Why Is Wall Street Giddy About a Furniture Retailer's IPO?

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When Wayfair (W) went public last week, it captured one of the 26 single-letter ticker symbols -- and something more, as well. Wayfair also captured the excitement of Wall Street, pricing at $29 a share after it was initially expected to hit the market between $25 and $28 a share.

The bump wasn't enough. The stock opened at $36 on its first day of trading, and while It went on to give back some of those heady gains in the three subsequent trading days, the Web-based furniture retailer is still trading well above its initial price.

That's a welcome embrace for a company that may be redefining the way customers shop for sofas, ceiling fans and accent tables, but it's still struggling to turn a profit.

Pulling Back the Curtain

Wayfair got its start a dozen years ago, building out dozens of niche websites. It leaned on generic names -- gems including bedroomfurniture.com and allbarstools.com -- to generate organic search engine traffic that it could try to convert into sales.

Three years ago, it chose to consolidate most of its operations under Wayfair.com. It redirected the 240 generic domain names of its niche websites to its new storefront. The strategy is working. Sales went from $517.3 million in 2011 to $601 million in 2012, then jumped to $915.8 million last year.

Business is still booming so far in 2014, with sales up nearly 50 percent through the first six months of the year. Wayfair has sold more furniture during the first half of the year than it did for all of 2011.

This Loveseat Also Comes in Red

Wayfair's popularity is booming, but the path down its income statement isn't as kind. Wayfair is not only losing money, but the deficits are widening with every passing year. The furniture e-tailer has gone from generating a loss of $20.5 million in 2011 to $33.2 million in 2012 to $40.9 million in 2013.
The shortfalls continue to grow in 2014. It has lost three times as much money through the first half of this year as it did in 2011.

Why is Wayfair losing so much money if it's growing so quickly? One big challenge has been the high cost to acquire new customers. It spent an average of $45 in advertising for every new customer it acquired during the third quarter of last year. It's a high hurdle because furniture isn't something that lends itself to repeat purchases like groceries, apparel and other merchandise do. Less than a quarter of the new customers it acquired during last year's third quarter made another purchase within the subsequent 270 days.

The business strategy here is that this will pay off over longer stretches. Wayfair has delivered nearly 13 million orders since its 2002 inception, and it now watches over 2.6 million active customers. The wide reach is essential to Wayfair's 7,000 suppliers, which are mostly small family-run businesses that lack the means for brand recognition or substantial retail distribution.

More Than One Nightstand

Selling furniture online has been a hard sell, but Wayfair believes that its wide selection -- more than 7 million items -- and its seasoned experience in online presentation sets it apart from Amazon.com (AMZN) and brick-and-mortar merchants trying to expand their presence online.

Wayfair knows its target audience. Women make up 70 percent of its customers. The typical customer is a 35- to 65-year-old woman with annual household income of $60,000 to $175,000. Despite the competitive landscape, the market's giving Wayfair a shot. The top-line growth is too heady to ignore, and the hope is that mounting losses will reverse before long. There is plenty on Wayfair's plate, but it doesn't mind since it's the one selling you the table.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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