Wayfair Is The Most Mispriced Stock Citron Research Has Seen In Years – Fair Value Under $10 by Citron Research

Citron Exposes Wayfair’s Admission of the Fatal Flaw in their Business!

WayfairWayfair makes Citron feel like apologizing to every company we have written about in the past 5 years. Compared to Wayfair, (NYSE:W) … you all have viable business models. Any analyst who defends this stock is clueless about furniture retailing and even more clueless about e-commerce.

First, it must be appreciated that Wayfair is not a battleground stock.

Shake Shack, FitBit, Tesla, Ambarella and GoPro: Each of these stocks has passionate bulls and bears of equal conviction. While each of these stocks still sells at nosebleed multiples, each has a disruptive, cult like, or blue-sky prospect, which longs and shorts will continue to debate.

Wayfair is not a Battleground! There is no bull case whatsoever and Citron will prove it. As we have previously tweeted, Citron admired the work of the Friendly Bear published last week on Seeking Alpha explaining why Wayfair’s current business is in the doghouse:

http://seekingalpha.com/article/3443236-dont-get-zulilyd-by-wayfairs-overstocked-valuation

While acknowledging Friendly Bear’s piece, Citron elaborates on the real context of Wayfair’s actual business prospects, predicting that its stock will soon end up in single digits. We will defer to the Friendly Bear for all relevant information about Wayfair’s dangerously high customer acquisition costs.

Meanwhile, for longs, a challenge: Finish this sentence:

Wayfair is the next __________________________??? Exactly.

It’s Overstock!!

First we would like to stress the obvious, which everyone except the company and the analysts will admit. Wayfair is Overstock, plain and simple. The only difference is that Overstock has better brand recognition and higher traffic. 74% of all Overstock sales are furniture and home goods. Here is a quick comparison of the two companies:

Wayfair

What is more amazing is that in Wayfair’s analyst report from Evercore we see a consumer survey showing that in the past 12 months more people shopped for home goods on Overstock than Wayfair.

Wayfair

With only slightly more top line revenue, Wayfair is running 5x the amount of commercials as Overstock. Notice even the advertising agencies make the apples to apples comparison.

Wayfair

http://www.ispot.tv/brands/Id3/wayfair and http://www.ispot.tv/brands/d32/overstock-com

Both companies even have the same corporate strategies.

This month Overstock partners with HGTV:

http://www.furnituretoday.com/article/522546-overstock-partners-hgtv-urban-oasis-home

And a few months ago Wayfair partners with HGTV:

http://www.homeaccentstoday.com/article/519317-wayfair-partners-hgtv-fixer-upper-stars

For those who are not convinced this is the same business as Overstock: take this.

While never PR’d by Wayfair, local news stories have confirmed that as of this month Wayfair has committed to open a 1 million Sq Ft. warehouse facility in Cincinnati. (so much for the “asset light” model)

http://www.cincinnati.com/story/money/2015/08/26/wayfair-distribution-center/32398239/

This happens to be two miles away from the Overstock warehouse in Cincinnati.

https://www.internetretailer.com/2013/03/07/overstock-looks-east-new-warehouse-near-cincinnati

And BOTH companies also operate Warehouse shipping Distribution Centers in Utah.

So how does studying Overstock help us understand where Wayfair will trade in 12 months?

(OSTK) was spending a similar portion of its gross revenues on marketing until 2006-2007, when it reduced this unsustainable spend rate to around 10% of sales. What happened? Revenue growth fell from 63% per year in 2005 to -3% in 2007 and never really recovered….Nothing more to be said. https://www.newconstructs.com/danger-zone-wayfair/

Wayfair actually intentionally shuns the comparison (incredibly, they refuse to mention Overstock as a competitor in their SEC filings.) The ONLY conceivable rationale for this omission is if they acknowledge Overstock as a comp, it becomes apparent to all that Wayfair’s stock is not worth more than $10 a share.

” Will someone please come to my office and sit on my hands to keep me from covering my short at $30 … and then come back and bash my knuckles so I don’t cover at $20!”

— Andrew Left, Editor, Citron Research

Before we prove why Wayfair will face the same uphill battle as Overstock in selling furniture/home goods online, let’s look at the fallacy of their last quarter.

Wayfair’s stock surged earlier this month after reporting seemingly strong numbers. The bulls cheered the fact that marketing spend declined marginally, relative to its revenue growth. The analysts were quick to tout this as a breakthrough – and validation of their business model.

We have seen this movie before. … Saving money by realizing marketing efficiencies while riding the wake of a short-term marketing blitz is a one-time event. It cannot be extended in a linear fashion, especially when you are competing with Amazon, Target, and Walmart.

Watching History Repeat Itself

The one-time event of Wayfair’s most recent quarter is the IDENTICAL play Zulily ran in Q1 2014, which drove the stock to its peak, from where it plunged by over 70%. From the Zulily Conference call when the stock was over $50:

Shawn Milne – Janney Capital Markets

Thank you and thanks for taking my question. I wanted to go back to the marketing efficiency, I mean, pretty remarkable, I mean, your business was up about $130 million in revenue on, just under $6 million and I mean, incremental marketing spend? Can you help us around what some of the — what channels were most productive and I don’t know if you can maybe give out some mobile app downloads update and what you saw from that channel and I have one follow-up?

Darrell Cavens – Chief Executive Officer

Sure. I think if you look at our channels, we don’t disclose the kind of difference between each one and what we are seeing across channels, but what I can say is, we saw great efficiency across all our channels. We continued to see kind of strong diversity across the channels there.

For those who need a visual reminder, here’s the chart:

Wayfair

Wayfair is not even as efficient as Overstock or Zulily….look at this startling chart to understand what a bad business they have created.

Wayfair

Analysts take notice:

Anyone who believes that a vertical market retailer selling furniture exclusively online is a good business model does not understand the furniture/home furnishings category and does not understand e-commerce. Will analysts please understand the shortcomings of this “asset light business model.”

See full PDF below.