Wayfair Has a Lot to Prove This Week

After a brief slump at the end of 2018, Wayfair (NYSE:W) stock is back in rally mode heading into its key fourth-quarter 2018 earnings report. Investors have some sound reasons to expect impressive growth results from the home furnishings retailer over the holiday shopping season. The company has been consolidating market share at an accelerating rate for much of the past year, after all.

However, it will take more than just revenue growth to extend Wayfair's rally deeper into 2019. With that caveat in mind, let's look at the main metrics shareholders will be watching in Friday's earnings announcement.

Image source: Getty Images.

Sales gains

Wayfair's 43% year-over-year sales increase last quarter comfortably surpassed management's outlook for the third straight period. Yet the holiday period brings additional challenges that might make it difficult to produce a fourth consecutive beat. The retailer faces a comparison with a stellar prior-year period that saw sales jump 48%, for one. Meanwhile, competition traditionally spikes across the e-commerce industry during the holiday season as rivals all fight to unload the inventory they've accumulated.

Most investors who follow the stock are expecting sales gains to slow to about 37% to reach $1.97 billion. Looking behind that figure, shareholders will want to see continued improvement in Wayfair's engagement metrics, including a rising customer base, increased average order value, and healthy repeat business. The early indications suggest the company fared well across each of these important areas.

Costs are rising

Growth metrics aren't valuable in isolation, since they don't indicate whether Wayfair is constructing a profitable business from all the merchandise it ships out to shoppers. That's why it's critical to watch gross profit margin and advertising spending, which together will show just how well the company defended its market share from competition.

Wayfair held off major challenges from Overstock and others for most of the year, but executives said in early November that they were prepared to forego short-term profits to match rivals' promotional stances, if necessary. That move would show up in gross profitability falling below the 23% rate from recent quarters. Heavier competition might also force Wayfair to scale up advertising and marketing spending to higher than 12% of sales, which would be constitute another potential red flag for the business.

When will losses stabilize?

When the books close on 2018, investors are expecting the company to post significant annual losses for yet another year. That situation hasn't alarmed Wall Street so far, since it's not hard to see how the elevated spending rates are helping Wayfair build scale in an attractive market that keeps getting bigger. The shipping and marketing platform the organization is creating, for example, should allow it to edge into adjacent product areas, just as it has with bathroom vanities recently.

Those spending needs might increase over the short term since Wayfair's latest growth success is giving CEO Niraj Shah and his team extra confidence to get aggressive in seeking to build global scale before rivals can catch up. Still, investors will want to see at least the outlines of a path toward sustainable profits for the business. The first step in that direction will be when Wayfair predicts stabilized or declining annual losses, which executives may do when they issue their 2019 outlook on Friday.