Wayfair Still Has Room to Grow As Consumers Redirect Travel Spending to Home Goods
The desire from consumers to spruce up their homes and outdoor furniture has seen a spike from the coronavirus, and Wayfair is perfectly positioned to capture this spending, according to Wedbush analyst Seth Basham. The analyst upgraded his rating on Wayfair from NEUTRAL to OUTPERFORM and increased his target price from $165 to $240 on Tuesday.
Bigger share of consumer spend: As the pandemic keeps the Travel and Entertainment business at a standstill, people are shifting some of the money they would be spending on trips to home goods purchases. Basham notes that 17% of the T&E expenditures decline is being redirected at the home furnishings & durable equipment categories, which spiked at a 33% run-rate in June, according to NPD data.
In addition to more available dollars from consumers, the pandemic has accelerated adoption of online shopping, playing directly into the hands of Wayfair.
“In 2019, W captured 38% ($2.0b) of the $5.1b U.S. online home goods market’s growth. Illustratively, if the online market grows 30% in 2020 and W captures a similar 38% of that growth, it would add $7.8b in U.S. sales, which is more than double our estimate of $3.7b,” Basham said in a note.
The retention problem: Customer churn is the biggest risk to Wayfair’s growth, according to Wedbush. Wayfair operates in low-frequency product categories, and competes with retailers such as Target and Amazon that have their hands in high-frequency segments such as grocery.
Yes, but: Basham is optimistic that expansion into higher purchase frequency products, lower advertising rates, and reduced promotions will help mitigate downside resulting from churn.
Keeping momentum: Investors have already taken note of the advantages Wayfair has experienced since the start of the pandemic. Shares are up more than 130% year-to-date, and aren’t too far from their all time high of nearly $231.
