How Wayfair Is Wowing Investors With Market Share Gains and Growth

You know you've had a good first quarter as a retailer when sales growth doesn't decelerate from the seasonally strong holiday period. Home furnishings specialist Wayfair (NYSE: W) just achieved that impressive result.

In new figures posted earlier this month, the e-commerce company showed that it's still in a leading position in its industry despite rising competition from discount rivals.

Faster growth

Sales improved by 48%, which matched the expansion pace from Wayfair's massive holiday quarter. Management, meanwhile, had predicted a slowdown to between 40% and 43% since the prior-year period included spiking sales gains that would be harder to eclipse as the quarter progressed. The gains outpaced e-commerce titan Amazon, whose first-quarter product sales rose 33%.

Wayfair's growth was bolstered by signs of an increasingly active and loyal user base. Orders per customer rose to 1.79 from 1.73 a year ago, and repeat customers accounted for 64% of orders compared to 60% in the prior-year period. Its active base of shoppers expanded to 11.8 million from 8.85 million in the prior year, and roughly 11 million at the end of fiscal 2017. "We are delighted with this momentum," CEO Niraj Shah said in a press release, "and the market share gains this growth represents."

Losses continue

As usual, Wayfair didn't come close to profitability in the quarter, as management prioritized investments in the international business and in capturing market share at home. There are signs that these initiatives are gaining traction, though. The international segment nearly doubled its sales base, and adjusted losses were $42 million, or 20% of revenue, compared to $25 million, or 24% of sales, last year.

The U.S. division landed right within management's target at just below breakeven. That was an impressive result considering rivals like Overstock recently ramped up their price cuts in a move that threatened to hurt Wayfair's profitability. Yet investors didn't see an impact from that competitive threat this quarter, either in sales growth or in profitability. In fact, advertising expenses dipped slightly, which suggests the company isn't struggling to hold on to its customer base.

The long-term outlook

Management's long-term outlook predicts adjusted profit margin of between 8% and 10% once the global business achieves scale, and this quarter's 4% loss represents a small step away from that aggressive goal. Adjusted losses were 1.4% in 2017, after all, and 2.6% in the prior year.

However, investors can see how Wayfair might start moving toward its financial targets in the coming years. Market-beating sales growth, combined with a rising proportion of repeat customers, should reduce expenses and lift profit margins. Its international expansion program is delivering market share gains, too, and the costs associated with establishing a delivery and supply chain across much of Europe will eventually come down.

Executives say the competitive landscape in this area consists of a fragmented base of retailers that lack broad sales bases. There's no dominant online player, either. That description roughly matches the organization of the U.S. market when Wayfair started attacking the home furnishings industry a few years ago. Now it's up to the company to apply that model to outside markets while lifting its domestic segment into consistent profitability.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Wayfair. The Motley Fool has a disclosure policy.