Wayfair faces a very real bankruptcy risk

During the covid pandemic spending habits changed. People were spending more time at home even if they weren’t in full lockdown mode.

There simply wasn’t much to do as restaurants were only takeout-and-delivery, movie theaters, concerts and sporting events were not welcoming audiences, and travel opportunities were limited. So people spent where they could — and in some cases made certain companies look stronger than they are.

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Peloton (PTON) – Get Free Report might provide the strongest example of a covid-related-demand surge that sharply exceeded the normal-times demand for at-home connected fitness. The company pulled forward demand: Anyone who might have bought a Peloton bike over the next few years bought one almost immediately.

That sent short-term sales surging but did not lead to a sustainable business. 

Best Buy  (BBY) – Get Free Report suffered from the same issue to a point as well. People sped up their technology purchases because they were both bored and, in many cases, needed to enhance their work-from-home setups.

For Best Buy, the demand just shifted, and normal device-replacement patterns settled back in, but once gyms reopened, Peloton simply became a microniche product. 

Many retailers including Home Depot, Lowe’s, Costco, Walmart and Target benefited from covid-related purchases and faced some struggles as the pandemic eased, but their woes were relatively minor.

A pandemic-popular digital retailer is in trouble

Before the pandemic, online furniture retailer Wayfair (W) – Get Free Report always seemed like an odd business model. The company sold furniture — something people generally like to try before they buy — in a purely online model.

There’s a reason that most of the direct-to-consumer mattress companies have opened brick-and-mortar stores or sell their products through traditional retailers. People want to lie down on a bed before they buy it. 

People might buy a desk or certain other pieces of furniture without trying them, but the idea that there’s a huge online market to sell high-priced beds, couches, and chairs that people can’t test out first is hard to picture.

The pandemic, however, sharply increased demand for furniture. People needed home-office setups, wanted to upgrade their beds and couches, and generally focused on their homes (since they were stuck there). 

That was very good news for Wayfair, which saw a Peloton-like surge in sales. But once the pandemic’s influence lessened, people went back to the traditional way of buying furniture.

That has left Wayfair struggling, with a meaningful risk of bankruptcy, according to RapidRatings, which tracks the financial health of companies.  

Wayfair faces a possible bankruptcy

“Wayfair Inc’s Financial Health Rating was a very unimpressive 20 (0=worst, 100=best) for the four quarters ending June 30, 2023, and represents a 1-point downgrade as compared to a year earlier,” according to Rapid Ratings.

That rating puts the online retailer in the bottom half of Rapid Ratings’ high-risk group “with an estimated probability of default of 11.41% over the next 12 months,” according to the report.

Wayfair, “with its once-promising pandemic-era business surge, now finds itself in treacherous waters,” said Rapid Ratings Executive Chairman James Gellert in an email to TheStreet.”In an era of abundant and inexpensive capital, Wayfair was able to stay afloat because they had time on their side. However, the clock is ticking. Higher interest rates and a risk-on market environment are causing a capital retraction.”

Essentially, it’s harder for Wayfair to raise money to cover its losses.

“This scenario has exposed underlying issues that many companies, like Wayfair, have been grappling with for some time. With a concerning FHR rating of just 19 out of 100, Wayfair’s vulnerabilities are coming into sharp focus,” he added.

Wayfair, which did not answer a request for comment from TheStreet, did comment on its financial position in its second-quarter earnings report. Chief Executive Niraj Shah said that since last year the company had been working on a plan to strengthen its business.

“For the past few quarters, you’ve seen us execute against that plan — to lower our costs, focus on the basics, and earn more customer and supplier loyalty,” he said.

“And you’ve seen the tangible impact of this plan as our performance has continued to improve. I’m pleased to share today that we’ve passed one of our key milestones and we are reporting positive adjusted Ebitda and positive free cash flow.” 

Wayfair has cut its losses over the past six months to $401 million from $697 million in the year-earlier six-month period. The company currently has roughly $3.4 billion in assets and $6 billion in liabilities.

Historically, over 90% of companies that have defaulted were rated 40 and below on our scale. So there is a high correlation. The distinction between bankruptcy and default is that there are defaults that don’t end in bankruptcy but have caused economic loss. In general, they are often used interchangeably though there are technical differences.”

Gellert made it clear in his comments that the company faces significant risk of financial peril.

“Historically, over 90% of companies that have defaulted were rated 40 and below on our scale. So there is a high correlation. The distinction between bankruptcy and default is that there are defaults that don’t end in bankruptcy but have caused economic loss. In general, they are often used interchangeably though there are technical differences,” he added.

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