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Why Wayfair Stock Plunged 14% in August

John Ballard, The Motley Fool

What happened

Shares of Wayfair (NYSE: W) lost 14% last month, according to data provided by S&P Global Market Intelligence. When the online home goods retailer announced its second-quarter earnings in early August, the numbers showed continued robust revenue growth. The company beat analysts' consensus estimate on the top line, with direct retail net revenue up 42% year over year. In addition, its non-GAAP net loss of $1.35 per share matched analysts' expectations.

However, the company's third-quarter outlook forecast that revenue growth will decelerate to a percentage in the mid-30s. Given that shareholders have gotten used to growth in the 40%-plus range, market participants didn't like that prediction, and shares tumbled from their high valuation level.

A well-furnished living room in a house.

IMAGE SOURCE: GETTY IMAGES.

So what

Management asserts that it's not concerned about the predicted deceleration. CEO Niraj Shah said it's "the outcome of doing dozens and dozens of ambitious things." What he meant is that they are constantly tweaking areas of the business, such as the recent launch of a new app design. Shah said, "When you do that you reset some of the customer consideration cycle for a portion of your customers."

Shah also talked about the potential impact of tariffs, stating, "Our business model is more resilient than that of a traditional retailer by being a platform." But he explained that trade conflicts can disrupt supply chains in the short term, as suppliers change how they price their products to mitigate higher costs.

Now what

No matter what happens in the short term with respect to tariffs and the economy, management is focused on the long term. Wayfair continues to operate at a loss as it invests in building out its logistics network. The company's CastleGate warehouse facilities are crucial to meeting the tremendous demand the company is experiencing. More importantly, Wayfair's expanded logistics capabilities should translate into lower costs and higher profitability over time, as Shah explained: 

Our CastleGate penetration in the U.S. continues to trend upward due to robust levels of growth. At the current pace, this means that the actual dollars flowing through CastleGate for both large and small parcel are doubling year over year. We believe we are well prepared to meet the increased demand and that we have architected our logistics network to move steadily toward lower cost and faster delivery times as it scales.

Wayfair's stock price is going to be volatile simply because management operates on a different time scale than Wall Street. The company is being managed to maximize profit down the road, not next quarter. More spending in the $600 billion home goods market continues to shift online, which should allow Wayfair to maintain its momentum and remain a compelling growth opportunity for investors

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John Ballard owns shares of Wayfair. The Motley Fool owns shares of and recommends Wayfair. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com