Wayfair turned a corner due to COVID in Q2, but there are a few signs that there could be a regression to the mean as things go forward.

• eMarketer has reported that Furniture penetration online vs. offline accelerated almost 50% Year on Year from 21% to approximately 30%. This is a huge tailwind - some of which will stick around.

• Gross Margins reached 30% - pretty great for what is primarily a drop ship and fulfillment services business. They expected this to decline in Q3 to around 26%.

• One thing I would watch with Wayfair that was mentioned is the reduced amount of promotional activity on the site during Q2. As demand slides down, promotional activity must naturally increase off what is probably a generational low. (Though anecdotally, David Lerner noted that he was “not sure where the perceived lack of promotional activity comes from. One thing that stuck out to me during Q2 was the overwhelming volume of sale-driven emails I was receiving from Wayfair. At a rate of what seemed like 1-2 per day.”)

• I continue to think they have a big opportunity in fulfillment because the furniture supply chain is so fragmented.

  On this note, Michael Gutfraynd added that “shipping is definitely a pain point as oversize items' costs continue to increase at a much higher rate than smaller items. The dimensional divisor keeps shrinking and surcharges are increasing. The question on Wayfair is can they build out a distribution network to cut costs. That's another area Amazon is way ahead.”

• Revenue growth accelerated 83% Year on Year in the US and 90+% Year on Year internationally.

Matt Mallouk added that “Wayfair does a better job than most retailers combating price comparison activity with their proprietary images and white-labeling efforts. That could be one reason for margin resiliency. The Castlegate network lets Wayfair have control over fulfillment while keeping the inventory cost on the supplier’s books, and making suppliers cover the cost of pick-pack-ship. Suppliers get a “prime-like” ranking boost on the site for having their items in Castlegate, which keeps suppliers incentivized to put more items in the network. I don’t see fulfillment as a growth opportunity in and of itself for Wayfair, but it is critical to the low-cost, full control dropship model they are trying to achieve.”

I think as a company they are smart and improving. They have a niche and their experience and selection is miles better than Amazon in a category which has proven to be defensible. They have been better than most about building a moat and defending their territory. I’m curious to see how the coming quarters go for them.