furniture retailer Wayfair (W 0.79%) stock gained 19% in May according to data provided by S&P Global Market Intelligence. Wall Street celebrated progress in its turnaround despite a harsh operating climate for the home improvement industry.
Wayfair is trying to stage a comeback
Wayfair was a pandemic darling whose star plunged when people stopped focusing on home improvement. Wayfair's sales declined for nine straight quarters before finally breaking that trend in the 2023 third quarter.
But the way the business nearly collapsed revealed ongoing internal issues in Wayfair's operations. Notably, as it scaled, its expenses continued to increase -- it was working too hard to generate growth. It became a large, clunky organization despite its asset-light model that lends itself to wide margins and profitability. It works with a dropship model and doesn't hold inventory on its books, and it invests heavily in its platform through technology and marketing. Instead of profitability through scale, Wayfair became bogged down in bureaucracy, and things fell apart when it no longer had the money coming in to fund its grand ambitions.
Since then, though, management has made the commitment to get its act together and has taken deliberate steps to cut costs and become a leaner operation. It slashed employee count and identified actions throughout the organization to improve cost efficiencies.
Wall Street cheered Wayfair's first-quarter earnings results. Adjusted loss per share of $0.32 came in a penny below Wall Street expectations, and revenue was down 1.6% year over year but exceeded analyst expectations. Active customers increased 2.8%. This is a solid performance considering the overall pressured home improvement industry.
Wayfair gave investors another important update in May, and that is the opening if its first superstore in the Chicago area. It's meant to be an immersive experience, with a full line of home furnishings and appliances and design experts on hand, plus an on-site restaurant. This is a departure from its asset-light, online-only model, but a small one, at least for now.
Should you take a chance on the recovery?
Wayfair stock is still down about 80% from its 2021 highs. Its first-quarter earnings had some positive moments but were overall a mixed bag, and Wayfair is operating in a hostile environment right now. In one sense the report does illustrate resilience, but at the same time, it may not be the ideal circumstances for investors to decide it's turned a corner.
Buying Wayfair stock right now is risky, and most investors should wait for more steady progress before jumping in.
