Wayfair has been stuck in a trading range since last summer. And in early August, Wayfair reported a disappointing quarter. While revenue of $787 million was about $4 million better than expected, active customer growth was up 65% -- weaker than expected. In the first quarter, active customer growth was 76%.
Wayfair added 598,000 new customers, down sequentially from the 714,000 in the first quarter. Orders delivered were up 50%, but that was also disappointing, considering first-quarter orders were up 67%.
The only bright spot was average order value. AOV increased 15% to $258. Orders from repeat customers increased 220 basis points to 57.6%. Mobile orders accounted for 38.4% of sales.
Earnings before interest, taxes, depreciation and amortization were a loss of $24.9 million, and non-GAAP earnings per share were a loss of 43 cents. The company is expected to lose money through 2017.
Management sees third-quarter revenue at $835 million at the midpoint, which is considerably below the consensus analyst estimate of $897 million. The company added nearly 800 employees last quarter, so profitability will be impacted in the third quarter. In addition, Wayfair is spending heavily to expand its operations overseas, so its expansion plans will also weigh on profitability for the foreseeable future.
For the full year, total revenue is expected to be $3.4 billion. Non-GAAP operating income is forecast to be down $153 million. EBITDA is expected to be a loss of $85 million.
Management believes it can begin to show a profit in fiscal 2016, but that's hard to see, given the disappointing second quarter and the lackluster third-quarter guidance. Even with 33% revenue growth next year, the company will still lose money.
While I view Wayfair as the most successful Internet furniture retailer and a true disruptive force, it's hard to see how the company can make much of a profit with a gross margin of only 25%. (These guys would get thrown off Shark Tank with a 25% gross margin!)
Unless Wayfair can find a way to grow its gross margin, I don't think the stock will perform well.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.