Wayfair Inc. shares were tumbling in Thursday trading after the online furniture retailer said it expected to reach its profitability goals earlier than previously estimated but also disclosed heavy advertising spending for the latest quarter.
Wayfair W, -26.94% has embarked on a series of cost cuts involving layoffs and other areas, but Jefferies analyst Jonathan Matuszewski flagged that advertising spending as a percentage of sales was at its highest level in the latest quarter since early 2016.
“Wayfair is controlling what it can in terms of headcount, but this category continues to be deprioritized by consumers and therefore increased paid ad spend is necessary to spur demand,” he said.
The company disclosed that advertising spending was 13.1% of net revenue in the fourth quarter.
Chief Executive Niraj Shah said that from a marketing perspective, Wayfair sees consumers swimming in “negative headlines” about factors like interest rates and the housing market.
“Well, what then happens is, if you tell them, hey, there’s the sale event, it’s got great value, turns out the top three quintiles of customers actually have an incredible amount of savings,” he said on Wayfair’s earnings call, according to a transcript provided by Sentieo/AlphaSense. “They still have significant excess savings from pre-COVID. That message caused them to be curious.”
Wayfair shares were off 29% in Thursday afternoon action and on track for their largest single-day percentage decline on record.
“From stock’s sharp sell-off, we believe investors see the [quarter-to-date] trend and elevated ad spend as obstacles to overcome,” Matuszewski wrote.
Wayfair Chief Financial Officer Kate Gulliver said on the earnings call that gross revenue for the first quarter has been trending down roughly 10% from the same period a year before. “However, we are seeing a return to traditional seasonality in the core business, and we expect net revenue to end the quarter down in the high single digits,” she added.
For the fourth quarter, Wayfair’s revenue fell 4.6% to $ 3.10 billion, while analysts were modeling $ 3.07 billion.
The company logged a fourth-quarter net loss of $ 351 million, or $ 3.26 a share, compared with a loss of $ 202 million, or $ 1.92 a share, in the same quarter a year ago.
On an adjusted basis, Wayfair lost $ 1.71 a share, while the FactSet consensus was for $ 1.62 a share.
Gulliver said on the earnings call that the company’s cost-cutting actions have management feeling more upbeat about the pathway to profitability on the basis of adjusted earnings before interest, taxes, depreciation and amortization (Ebitda).
“As we started to map out this journey last August, we said that we’d be profitable by [the fourth quarter] of 2023 at the latest,” she said. “With the actions we’ve taken this time January, we feel confident we’ll reach this goal earlier than originally planned. And while we believe we have taken the necessary steps to deliver on this commitment, we are prepared to take additional actions depending on the state of the macro environment.”
Despite Thursday’s steep selloff, Wayfair shares are up more than 8% on the year, as the S&P 500 SPX, +0.33% has increased 4%.