Bull of the Day: Wayfair (W)

Wayfair, a Zacks Rank #1 (Strong Buy), has quietly become one of the most compelling turnaround stories in retail.

The online home goods retailer just delivered its strongest U.S. growth since the pandemic era and its best free cash flow since 2020 — and it did so while the housing market, the single biggest driver of home furnishings demand, remains effectively frozen.

That combination is rare and the market certainly noticed. Shares closed roughly 30% higher on the day of the latest earnings report, one of the largest single-session moves for a large-cap retailer this year. The stock had entered that print down about 11% year to date, which tells you how little was expected.

A Leading Industry Group

Wayfair is part of the Zacks Internet – Commerce industry group, which currently ranks in the top 43% out of more than 250 Zacks Ranked Industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months.

Take note of the favorable characteristics for this group below. The industry’s improving positioning has been driven by a positive earnings outlook for its constituent companies in aggregate. Stocks in this industry are relatively undervalued and are expected to experience above-average earnings growth, signaling a powerful combination that should lead to higher prices in the future.

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Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.

It’s no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.

Company Description

Headquartered in Boston, Wayfair is one of the world’s largest online sellers of home goods, offering more than 18 million products from over 12,000 suppliers. Beyond its flagship site, the company operates a family of specialty brands including Joss & Main, AllModern, Birch Lane and the luxury-focused Perigold, with international operations in Canada, the U.K. and Germany.

What has changed is the business model underneath. Management spent the past two years aggressively rationalizing costs, exiting unprofitable geographies and rebuilding the platform around profitability rather than growth at any price.

The result is a company that now converts revenue growth into cash. Wayfair has also been pushing into physical retail with large-format stores, a notable pivot for a business built online, and one that appears to lift both brand awareness and digital sales in surrounding markets.

Earnings Trends and Future Estimates

The second quarter was emphatic. Total net revenue rose 7.5% to $3.52 billion, surpassing the Zacks Consensus Estimate by 1.5%, while adjusted earnings of 95 cents per share also topped the 94-cent consensus.

U.S. net revenue climbed 8.7% to $3.1 billion — the strongest domestic growth of the entire post-COVID period. Non-GAAP adjusted EBITDA reached $242 million against roughly $230 million expected, and free cash flow hit $301 million, the highest since 2020. The balance sheet ended the quarter with $1.1 billion in cash and short-term investments and $1.6 billion of total liquidity.

Management’s commentary was equally constructive. CEO Niraj Shah pointed to the best sequential second-quarter growth since 2020 and noteworthy outperformance at Perigold, while CFO Kate Gulliver said plainly that Wayfair is taking share from traditional brick-and-mortar competitors while the housing market remains stalled. For the third quarter, the company guided to high-single-digit revenue growth — against a Street looking for roughly 5% — with gross margin of 29.5% to 30.5%.

The estimate picture reflects all of this. Wayfair has topped consensus EPS estimates in each of the last four quarters. The Zacks Consensus Estimate stands at 81 cents for the current quarter and $2.95 for the current fiscal year, with those figures surging 6.58% and 5.36%, respectively, over the past 60 days. This is the kind of revision momentum that drives the Zacks Rank.

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Let’s Get Technical

Wayfair W has transitioned from a broken-down laggard into one of the more powerful momentum stories in consumer discretionary. This is exactly the kind of stock we want to include in our portfolio — one that is trending well and receiving positive earnings estimate revisions.

Image Source: StockCharts

Notice the decisive breakout following the latest earnings report, with shares clearing both the 50-day (blue line) and 200-day (red line) moving averages. Gaps of that magnitude on fundamental news frequently mark the beginning of a new trend rather than the end of one.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. As we know, Wayfair has recently witnessed sharp upward revisions. As long as this trend remains intact (and W continues to deliver earnings beats), the stock will likely continue its bullish run.

Bottom Line

Backed by a leading industry group, accelerating domestic growth, record post-pandemic free cash flow and a powerful wave of upward estimate revisions, it’s not difficult to see why this turnaround has captured investor attention. Currently, W sports the highly coveted Zacks Rank #1 (Strong Buy), placing it in the top 5% of Zacks-covered stocks on estimate revisions.

A company growing share while its end market shrinks is a company with genuine competitive advantage — and when housing does eventually turn, Wayfair will have that tailwind on top of the share gains it is banking now. If you haven’t already done so, be sure to put Wayfair on your watchlist.

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This article originally published on Zacks Investment Research (zacks.com).

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