Last week, Internet retailer Wayfair (W) filed paperwork with the Securities and Exchange Commission to conduct an initial public offering. If successful, the IPO valued at $350 million IPO will be one of the largest ever in Massachusetts.
In a whacky retail environment, is this really the time to bring an Internet retailer public?
Founded in 2002, Wayfair was initially a collection of 240 niche websites, including bedroomfurniture.com and allbarstools.com. The company changed its name to CSN Stores in 2011. Eventually, the company consolidated all its websites into five brands: Wayfair.com, Joss & Main, All+Modern, Dwell Studio and Birch Lane.
The new strategy paid off. The company has had explosive growth ever since. In fact, in the six months ending June 30, the company increased revenue 50% to $574.1 million. For all of 2013, Wayfair generated $915.8 million in revenue. The company had 2.1 million active customers in 2013, up 61.5% from 1.3 million in 2012.
Like all Internet companies, it can't be bothered with profits. In the last six months, Wayfair lost $51.4 million. The losses came mostly from increased spending on advertising.
The home goods market is huge. According to Euromonitor, Wayfair's addressable market is $233 billion. Women represented 70% of Wayfair's customers. Wayfair's target market is a woman between the ages of 35 and 65 who have a household income between $60,000 and $175,000 annually. According to the U.S. Census Bureau, in 2013 there were 158 million women in the United States, of which 63 million are between the ages of 35 and 65 years old.
Like Zulily (ZU), the company keeps minimal inventory. Wayfair mostly acts as a curator of other products. The company selects items from more than 7,000 vendors and features those products on its website. Last year, 75% of customers' orders went directly to the vendor for shipment. The direct retail business is a great way to do business since Wayfair doesn't have to build massive distribution centers to pick, pack and ship orders. Leave that to the vendors.
The average customer spends more than $300 on the site and it costs about $46 to acquire those customers.
Sites like Wayfair and Zulily have an interesting business model. These companies keep virtually no inventory and simply act as electronic middlemen. Only photography keeps customers coming back for more. Wayfair provides real-time data to its vendors so they can plan their manufacturing schedules. Most all vendors pack and ship the orders. Wayfair has more than 400 customer service reps that answer questions and assist customers with their purchase.
In its first 10 months as a public company, ZU is down 10%. Investors have been concerned about poor execution, long delivery times, gross margin pressure and increasing capex requirements.
In a nutshell, poor execution is a major problem for companies like Wayfair and Zulily. If outside vendors fail to ship purchases on time, Wayfair takes all the blame. If Wayfair or Zulily have too many disgruntled customers, customer acquisition costs can increase substantially.
The management road show will likely take place the second week of September, just in time for the fall investor conferences. Since I have never met the management of Wayfair, I really can't recommend the stock. If get a chance to meet the management team, I will report back. But, for now, I will sit on the sidelines.