• by Sarah Mahoney  @mahoney_sarah, May 5, 2020

Housebound consumers shopped up a storm at Wayfair, and the company turned in a first-quarter sales report that topped Wall Street expectations. Revenues jumped 19.8% to $2.33 billion, compared to $1.94 billion in the same period last year.

But increased marketing spending continued to eat up profits, with the net loss for the period swelling to $285.9 million, up from $200.4 million in the same period a year ago.

The Boston-based ecommerce furniture company says the number of active customers climbed to 21.1 million, a 29% increase. U.S. sales improved 19.1%, while international transactions advanced 23.7% in the comparable period.

Wayfair, which also owns Joss & Main and Birch Lane, says the pandemic has helped it, as sheltering-at-home consumers looked to spruce up their surroundings.

“The broader market disruption has highlighted the many differentiated advantages we have built as the e-commerce leader in home  [goods] over the last two decades,” says Niraj Shah, Wayfair’s CEO, co-founder and co-chairman, in its announcement. “Millions of new shoppers have discovered Wayfair while they shelter in place at home, and we are seeing strong acceleration in new and repeat customer orders across almost all classes of goods and across all regions.”

But while the company claims it is making “significant strides toward profitability,” some are skeptical. Calling the results “a marked deterioration,” Neil Saunders, managing director of GlobalData Retail, blames Wayfair’s “unsustainable” marketing budgets.

“This quarter, Wayfair spent around $275 million on advertising -- a 13% increase over the same period last year. This represents $13 for every active customer. Given active customers spend around $112 each quarter, this means 11.6% of that value is immediately absorbed by advertising expense.”

He’s also concerned that the company’s growth rate has fallen below 20%, the rise in active customer numbers is leveling out, and average spending per order continues to fall. Acknowledging that most retailers would love to see such strong gains in its sales, revenue “needs to trend much higher if Wayfair is to eventually find a pathway to profitability,” Saunders says.

Others are more optimistic the brand can eventually ride its sales growth toward profitability. “The company has undoubtedly benefited from consumers turning to online retailers for home goods, with most bricks and mortar retailers closed,” writes Seth Basham, who follows the company for Wedbush Securities, calling it “perfectly positioned to capture this surging demand.” Basham believes the company's marketing costs will decline, perhaps as much as 20%, due to increased email marketing effectiveness and lower online ad rates.

Still, he rates the company as neutral. While he thinks consumers are going to initially be reticent to return to physical stores in the category, he says the key question is how many of those sales Wayfair retains, as stores reopen and Amazon continues to gain.