Wayfair analyst warns of growing problem

As Wayfair’s (W) The stock performance makes you weak in the knees, we know a place where you can get a good deal on a chair.

The home goods company recently slashed the price of the Snugway Contemporary Leather Recliner and Ottoman by about 60% to $389.

The chair has an adjustable backrest with lever, easy-to-clean imitation leather upholstery and a convenient swivel function.

Related: Wayfair Sells ‘Modern and Trendy’ Nearly $1,000 Leather Recliner with Ottoman for Just $389

The footstool has a sturdy, solid base and is wide enough to rest your feet on without the sofa tipping over or wobbling.

“Wobbling” might be one way to describe Wayfair’s stock, which is down nearly 16% this year and about 32% from a year ago.

Earlier this month, the Boston-based e-tailer missed Wall Street’s second-quarter profit forecasts.

Wayfair posted adjusted earnings of 47 cents a share, compared with 21 cents a year ago. That was below Wall Street’s forecast of 49 cents a share.

Total revenue was $3.12 billion, down 1.7% from a year earlier and below estimates of $3.18 billion in sales.

Gross profit, the amount the company has left after deducting expenses, fell about 4.4% year-over-year.

“Customers remain cautious about their home spending, and our credit card data suggests the category is down nearly 25% from the peak we saw in the fourth quarter of 2021,” Wayfair CEO and co-chairman Niraj Shah, who co-founded the company with Steve Conine in 2002, said during the company’s earnings call.

Analyst raised concerns about economic impact on Wayfair

Sarah L. Voisin / The Washington Post via Getty Images

Wayfair CEO: ‘People still need mattresses, tables and chairs’

“This reflects the magnitude of the peak-to-trough correction the home furnishings industry experienced during the Great Financial Crisis, according to U.S. Census Bureau data,” he told analysts, referring to the Great Recession of 2008, the worst U.S. financial crisis since the Great Depression of 1929.

Shah cited factors including a housing market malaise, overspending in 2020 and 2021 that disrupted the historic replacement cycle, and a slowing U.S. economy.

Related: Veteran analyst revises stock forecast as rate cut expectations revised

“In the first five months of 2024, new home sales are down nearly 20% compared to the first five months of 2021, while existing home sales are down more than 30%,” he said. “Customers have more than offset overspending during the pandemic and are now underspending in this category compared to historical patterns.”

“This is despite the fact that the structural need for products in this category has not changed,” Shad added.

The situation is so dire that the Washington Post reported that real estate agents are quitting en masse due to disappointing sales figures and changes in commission structures.

“The real estate sector may look bleak, but the darkest thing is always before the dawn,” TheStreet Pro’s Ed Ponsi wrote on Aug. 23. “Real estate activity should get a boost from lower interest rates.”

The Federal Reserve is expected to cut rates at its September 17-18 meeting.

“Expectations of increased home sales and refinancing are already being reflected in stocks related to the real estate sector,” Ponsi said.

And Shah was optimistic about the future, saying that “people still need mattresses, tables and chairs.”

“They still need desks, bathroom fixtures, kitchen appliances,” he said on the earnings call. “And at some point, we expect a reversion to the mean. While we have yet to see a recovery in the housing market, replacement of pandemic spending, and a broader economic recovery, we expect those factors to be on the horizon.”

“Given how deep we are in the cycle, it is reasonable to expect a recovery to occur quickly, and Wayfair is well positioned to benefit from this,” he added.

Analyst warns of ‘muted outlook’ for Wayfair

According to The Fly, Argus downgraded Wayfair from buy to hold on August 26, with no price target.

The company cited Wayfair’s “muted outlook” due to slowing home sales trends. Wayfair’s second-quarter revenue fell 1.7%, below estimates.

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Argus said Wayfair’s profit growth could be hampered by “stressed” consumer spending, less favorable operating leverage and the need to reinvest profits in software that allows the company to compare prices with competitors.

Earlier this month, Truist cut its price target on Wayfair to $60 from $70, but maintained a buy rating on the stock after disappointing earnings.

The company said it remains positive about Wayfair despite weaker second-quarter results and a lower third-quarter outlook, reflecting weaker demand and higher promotional intensity in a challenging macro environment.

However, Truist said that while the stock doesn’t have catalysts to move higher in the near term, continued market share gains in the struggling home furnishings segment and the significant cost savings the company has achieved over the past 18 months serve as longer-term catalysts for when rates improve.

Raymond James analyst Bobby Griffin lowered the company’s price target on Wayfair to $65 from $70 and maintained a strong buy rating on the stock.

Griffin said Wayfair’s second-quarter sales were slightly lower than expected, reflecting continued pressure on the category during non-promotional periods.

The company continues to gain market share despite a weak industry environment and industry demand pressure during the quarter. Wayfair delivered its best quarter of cash flow and profitability in three years, the analyst said.

Related: Veteran fund manager sees world of pain coming for stocks