Why Wayfair Inc. Fell on Tuesday

By Anders BylundFool.com

Source: Wayfair.

What: Shares of Wayfair fell as much as 14.2% on Tuesday morning. The online retailer of home furnishings and decor reported third-quarter results in the early morning hours, surpassing management's guidance targets for the quarter.

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So what: In the third quarter, Wayfair saw direct retail revenue rising 91% year over year, landing at $545 million. The high end of management's guidance range for this key metric stopped at $475 million. Adjusted EBITDA margins were expected to come in at negative 3%, but the final margin was just negative 0.2%. These results yielded a GAAP net loss of $0.18 per diluted share, up from a $0.71 loss per share in the year-ago quarter.

If these results don't sound terrible at all, you'd be right. Wayfair shares rose as much as 3% on the news. The plunge started later, when management issued fourth-quarter guidance as part of the earnings call.

Now what: To set the stage for his fourth-quarter guidance, Wayfair CFO Michael Fleischer noted that the coming quarter's results must measure up to an "extremely strong" 2014 holiday season, and that he wanted to provide a "thoughtful" forecast.

That being said, direct retail sales are seen rising approximately 70% year over year to roughly $593 million, yielding something like $645 million in total top-line revenues. While the sales trend from the third quarter still continues to nearly double the year-ago period's results, Fleischer warned that the holiday quarter always is back-loaded and that full quarterly trends therefore are difficult to predict.

EBITDA margins will stay negative at roughly -1%, as the company is "catching up on operating expenses" and scaling up for continued sales growth.

Fleischer's fourth-quarter sales guidance sits at the very top end of current analyst estimates for the period. However, the projected sales growth in that period is also seen slowing down significantly from this quarter's rapid increase. That's always a hard pill for growth investors to swallow, but doubly so when it's a retailer looking at the all-important holiday quarter.

Including Tuesday's steep dip, Wayfair shares are still trading 45% higher year over year. The stock has more than doubled in 2015.

The article Why Wayfair Inc. Fell on Tuesday originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool 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.

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