Online furniture king Wayfair's (NYSE: W) stock skyrocketed 32% in September according to data provided by S&P Global Market Intelligence. Although it didn't report any of its own news, it benefited from positive news about industry peers and an overall sense of confidence in a rebounding real estate and home improvement market.
Wayfair is still struggling
Wayfair has developed a strong online presence with its collection of furniture brands targeting different demographics. The Wayfair label is probably the most well known and reaches the largest target audience, offering a huge selection of mid-priced furniture all online. In addition to housewares, it also has a large third-party platform with many different products.
After a stunning showing early in the pandemic, sales have drooped and have been almost continuously falling for several years. It's reaching toward a plateau but hasn't quite gotten there yet, and management has been trying to become more efficient at its new sales levels. It reported net profits for a brief time when sales were flying, but it hasn't managed to get back to scaling, impeding its efforts to become profitable.
There have been some ups and downs over the past few years, but the second-quarter results weren't inspiring. Sales were down and less than expected, net loss was $42 million, and earnings per share (EPS) came in below Wall Street expectations. It's also guiding for a full-year sales decline.
Is the only way to go back up?
Wall Street still has high hopes for this company. It has done some of the hard work to become profitable that it looked like it was avoiding when sales were high and money was easy. Backed into a corner, it's making the moves to thrive. Some second-quarter wins include its highest free-cash-flow generation in three years at $183 million, and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin in the mid-single digits, one of its profitability goals, at 5.2%.
There were twin tailwinds for Wayfair stock in September that, mixed with some of its own wins in the second quarter, propelled the stock forward. Competing furniture retailer RH reported an increase in sales and strong net income, demonstrating a solid rebound that bodes well for similar companies. The Federal Reserve lowered interest rates for the first time in four years, and that is expected to trickle down to higher spending on large items that people have been holding back on as well as a resurgence in real estate. More people moving leads to more home improvement and housewares sales.
Wayfair stock could rebound big, but it's quite risky right now.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends RH and Wayfair. The Motley Fool has a disclosure policy.
