Why Wayfair Stock Crashed on Tuesday

By Markets Fool.com

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Image source: Wayfair.

What: Shares of online furniture retailer Wayfair (NYSE: W) tumbled on Tuesday following the release of the company's second-quarter report. Results were mixed relative to analyst expectations, with rapidly growing costs leading the company to post a wider loss compared to the same period last year. At 12:15 p.m. ET, the stock was down about 18%.

So what: Wayfair reported second-quarter revenue of $786.9 million, up 60% year over year and about $4.5 million higher than the average analyst estimate. Direct retail revenue, which accounts for nearly all of the company's total revenue, grew 71.6% to $755.7 million. Total active customers increased by 65% year over year to 6.7 million, while net revenue per active customer rose 13.2% to $404.

While revenue grew quickly for Wayfair, so did costs. The company reported a non-GAAP EPS loss of $0.43, compared to a loss of $0.15 during the prior-year period and $0.02 worse than analysts were expecting. Adjusted EBITDA widened to a loss of $24.9 million, down from a $5 million loss during the second quarter of 2015. On a GAAP basis, the company lost $48.3 million, or $0.57 per share, down from a loss of $19.3 million, or $0.23 per share, during the prior-year period.

Total operating costs grew by 69% year over year, outpacing revenue growth and driving Wayfair's increased losses.

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W data by YCharts.

Now what: The slump in Wayfair's stock price on Tuesday puts the stock right back where it was prior to a pre-earnings run. While Wayfair continues to grow revenue at a brisk pace, profitability is getting worse, no doubt raising questions about the company's strategy of heavy spending. Wayfair will eventually need to prove to investors that scale will lead to improved profitability metrics -- something that did not happen during the second quarter.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wayfair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.