Few pandemic winners have been hit as hard as Wayfair (NYSE: W). Shares of the online home-furnishings leader plunged in 2022 and have been down for the count since then as revenue growth has been negative almost every quarter since mid-2021.
In its third-quarter earnings report, the company said revenue declined 2% year over year to $2.9 billion, and it remained unprofitable on a generally accepted accounting principles (GAAP) basis with a loss of $74 million. It did report adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $119 million, and the company has said its top goal is to deliver adjusted EBITDA above share-based compensation and capital expenditures.
While Wayfair has missed out on the bull market of the last two years, the stock could finally be due for a recovery. Let's take a look at a few reasons why.
Image source: Getty Images.
Macro conditions are set to improve
Wayfair isn't alone among home furnishings retailers in its struggles. The sector has been weak amid a broader slowdown in the housing market due to high mortgage rates.
Peers like RH and Williams-Sonoma have posted revenue declines in recent quarters, and comparable sales are down for the home improvement retail giants Home Depot and Lowe's. However, several potential tailwinds could help Wayfair and its home furnishings peers benefit in 2025.
First, the federal funds rate is set to continue coming down. The central bank slashed rates by 50 basis points in September, and it's expected to reduce them further this year and in 2025. That should bring down mortgage rates, helping to spark a recovery in home-buying activity as existing home sales remain approximately 40% below pre-pandemic levels. Such a turnaround for the real estate market should benefit sector stocks like Wayfair as people furnish their new homes.
Additionally, there's a well-documented housing shortage in the country with millions of homes needed across the country. The next administration in the White House, regardless of who wins, has pledged to tackle the lack of affordable housing in the U.S. An political moves to incentivize new home construction could also give Wayfair a long-term boost.
What Wayfair is doing
Wayfair isn't standing still during this challenging period. The company has streamlined its business during the downturn to prepare for a recovery, implementing several rounds of layoffs, including one it announced just last week.
It also launched a new rewards program that costs $29 a year, hoping to leverage the same dynamics that have made Amazon Prime so successful. Wayfair Rewards will offer free shipping and 5% back on purchases.
There's room for recovery
Not only is Wayfair down nearly 90% from its pandemic-era peak, but the stock could have a lot of potential for recovery if sales growth starts to accelerate and profitability improves. The stock trades at a price-to-sales ratio of just 0.4, a bargain price for a leading player in e-commerce. That figure could easily double or triple as the stock recovers. The stock also trades at a forward price-to-earnings ratio (P/E) of 30, based on the analyst consensus of $1.34 for earnings per share next year.
It may take some cautious optimism to see Wayfair's recovery taking shape next year after another disappointing earnings report, but the housing market will eventually recover. When it does, Wayfair should be ready to capitalize.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon and RH. The Motley Fool has positions in and recommends Amazon, Home Depot, and Williams-Sonoma. The Motley Fool recommends Lowe's Companies, RH, and Wayfair. The Motley Fool has a disclosure policy.
