ecommerce

Wayfair's Ad Spend Part Of Its Woes



Wayfair is facing some blowback for its ambitious growth plans. After posting a quarterly loss considerably larger than expected, the company is getting beat up by the investment community, who are becoming increasingly skeptical Wayfair can find its way to profitability.

The company now concedes it needs to rein in marketing and advertising costs if it wants to make money.

Revenue soared 26% in the fourth quarter to $2.5 billion, including a 24% gain in the U.S. and a 37% jump internationally.

But amid that impressive growth, cost problems are more glaring, with losses more than doubling to $330.2 million, compared with a loss of $143.8 million in the year-ago period.

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Advertising spending in the period climbed to $310.9 million, up from $232.4 million in the fourth quarter of 2018.

In his announcement of the results, Niraj Shah, CEO, co-founder and co-chairman, says the company is “taking important steps to further optimize the business and drive greater efficiencies where needed to enhance our customer experience, strengthen our supplier partnerships, and further propel us down the path to profitability.”

Earlier this month, the company announced it was cutting 550 jobs to trim costs, signaling to some that the Boston-based e-tailer is getting more realistic about its growth ambitions.

“This recognition aligns with our view that the payoff from aggressive investments remains unclear and the path to profitability could be a long one,” writes Seth Basham, who follows the company for Wedbush Securities, which currently rates the company as neutral. “At the same time, we remain concerned that customer acquisition costs are rising faster than contribution margin per customer.”

He says that significantly changing the outlook on future profitability “will be difficult without cutting bait on some of its largest cash-draining investments, such as European expansion.”

Some see the problems as even more dire. Wayfair has “no clear path to profitability,” writes Neil Saunders, managing director of GlobalData Retail, in his comment on Wayfair’s earnings. He’s particularly troubled by its $1.5 billion in long-term debt and excessive ad spending, which amount to about $1.1 billion for the year.

In a webcast presentation for investors, the company says its ad spending will decrease over time, as the size of the repeat customer base grows as a percentage of its total. In 2014, when the company went public, ad spending was at 14.5%, declining to 11.4% in 2018 and rising again to 12% in 2019. Its long-term targets are between 6% and 8%.

Furniture is a tough category, with slim margins. And the shipping logistics for online orders is daunting. Pier 1 recently filed for bankruptcy, and Walmart recently laid off 200 of its 300-person staff at Hayneedle’s Omaha headquarters.

“No one denies the necessity of advertising and marketing to attract customers, especially for a category that is infrequently purchased,” Saunders writes. “Equally, no one would deny that online furnishings is a hard business with relatively thin margins. However, others have made it work. Sadly, Wayfair has not. And it does not appear that it will do so any time soon.”

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