Wayfair Inc. shares took an 11.3% nosedive in Thursday trading after the company reported deeper-than-expected losses and skyrocketing advertising costs.
While the online home furnishings retailer reported a sales increase to $1.71 billion in the third quarter from $1.20 billion last year, beating the $1.67 billion FactSet consensus, the company had an adjusted loss of $1.28. The FactSet guidance was for a loss of $1.09. Wayfair W, -13.30% reported a loss of 65 cents last year.
Moreover, the company reported advertising costs of $541.8 million for the nine months ending September 30.
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The advertising numbers caught the attention of Neil Saunders, managing director of GlobalData Retail, who points out that the company added 3.6 million new active members in the last year at a cost of $196 for each new customer.
“Obviously, we appreciate that this is a simplified calculation as it does not account for the impact advertising has on existing customers, but it underlines the point that Wayfair is buying both market and shopper share with extremely high marketing spend,” Saunders said in a note.
Revenue per active customer for the last 12 months was $443 as of Sept. 30.
Wayfair Chief Executive Niraj Shah talked up the investments that the company is making across the business in order to scale up and become profitable over the long term. That includes a focus on mattresses over the past two years, including its exclusive bed-in-a-box brand Nora.
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And the launch of the MyWay membership program that costs users $29.99 annually.
Shah also said the company has been experimenting with allowing suppliers to spend their advertising dollars to for more prominent placement on the Wayfair site. The program is now generally available after a pilot phase that ended in September.
“We are very much in the early stages of developing this area of our business with our data-driven culture and partnership with suppliers puts us in a strong position to scale this effectively over time,” he said, according to a FactSet transcript.
GlobalData acknowledges that some of Wayfair’s spending is tied to geographical expansion. However, Saunders said costs should be on the decline as it grows in the U.S., which accounts for the majority of its revenue, and switches to direct email marketing, which is a less expensive option.
“For all of these operational concerns, Wayfair deserves credit for replacing a retail proposition that is engaging and easy to use,” Saunders wrote. “[T]he general shopping experience is superior to other online propositions and this, combined with the extensive range of products, helps to make Wayfair a destination.”
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Still, he questions just how sustainable the business is.
“All online businesses find profitability challenging, but this is all the more so in a high-cost, low frequency category like home furnishings,” Saunders wrote.
Wayfair shares have gained nearly 32% over the past year while the S&P 500 index SPX, +0.68% is up 6% for the period.
