Margins Talks Report Card: What Wayfair Numbers Tell Other DTC Brands

‍Intro: EBITDA calculations are important, but could be misleading. Top-line revenue walks, but margins talk. Welcome to the first edition of Margin Talks, Finaloop's new series where we dive deep into the financial metrics that matter most for DTC brands. In each installment, we'll analyze a prominent DTC company's margins to extract valuable insights for founders and operators.

For today’s analysis, we're examining Wayfair. For those of us who have a tax background (and yes, I confess, I used to be a tax professional)- Wayfair reminds us of sales tax, nexus, and all kinds of other lovely associations.

But it turns out that Wayfair is actually more than a textbook item, it happens to be a huge e-commerce brand that sells furniture and home goods online. Wayfair was founded back in 2002, and slowly but slowly but surely grew until a 2014 IPO (in which $300M was raised). Originally just an online retailer, the company is now branching out to brick and mortar, joining other brands like Warby Parker, in this trend.

With a current market cap of approximately $6.8B and a sizable amount of the home-goods market, Wayfair is a force to be reckoned with, even if its market cap and share price is a fraction of the 2021 heyday.

In addition, they recently launched Wayfair Rewards, a loyalty program that costs $29 per year, giving members discount pricing and free shipping. With that said, Wayfair’s numbers are not looking great (although not as bad as the past, see more below), so buckle up and hold on tight, because this is going to be a rocky ride.

A couple of macro effects that have impacted Wayfair is the major slowdown of the housing market (per Redfin, just 25/1000 homes changed hands in the 8 months of the year- the lowest figure since 2012), which trickles down to the home goods market. With fed rates set to decrease in 2025, this should bring down mortgage rates, and hopefully (for Wayfair’s sake), drive up home-buying activity, along with purchases of home furnishings. 

Today, we're digging into their margins to see what's working, what's not, and what small brands can learn from their story.

But why focus on margins? While many DTC founders chase top-line growth or concentrate on vanity metrics, understanding and optimizing various margin metrics is crucial for building sustainable businesses. Whether it's a lack of real-time data access, financial expertise, or simply being caught up in the growth narrative, too many founders overlook these critical indicators of business health.

Margins, in general, refer to the amount by which one thing is different from another. When running through a P&L, we will see quite a few margins, such as the gross margin, operating margin, and net margin; with a bit of work - we will see the EBITDA. Understanding these margins is crucial to understanding your brands' profitability, unit economics, and trends.

In this report card, we'll break down four key margins from Wayfair’s latest financials. Each metric tells its own story - some impressive, others cautionary - and offers practical takeaways for DTC brands at any stage.

Let's dive right in.

The DTC Margins Report Card

1) Gross Margin

Grade: B-

Definition:

Revenue minus the cost of goods sold (COGS), expressed as a percentage of revenue. Indicates how efficiently the company produces and prices its products.

Wayfair's Numbers:

Per Wayfair's Q3 numbers, their gross margin is just about 30.3% (which means that their COGS are approximately 69.7%).

Quick Analysis:

Wayfair's gross margin has slightly decreased vs comparable numbers from 2023 (when COGS were 68.9%), and in general, as a retailer, they are working with pretty low margins. A couple of other warning signs are decrease of total net revenue (decrease of $60M or 2% YoY), active customers decreased 2.7% YoY and orders delivered in the Q3 decreased 6.1% YoY.

Other numbers stayed similar or slightly improved, such as LTM net revenue (increase of 1.3%), orders per customer (1.85 vs 1.83) and repeat customers' percentage of purchases is more or less the same. These figures correspond with a tough home goods market, which has taken a hit due to low home purchase numbers, which are influenced by the high interest rates.

In order to drive up their sales, Wayfair has recently launched a loyalty program (with free shipping and discounted prices- think Amazon Prime), which they hope will boost the company’s market share by 50%. Company’s management believes that their customers (who make 1.85 orders per year), are ordering elsewhere between four to six times.

The goal is to increase their Wayfair orders by approximately 1 more order per year (meaning a little under three per year). This won’t necessarily help their gross margin significantly (especially with their discounted prices), although it could drive down CAC (see below), which is a major expense line for Wayfair. 

Another recent update is that Wayfair is following the lead of other leading e-commerce brands, and starting brick-and-mortar stores.

Takeaway for DTCs:

When operating in lines of business with relatively low margins, increasing recurring revenue (via memberships) and LTV is the name of the game, as well as preventing customer churn. Loyalty programs (if they work- they haven’t worked in the past for Wayfair) can drive up customer LTV, which could be worthwhile in the long run, even if you take a bit of a gross margin hit.  In addition, expansion into new markets, especially when they have higher profit margins while keeping your operating costs relatively stable can definitely drive top-line growth, and increase gross profits as well as operating profits.

2) Operating Margin

Grade: B+

Definition:

Operating income as a percentage of revenue. Reflects how efficiently the company manages its operating expenses like marketing, rent, and salaries.

Wayfair's Numbers:

-2.5% 

Quick Analysis:

While Wayfair’s gross margin doesn’t give it much wiggle room, with operating margins of approximately 32.8%, they are pushed into loss territory. The bright side- they now  have nine sequential quarters of compression in fixed costs and a third quarter result that is the lowest SOTG&A had since 2021 (comparable opex of 36.3% in Q3 2023), which show real operating cost discipline. While they anticipate marketing costs to increase slightly, the long term plan- assuming the membership plan takes off- could decrease marketing costs while driving up sales, helping increase the operating margin. They are taking expansion into brick and mortar slowly, although this can obviously drive up depreciation costs.

Takeaway for DTCs:

We’ve said this before, and we’ll say it again- when your gross margin is razor thin, you need to both increase volume and keep your operating costs lean and fixed (and preferably reduce them) in order to drive operating margin profitability. Having discipline and keeping opex steadily decreasing YoY, while (trying) to keep revenue levels solid, is definitely the way to go.

3) Net Margin

Grade: B-

Definition:

Net income as a percentage of revenue. Reflects profitability after all expenses, taxes, and interest.

Wayfair's Numbers:

-2.6%

Quick Analysis:

As we’ve noted time and time again- gross margins of 30%, with operating costs of over 30% will definitely push you into loss territory. We’ll get to the adjusted EBITDA soon, but the bottom line is that Wayfair is in a loss position. The silver lining- the comparable Q3 loss in 2023 was 5.5%, this decrease of loss driven primarily from operating cost efficiency.

Takeaway for DTCs:

There is no magic formula here- bottom line in companies with thin gross margins is tough. Short term investment in Capex and marketing campaigns can hopefully  lead to long term decrease of opex, specifically marketing costs, which can drive up margins.

4) EBITDA Margin

Grade: B

Definition:

Earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. Often used to measure core operational profitability.

Wayfair's Numbers:

Adjusted EBITDA margin of 4.12% (increase of 0.82% over comparable period)

Quick Analysis:

It is worth keeping in mind that the adjusted EBITDA (which becomes 4.12% positive) is mainly due to adjustment of stock-based compensation (which isn't cash, but dilutes investors), and depreciation and amortization - which is a significant expense for Wayfair, so this kind of adjustment, and measure, should be taken with a grain of salt.

In general, the improvement in adjusted EBITDA is primarily driven by improvements in operating costs. It is worth noting that the equity based compensation is significantly lower this year, which is a positive sign.

Takeaway for DTCs:

EBITDA really is the market gold standard for comparisons between companies, and is definitely an important metric. However, beware adjusted EBITDA calculations and make sure you are comparing apples to apples, and stating the obvious- strive for net profitability and positive cash flow- you can’t go to the bank with your EBITDA.

Wayfair's Overall Grade: B-

While Wayfair's numbers have improved based on their Q3 financials, they still need to show how they will rebound into profitability taking into account a tough market that hopefully will rebound in 2025.

Key Takeaways:

• Membership programs (and any other measure to drive up recurring revenue), are great. Too many ecommerce brands don’t push recurring revenue, this can really be a break or make it point.
• Keeping on top of your Opex long term, especially when your margins are slim, is crucial.
• Consider following Wayfair’s lead and looking into new types of markets, such as brick and mortar, when the going gets tough in online sales only.

Summing it up

Wayfair's story shows that even the biggest names in DTC face financial challenges. But with a closer look at your own margins, you can set your brand up for sustainable growth—without the big brand headaches.

Want to know your own margins and where to improve? Finaloop makes it easy for DTC founders to track profitability and plan for growth.