Wayfair: Stick a Fork In It, Because It’s Done

Wayfair puzzled me since Goldman and Bank of America/Merrill Lynch re-purposed the $1 billion husk of CSN Stores a decade ago and relaunched it as “Wayfair”, a firm whose entire business model seemed to be to find every vendor of Overstock.com and say, “We want whatever Overstock gets. We want whatever Overstock buys. We want whatever price Overstock.com receives.” We heard it across the entire industry: that is how they got going.

Wayfair did come up with precisely one innovation in their business model: they bought the products we and other folks (e.g., Wal-Mart) were selling, changed the Manufacturer’s ID# from #123456 to #123456W (or eventually, something less obvious), marked them up 15% over our price, and hired a legion of copywriters and photographers to generate original creative. Why? Because Google-bots are now sophisticated enough to AI-match products across websites. Wayfair was trying to charge more and beat the fact of price comparisons by having their own original copy, photographs, and Manufacturer’s ID#.

That’s it. That’s the business model.

Put more succinctly, Wayfair’s business model was to enter the most commodified marketplace in history (the Internet) with commodity products it sought to decommodify by paying an army to generate creative that would trick Google search-bots, so that Wayfair could go to all of our vendors and get everything they could, charge 15% more than Overstock, and hope the products would not be directly comparable to ours and other sites’ (even though they were, in fact, the same products). That’s the business model upon which, by the end of 2020, they will have burned $5 billion.

I always felt it might be unseemly to write that while serving as CEO of Overstock.com. It seemed… petulant? But now that I have no skin in the game (I am not a shareholder), I cannot be accused of ulterior motives. I just would feel better if I let the marketplace know.

Some ask me, What does the future have in store for Wayfair?

Allow me to present some data on why you might believe what I am going to tell you. Simply put, I know something about running a furniture-drop-shipping-pure-play-eCommerce website, arguably, more than just about anyone you can think of. These were OSTK results since the Great Recession of 2008 (note that in one of those years our post-tax profit was actually ≈ $80 million because of a beneficial tax effect I exclude here, though all competitors include it and it passes without notice: I know if I did I would be accused of being misleading, so I have always excluded it).

Then along came Wayfair. They copied Overstock’s business model to the letter, hired massively, outspent us on television by as much as 12-to-1, grew and surpassed Overstock, never made a dollar of profit (in fact, I believe that by the end of 2020 they will have burned through damn near $5 billion)…. and at some point were getting valued around $12 billion. 

Buffett says, “Sometimes a man has to rise above his principles.” I decided to rise above mine. It is ironic, because the principle that I “rose above” is one he taught me: “In the short run the market is a voting machine, but in the long run the market is a weighing machine.”  Sometime in 2017  I began wondering how the market could value us so differently for so long. We had something about as rare as a mermaid, a profitable B2C website, but nobody would  give us credit for it (after all, I had been in the public markets for 15 years waiting for  “the long run” to show up), but  perhaps if we just accelerated to >20% growth, creating a Wayfair-lie income statement but with skinnier losses, we might start getting a generous valuation too, one off which we could capitalize off as Wayfair did. (In addition, during the sale process we often heard from potential acquirers, “We know how to make money, show us you can grow!” All but one indicated they understood we would need to show large losses to do it. One said, with no trace of irony, “We are only interested in a B2C website that grows 30% profitably!” This, while they had never seen such an animal [I think Overstock may have achieved that once, but I am not sure anyone else has, and they themselves had recently spent several billion dollars for a website losing $1 billion per year).

In any case, I follishly decided to hit the afterburners in an attempt to duplicate Wayfair’s income statement (but with lower losses), announced to the world we were doing so, then did so. That worked out as follows.

Traffic growth did return to being above 20%, sales swelled (but lagged a bit behind), and we learned that the market did not care. Sometime in 2018 I looked at the income statement, threw up all over myself, and throttled back.

I do not know yet how Overstock fared in 2019. I do believe, “Much better”. At the start of 2019 I thought Retail would do $115 – $120 million better on the bottom line for the full year (on a calculation defined by lawyers and accountants in SEC filings), and I told the world I thought it would do at least $100 million better. Right now I know nothing beyond what the public knows, along with my sense of things from having run the firm for 20 years.

From glancing at Wayfair’s numbers, I can see that there is secular weakness within our economy. I began hearing of something in the real estate market just after Labor Day, a downshift audible to those who know where to listen. Then came the sputtering repo market (about which a knowledgeable friend gives me this explanation: JPMorgan had been acting like a mini-Federal Reserve to smaller banks, the vig disappeared so they pulled out of that line of business and it cost the system so much liquidity it created the repo market ripples we started seeing last autumn). So even before we get to Covid-19, Wayfair’s numbers suggest some kind of systemic downshift. Throw Covid-19 on top of that, and its anyone’s guess: Does the economy collapse? Or do quarantined people shop from home? You know what I know (though I will point out that the agile networked supply chain Overstock has developed is far more robust than the ones conventional brick-and-mortar stores use).

Setting macro-economics aside and returning to Wayfair: What’s in store for them? They’re done. Here’s is why. Less and less of their overhead (corporate expenses) is being covered by what their operations generate to pay their overhead (which is to say, their Gross Profit minus their advertising costs, or what was once known as “Contribution Margin”, an analysis suggested to me years ago by the good people at Allen & Co.)

For 2019, 43% of their overhead was covered by their Contribution Margin. That means that to get to break even they would have had to cut 57% of their overhead (which would mean about 2/3 of their people, given sticky fixed costs): it is hard for anyone to do that without nicking an artery, but Wayfair has not shown a proclivity for cutting in any case. And if they did eliminate that much overhead, presumably those people were contributing something, when they are gone Wayfair would lose that something, and the Contribution Margin will thus drop. That puts them in a death spiral.

Will the capital market save them? By the end of 2020 they will have lost $5 billion with no end in sight and nothing remotely looking like “a profit” (not even on some adjusted triple-reverse-Earnings-Before-Expenses Wall Street basis). To anyone considering funding Wayfair with more capital, please feel free to forward (royalty free) this robust counterargument:

Will they be purchased for their technology? The idea is not dumb, actually. There are some massive home-related brick-and-mortar retailers who more or less sat out the last 20 years and have websites about which they are embarrassed. Such are the advantages of a hybrid brick-and-click model in home goods that if they don’t buy good technology (they will never develop what they need in-house and they know it), then over the next 10 years they are all going to be roadkill for Amazon, Wal-Mart, and Target. Truly, any other home goods retailer who thinks it has a moat is going to learn that those three firms use a hybrid model to absorb all neighboring models.

So such firms are in quite a fix. Wayfair is good technology, and buying it would let one of those large brick-and-mortar retailers solve their problem with one huge check. But Overstock is better technology and trading at 1/20 of the cost. How can we know it is better technology? Again, to any candidate acquirer of Wayfair, feel free to send this robust argument:

The reason Overstock stands virtually unique with that record is not because of its brand, its not because of its CEO, its because of its technology. And technologists. And teams that integrate business leaders and technologists. Given that Wayfair has never and will never produce anything like that in its history, while Overstock did on an amount of capital about equal to what Wayfair lost in the last 90 days, any potential acquirer of Wayfair would be massively overspending on an Edsel while they could be buying a Porsche at 1/20 of the price.

Absent any more dumb-money, Wayfair will try to survive not by leaning out their whole operation, but by cutting off a limb immediately. The move I expect is for them shut down their massive German expansion. Then all of Europe. Maybe Canada.

Yet the problem that will keep them awake nights about that is this: “As we shut down these operations we are going to hemorrhage huge losses, and so we are still going to need fresh capital. But the market valued us as a growth stock, and as we shut down those operations we will lose our luster, our valuation will collapse, and then we will not be able to recapitalize.”

Meanwhile, as they deliberate that chestnut, they are staring at something else: I believe you will see their Q1 growth drop under 20%. While a growth rate in the high teens may still be impressive, they will no longer be in “high-growth territory”, and their valuation will collapse anyway.

Note to Wayfair: since that Rubicon will be crossed this quarter, as you and I both see, I recommend you do your chopping right away so that when you have to report slipping below 20% you will also be able to report having started the expense adjustments (and no, I do not mean last week’s 3% RIF.)

So Wayfair is not going to get funded by the capital market, it is is not going to get sold, they probably cannot (and certainly will not) match their expense structure to their Contribution Margin (and even if they did, that Contribution Margin would collapse and they would be in a death spiral). How about their vendors?

On any normal day Wayfair abuses their vendors, with payment terms about 20 days slower than Overstock, as I recall, and even on its own generous-to-Wayfair terms, Wayfair stretches outs its vendors (while OSTK has maintained a perfect Paydex Score of 80 for about 99% of the last decade: I always wondered why vendors agreed to act as little banks for Wayfair but refused Overstock such treatment). Yet rumors from vendor-world reached me in the last week suggesting that Wayfair is now telling vendors: “Prepare to be stretched out even more!” Their vendors may agree to expand their side-business of being banks for Wayfair: If they do, they are going further and further into the business of picking up dimes in front of a steam-roller. Most days in the future they will make a dime. Then one day something else will happen: some vendors will decide that they are not selling any more products through Wayfair until they get paid as promised, at which point it will unravel. As a vendor, you do not want to be the last to get that joke (because only the first vendors who get it will get out whole).

So Wayfair will no longer be financed by Wall Street, no one in their right minds would buy them at anything like their current price (especially when they could get better technology in OSTK at 1/20 of the price), they cannot cut enough now to save things, their vendors may eventually decide they don’t want to be Wayfair’s bankers (and in fact could actually create the vendor-equivalent of a “run on the bank” just from not wanting to remain financing a firm that in 2020 will burn through its five-billionth $1 bill).

So Wayfair is as done as done gets. The public market can thank Goldman and Bank of America/Merrill Lynch for that one.

If only there were a pattern, if only there were a pattern…

Right now the best strategy for Overstock (in my view) is to rope-a-dope. Not to worry one iota about growth, but simply to hang back and maximize Contribution Margin by refining technology, and adjust the expense structure as needed. When your opponent is destroying himself, don’t interfere. Wayfair drove down a cul-de-sac from which there is no return.

If you agree with what I just wrote and you are an Overstock shareholder, you should not worry one iota about growth in Overstock Retail until the Wayfair farce plays itself out to its ugly, ignominious, and inevitable end.

  1. Hi Patrick.Thanks for this article.I still hope you can be convinced to help bring this dream to fruition that is linked below,whether OSTK wants to do this or not.

    It is the best idea I can think of to make the world a better place and I truly believe it could be a world changer.I included my email in this response if you ever want to discuss this idea.

    Have a good weekend.Peace


  2. Patrick if Wayfair was smart they would buy Overstock retail… Could save lots of money on adverting and other synergies with both coming together plus the value with tech…

  3. As of about a week ago vendors were saying that they still had not been paid by Wayfair for Black Friday sales!

    1. Wow. That is going on 90 days, then.
      The smart play for any vendor on both Wayfair and Overstock would be to diminish the articles you list on Wayfair and expand those listed on overstock. Yes, I know you are giving up volume, but you are giving up volume for which you will be paid between 90 days and never, versus adding volume on a website that pays in 30 days like clockwork.

  4. Wow… very informative. I learned that Merrill Lynch who shorted $OSTK since before 2010 also bought the old CNS company and re-purposed it as $W (Wayfair) to directly compete with and try to hurt OSTK’s revenues. Later in 2016 Merrill Lynch was found guilty in a Calif. court and paid $20 mill to settle claims it engaged in the short-selling of OSTK. Then Blackrock, owned by Merrill Lynch bought a sizable position in Overstock to lend shares short continually. I can speculate that there might be someone high up at Merrill Lynch who SERIOUSLY HAS A HATE-ON AGAINST OSTK FOR THE LAST 15 years. So far Merrill Lynch has wasted billions on Wayfair which is going under (if your summary of their business model is to be believe), wasted 20 million in its lost lawsuit and continues to hold funds in OSTK to short shares losing opportunity costs of that money. I do see a pattern here.

  5. Wow… very informative. I learned that Merrill Lynch who shorted $OSTK since before 2010 also bought the old CNS company and re-purposed it as $W (Wayfair) to directly compete with and try to hurt OSTK’s revenues. Later in 2016 Merrill Lynch was found guilty in a Calif. court and paid $20 mill to settle claims it engaged in the short-selling of OSTK. Then Blackrock, owned by Merrill Lynch bought a sizable position in Overstock to lend shares short continually. I can speculate that there might be someone high up at Merrill Lynch who SERIOUSLY HAS A HATE-ON AGAINST OSTK FOR THE LAST 15 years. So far Merrill Lynch has wasted billions on Wayfair which is going under (if your summary of their business model is to be believe), wasted 20 million in its lost lawsuit and continues to hold funds in OSTK to short shares losing opportunity costs of that money. I do see a pattern here.

  6. Nouriel Roubini’s comments today (re. virus pandemic) in Der Spiegel are somewhat shocking. Would love hear your take on it.

    1. Maybe I will write something with my thoughts on Covid-19. In brief, “Don’t panic, but prepare. And learn to bow.”

      1. I recall Trump saying many years ago that he wished Americans would bow like the Japanese instead of shaking hands — he was and is a germophobe. Maybe he will make it happen now!

        1. i spent 1983-1984 in China, among the early wave of foreign students going there. There are some things I picked up there that always made the West seem odd after it. One is our lack of honorifics in our speech. The other is, “not bowing”. Who wants to go around touching the hands of strangers?

  7. My only experience with Wayfair was after Trump was elected. I felt life was going to get better so maybe my hovel should reflect my optimism. When something at Wayfair caught my eye, I’d search Overstock and usually find it (or similar) for less. Wound up buying two wool rugs for my living room for a pittance and much better quality than expected. I guess I should thank you, Patrick!

  8. Overstock’s director, Rob Shapiro, appeared on CNBC representing only his economic consulting firm while spreading FUD like a tried and true Dummycrat.

    Not one comment with all his fear tactics that viewers should take solace shopping at home to Overstock’s site.

    Lost respect for this FN Buffoon.

    Patrick…rumors abound that you were in Singapore marshaling Makara to revisit by financing with you, Overstock/Medici on St. Patrick’s Day.

    If you do, throw that JA…Shapiro, out on his ass!

  9. Nope. I am 100% gone. The firm wanting to be 100% disassociated from me, I have moved on with my life, have other investments, and am doing other things.

    It is only proper. As some may discern, I am more or less laying low, until or unless the Deal Goes Down. Probably cannot be involved with any firm right now.

  10. Hi Patrick.What do you think about this idea of Overstock offering Ravencoin rewards to Club O members?Perhaps 1 Ravencoin earned for every $5,$10 or $20 dollars spent depending on the future RVN price?
    (For example, a purchase of $40 could earn Club O members 8,4 or 2 Ravencoins respectively.)

    I think it would not only only boost sales and website traffic for Overstock but also flood tZero with new accounts.

    I also think a Ravencoin dividend to OSTK and/or OSTKO holders would be great if possible.

    1. You seem to be right. Since Patrick wrote this article, Overstock has gone into nuclear meltdown almost inexplicably.

      It has accelerated Wayfair’s percentage declines since their disastrous report, and is trading for little more than the last known cash on its books.

      No “cold fusion” any longer here, and now we have another Friday, September 13th staring us in the faces.

      Do you feel lucky, Anonymous?

      1. I know I could use some luck tomorrow. My portfolio is heavy OSTK and Bitcoin. I never thought I would see OSTK market cap so close to $100M and Bitcoin has been hit hard. Next week Patrick can buy back in as I think mid week is when his restrictions expire. Got to be tempting at this price.

        1. I will not be buying back in via the open market. The company and I are disassociated. If they want my capital at any point, they know how to reach me. But I moved on to other endeavors. No public firms, boards of directors, corporate politics, or investor relations in my future.

          1. Looks like they are borrowing from loancore. I more than doubled down when OSTK was below 3 and sold some of that this past week. I still think the market is not done going down yet. Good luck on your new endeavors and stay safe.

          2. Sorry to hear that .. even if you left with OSTK on the trajectory to profitable, long-term, sustainable growth.

            Always thought you’d be back. There’s still a war to fight and win. But if your heart’s not in it ..

  11. Now that a great deal of America is sheltered in place while staying at home fully preoccupied with Virus Fears, when shall The Deep State Arrests domestically, and attacks against our enemies abroad begin? Will it appear like a thief in the night?

    Will President Trump place the globe in Shock and Awe in a way that The Bush Family Clan would be jealous of? Who and how many will be smoked out, and how important will those names be?

    Patrick Byrne has said he knows, but he remains in hiding in a different manner.

  12. Most people who lack prescience think the future of the world will be defined by progress in the form of globalization, or just copying things that work the way Wayfair is unsuccessfully doing with Overstock. It’s an old model that technology has leapfrogged beyond. It’s incrementalism, offering more sameness.

    Steve Jobs showed us the most important objective in business is the creation of new value. Apple’s value critically relied on the singular vision of one person.

    Patrick’s legacy is the act of creation — envisioning the future of progress as doing New Things through its serious technology advantage, the ethos of the Dot Com Boom whereby Overstock was founded.

    Patrick had the rare advantage of a quite prestigious career in cutthroat academia. I would imagine a decade-long exercise in thinking about the economy of ideas allowed him to conceptualize digital commerce from zero and scale it to a profitable venture. Overstock is still as much a technology company as it is an e-commerce one. Its increasing investment in machine learning and other technologies will allow it to remain the leader of its competitors.

  13. Excellent interview https://www.securitytokenacademy.com/ . Really put into words why we do this.

    Thank you again for your support of RVN. If you haven’t already read up on the last Dev meeting. There is a friend out there that could use some wisdom…

    Still would be nice if there was a place were we could post stuff FYEO…

  14. I’ve read a lot of articles, tweets, and analyses about Wayfair recently. It’s extremely rare for anybody to mention Overstock; it’s as though Overstock doesn’t even exist. I don’t know what to say about that. You guys got beaten at your own game. Nobody knows anything about you, and I wish I had known that earlier, because you’ve stolen a lot of capital from me, Bryne. Oh, well. I made my choices.

    1. On 29 February (in this post), Byrne predicted “So Wayfair is not going to get funded by the capital market”.

      Well, a little more than a month later, at the height of a global plague, the capital markets handed Wayfair $535 million. That’s more than twice the market capitalization of OSTK. W shot up 40% in one day as a result, and has gone up even more today.

      Why do you keep getting it wrong, Byrne?

      1. When Byrne wrote this article on 29 Feb 2020, $W was $63.21. Today, it reached an all time high of $212.06 (so far). You really know how to pick ’em, Byrne. No wonder they shoved you out of the Board.

        1. Yesterday, Wayfair reported a quarterly profit of $273.877 million, or a diluted EPS of $2.54. What does that make of your thesis?

          1. Right now, $W is $346.29.

            August 11, Overstock announced a secondary offering for $84.50, well below the current price on that date, diluting the shares to raise $177 million (gross).

            August 22, Wayfair announced they were going to REPURCHASE $700 million worth of shares.

          2. Lol, nice guess here Patrick…wayfair definitely died! Oh wait no they’re massively profitable and worth more than 10x what overstock is worth. I forgot overstock even existed til I read this article. Makes sense though that your predictions here would be as bad as your predictions and thoughts about everything else!

  15. media whores BUSY
    CORRUPT money changers in bed with corrupt gov, corrupt tech.
    stay safe- the good guys and gals will win.

  16. Hey Patrick, enjoyed your piece. Minor grammatical error

    “Will the capital market save them? By the end of 2020 they will have lost $5 billion with no end in site [sight] and nothing remotely looking like “a profit”…”

    All the best.

  17. Patrick, I hope you are well. Wayfair is now at $180/sh, an all time high. I am curious, do you see this as a legit shorting opportunity?

    Are you satisfied that the tZero dividend will be working as expected, or is there another form of bazoomba?

    1. You should probably stop seeking his advice at this point. He couldn’t just leave us holding the bag on OSTK.

      He had to make the worst short call of all-time on Wayfair to stick the knife in deeper.

  18. You should probably stop seeking his advice at this point. He couldn’t just leave us holding the bag on OSTK.

    He had to make the worst short call of all-time on Wayfair to stick the knife in deeper.

  19. in case buffett reads this-
    i watched the entire presentation on yahoo.
    great job! amazing.

  20. Patrick, did you see that Sara Carter is all over the latest revelations about #Obamagate??

    Maybe matters with Durham, Barr, et al. are finally building to a crescendo!!

    Will you be in the news again soon? Inquiring minds want to know. ;^)

    I really hope it won’t be nasty for you but it’s time this mess gets cleaned up, well as much of an exposure and clean up as can happen in our flawed world.


  21. Patrick,

    With due respect, you’ve been on Wayfair’s D for years saying the same thing. Over and over and over. Your jealousy is so transparent, it’s sad to watch. A true sign of intellectual honesty and strength is to admit you’ve been wrong for years and years on this. Move on, buddy.

  22. Hi Patrick,

    I know that you are not affiliated with Overstock.bomb any longer, but I did want to inform you that I am now one hundred percent certain of my earlier warnings and advice to you that the little boy known as Saum spearheading tZero was your most likely “traitor” that ended up forcing you out, and after yesterday’s investor day conference, I am pretty sure JJ was part of it also.

    The Chicken Farmer thinks he controls the company now in and out of the cue twice, while JJ and Saum wiped his but for him. He is an unimpressive player from all I glean, but I digress. The Street is still not willing to let Overstock succeed without Wayfair leading it, and when correction times comes like today, The Street is certain to make Overstock lead the way down “exponentially” vs. the Wayfair even during the wake of a second Wave of COVID-19 scaring the market which should have boded well for your former bomb company.

    On your Deep State Topic, it’s good to see the authorities including The President’s Men are making progress towards your claims.


  23. I see someone else posted today’s story about the overpriced Wayfair Cabinets and pillows. Patrick, I would be very interested in your take.

    I’m not look for you to dig deep into the claims. I would just like your thoughts regarding how a site like this could have items that are so seriously mispriced on their site.

    I’m also interested in your views on Wayfair’s statement. “There is, of course, no truth to these claims,” a Wayfair spokesperson said in a statement to Business Insider. “The products in question are industrial grade cabinets that are accurately priced. Recognizing that the photos and descriptions provided by the supplier did not adequately explain the high price point, we have temporarily removed the products from site to rename them and to provide a more in-depth description and photos that accurately depict the product to clarify the price point.” If you were advising them, is this that statement you would recommend they make?

  24. Good thing you dumped all your OSTK.

    And thanks for discouraging those of who believed in Overstock into selling their shares and shorting Wayfair.

  25. I click on Walmart and other interesting to me ads on FB. Wayfair requires an email address to see the items advertised. They keep fooling me but I do not go for it and do not enter their site. I comment on their posts but they do not listen to me. So, I just to a search for the item and find it somewhere else.

  26. In response to Karen, I too saw those posts.

    As an OCD shopper, I can attest that those shocking high prices are indeed real. I never understood where they came from and assumed they were tech glitches.

    I also heard the “How I Built This” Wayfair special on NPR a few years back. It struck me as odd, but fascinating. Now we have alternative theories that might explain everything.

    So many companies are artifically priced, WeWork and Twitter being shining examples. All is unraveling now!

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