Wayfair Faces Battle by Bricks-and-Mortar Furniture Retailers – TheStreet.com

We all know that bricks-and-mortar retailers are being challenged by online competitors. Americans love the ease of online shopping and the low prices.

But old-time retail has been battling back recently.

Home Depot (HD) has been a solid bet for appliances (which grew by double digits) as well as lumber and kitchen decor — none of which can effectively be sold online. Even e-commerce giant Amazon (AMZN) cannot truly compete in the the space! Best Buy (BBY) also reported a huge quarter because it, too, has pivoted more toward appliances than most people — especially the bears — realized.

Now another portion of retail is joining the battle that may be more immune to the Web than we thought: furniture.

The first clue that furniture has become more an offline winner came when South African retailer Steinhoff acquired Mattress Firm (MFRM) , a heavily leveraged U.S.-based mattress chain, for $3.8 billion including debt. The deal shocked Wall Street, especially short sellers. With 37% short interest, it should have been a signal to those who questioned the bricks-and-mortar model because as it turns out, people like to lie down on a mattress before buying it.

Then online furniture company Wayfair (W) delivered a weaker-than-expected second quarter that showed a staggering loss of $0.57 per share. It sent the stock down to $37 from $48 in just two sessions.

Wayfair had been one of the hottest of the online retailers, especially for furniture. But this quarter proved the bears’ thinking, including that of Andrew Left, who runs Citron Research. He shared his short thesis with Fill or Kill on Aug. 9 when the stock was around $39.95.

“Wayfair is a nonsensical company and this shows you,” Left said in a telephone interview. “The more they sell, the more they lose,” he said.

Wayfair was priced at $29 per share for its initial public offering and soared to $37.72, up 30%, on its first day of trading on Oct. 1, 2014. At the time, it seemed like the denouement of bricks-and-mortar furniture stocks was, at last, written.

Instead, the online-only premise has been harder to sustain. Yes, Wayfair has been selling furniture. The company pulled in $786.9 million in revenue, of which $755.7 million was from its direct retail segment. But there seems to be no end to the losses; it reported a loss of $48.3 million during the latest quarter, much wider than its loss of $19.3 million the previous year. The market made excuses for the losses at first; after all, Amazon was in the red for eons. But considering the growing losses, investors have to ask: Is the consumer going away from online for the furniture segment?

It’s a novel thesis. Just 10 months ago Restoration Hardware (RH) , the gallery-oriented retailer that stuck with traditional catalogs and did not embrace mobile, saw its stock peak at $106. But after two earnings misses, the stock dropped to $25 on June 24. Presciently, the next month, CEO Gary Friedman bought 32,918 shares in multiple trades at an average price of $27.59 per share. But in the aftermath of the Mattress Firm bid and with talk of a potential merger with Williams-Sonoma (WSM) (which reports after the bell Wednesday), the stock has run up to nearly $35.

Even traditional furniture retailer Ethan Allen Interiors (ETH) has seen its stock rise 24% year to date, after defeating a proxy fight staged by Sandell Asset Management, which had a 5.5% stake. The activist hedge fund was looking to unlock value by either a sale or real estate spinoff, but was unsuccessful in its proxy fight.

Considering Ethan Allen’s escalating stock and the Mattress Firm bid, investors should be searching for other bricks-and-mortar furniture companies.

Perhaps they should look no further than J.C. Penney (JCP) . The company reported a strong quarter two weeks ago but has since seen its stock languish around $10, despite Real Money‘s technical analyst Bruce Kamich seeing the potential for a new uptrend once the stock hit $12 and fundamental backing from Real Money Pro contributor Doug Kass, who is usually on the short side of these situations.

And why does Penney like its deal with Ashley Furniture so much? Just listen to CEO Marvin Ellison: It’s where the money is.

“By partnering with Ashley, we are able to offer customers more options, better price and faster delivery,” Ellison said during an Aug. 17 analyst meeting. Ellison added that the stores where J.C. Penney replaced its old furniture assortment with Ashley’s have improved by 1,500 basis points of comp.

So, who else could join the bricks-and-mortar battle? Perhaps At Home Group (HOME) , a home-decor company that went public at the beginning of the month to little fanfare.

The company has 115 large-format stores (85,000 to 140,000 square feet) that offer more than 50,000 items. During an interview with Bloomberg, At Home CEO Lee Bird said every store is making money and the growth strategy is more stores. Bird is planning to continue double-digit store growth for the foreseeable future. In the company’s IPO prospectus, it states that At Home has the potential to expand to at least 600 stores in the U.S. Bird said in the Bloomberg interview that the growth plan will be “self-funded by current operations; it’s a very healthy business.” In fiscal year 2016, At Home reported net sales of $622 million, and has seen the eight consecutive fiscal quarters of over 20% year-over-year net sales growth. 

The bricks-and-mortar retailer’s stock could be exciting ahead of a slew of potentially positive analyst reports when it reports earnings in the beginning of September.

Not all bricks-and-mortar furniture companies are created equal, though. La-Z-Boy (LZB) reported yet another weak quarter late Tuesday and its stock was clobbered, plunging nearly 16% in after-hours trading.

Still, one has to wonder if Ethan Allen and its $960 million market cap, after beating back Sandell, can escape the clutches of Steinhoff. Can JC Penney shares stay at $10 if it executes on its plan? And is At Home the classic “other side of the trade” of now-faltering Wayfair?

Ethan Allen and At Home are definitive at-home retailers, not websites — they are stores.

–Written by the Fill or Kill team


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