Wayfair Copied Amazon to Grow Fast. Now, It Searches for Profits

By Sarah Nassauer and Charity L. Scott 

For nearly two decades online homegoods seller Wayfair Inc. has grown quickly by burning through profits.

Now the e-commerce company is trying to show investors it can moderate its losses as revenue growth slows and investor appetite for unprofitable companies dries up.

"Ultimately every company needs to be self-financing," co-founder and Chief Executive Niraj Shah wrote in an email to staff earlier this month, explaining his decision to cut about 550 jobs after hiring thousands of people in recent years.

On Friday Wayfair said it lost $330 million in the quarter ended Dec. 31, more than twice as much as it lost a year earlier. Quarterly sales rose 26% from a year ago, but operating expenses jumped 44%. The company's annual net loss nearly doubled to $985 million.

Wayfair isn't like traditional furniture chains such as West Elm or Ikea, which stock stores and warehouses with curated inventory. It sells sofas and tables much like Amazon sells books and toys. It has filled its website with millions of listings and promises free shipping on much of it.

It spends heavily on marketing to attract web shoppers. It keeps minimal inventory and often ships directly from suppliers. That has quickly created a company with more than $9 billion in annual sales but also with losses every year since it went public in 2014.

It was a formula that investors mostly embraced until recently. The Boston company's stock tumbled in October after it reported a steep quarterly loss, and the shares have lost more than 50% of their value over the past 12 months. The stock fell another 15% in premarket trading Friday, amid a broader market selloff.

After years of pushing growth, top executives began to prioritize profitability in presentations to managers late last year, according to former employees. In one December meeting, Mr. Shah showed how hiring was growing faster than revenue, said one of these people. In past group meetings Mr. Shah primarily spoke about "compounding growth," said this person. A spokeswoman declined to comment on the meetings.

"Since we founded the company in 2002 we have always had periods where we invested very heavily in the business and periods where we have worked to drive greater efficiency," Mr. Shah wrote in his memo earlier this month. "On reflection this last period of investment went on too long."

Both startups and public companies have found investors cooling on companies that don't generate profits since office-rental giant WeWork's IPO plans unraveled last year. Mattress seller Casper Sleep Inc. recently had to slash its valuation to go public and its shares are now trading below the IPO price.

Wayfair's strategy to gain dominance in the online furnishings category has been to deliver large, bulky items better than their competitors through supply chain investments, said Brian Nagel, an analyst at Oppenheimer & Co.

The retailer is following a similar playbook to Amazon.com Inc. and has taken advantage of cheap capital to "lose money and build a competitive moat around the business that will help support the business long term," Mr. Nagel said.

But it is difficult for traditional and online furniture chains to generate profits amid stiff pricing competition and the high costs of shipping bulky furniture. Homegoods chain Pier 1 Imports Inc., which was slow to embrace online sales, filed for bankruptcy protection earlier this month. In January, Walmart Inc. laid off most of the headquarters staff at Hayneedle, an online furniture seller it acquired in 2016, as it works to make its U.S. ecommerce business more profitable.

Some analysts remain unconvinced that Wayfair can wean itself from spending. "Revenue growth seems more intertwined with ad spend, promotions and ongoing investments than the market appreciates," Morgan Stanley analyst Simeon Gutman said in a note this week, downgrading the company to the equivalent of a sell rating.

Tariffs aren't solely to blame for Wayfair's slowing sales, said Mr. Gutman, but also cluttered assortment and weak sales in categories such as plumbing and flooring. "The market is less tolerant of unprofitable online retailers."

Despite the desire of some investors to see Wayfair focus on profits, the company's leadership can't afford to become complacent about competition, with both Amazon and Walmart poised to become more aggressive in the home category, said Colin Sebastian, an analyst at Robert W. Baird & Co.

"There's just a window of opportunity for them," he said. "So why would they try to harvest profits when there's a lot more at stake over the very long term?"

Write to Sarah Nassauer at [e-mail] and Charity L. Scott at [e-mail]

(END) Dow Jones Newswires

February 28, 2020 08:02 ET (13:02 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.