The days of pandemic-fueled profits and $300 share prices are a distant memory for Wayfair Inc. (NYSE: W). Things were bound to normalize for the online home goods retailer, but its fall from grace has been one of the most stunning post-Covid plunges yet.

The reality check back to 2014 IPO levels took another hit last week after Wayfair reported its fourth consecutive quarterly loss. It was its worst one yet.

After the stock dipped below $30, bargain hunters emerged to drive the stock back above $40 by Friday (albeit amid a broad two-day market rally). It may seem tempting to declare Wayfair a potential 2023 turnaround story, but plenty of headwinds remain — not the least of which is a slowdown in U.S. e-commerce activity. 

How Were Wayfair’s Q3 Financial Results?

Wayfair reported that revenue fell 9% in the third quarter to $2.8 billion. Approximately 80% of sales came from U.S. websites, with the rest from international websites where sales fell 24%. Although overall revenue was slightly ahead of the consensus forecast, a worse-than-expected $2.11 per share net loss was tough to stomach.

Yet the most concerning metric was that repeat customer orders fell 19%. With online shopping no longer the only show in town, this suggests that consumers have returned to physical stores where they can touch and feel products in person. This is one advantage of furniture showrooms that will be tough for Wayfair to match. The novelty of virtual showroom tours and room visualizers seems to be wearing off.

Wayfair had 22.6 million active customers through the end of the third quarter. This was roughly 23% less than they had a year ago. Yes, the average order size increased to $325 as shoppers absorbed higher operating expenses. Unfortunately, this was more than offset by the shrinking customer base and a reduction on the number of orders per customer, which continued to slide below two.

What are the Challenges Facing Wayfair?

Wayfair faces an uphill battle when it comes to competing with established brick-and-mortar furniture retailers. Many of these traditional players have deep roots with vendors and customers that are simply hard to replicate online. 

Nationally-known companies like Ethan Allen, La-Z-Boy and Williams-Sonoma also tend to have deeper pockets to weather turbulent stretches and comfortably invest in expansion opportunities. The same goes for big box retailers such as Walmart and Target. Even the warehouse clubs are getting more into the home goods game.

Complicating matters is the fact that brick-and-mortar retailers are ramping their own e-commerce initiatives. This is making it even harder for Wayfair to develop customer loyalty and more expensive to acquire customers. Management is attempting to overcome this challenge in part by expanding overseas, but this is no cheap endeavor either. 

Then there is, of course, Amazon. Most Wayfair products can be found on Amazon.com and the prices are comparable. This leaves Wayfair with a grueling choice — undercut Amazon’s prices or spend mightily on advertising? As we saw again in Q3, profits get hit hard either way.

The bottom line, Wayfair is being forced to spend more on marketing to acquire customers. And with consumers spending less on things and more on experiences in the post-pandemic economy, luring online home goods buyers is a major challenge these days.

Meanwhile, Wayfair’s balance sheet health is also becoming compromised as losses mount. The company exited the quarter with more than $3 billion of long-term debt on the books compared to a $731 million cash position. 

Will Wayfair Stock Recover?

If Wayfair has any chance of regaining favor with investors, it will first have to reverse its streak of six straight quarterly revenue declines. Until the company returns to top-line growth (and ideally sustainable top-line growth), it’ll be hard for the stock to attract bidders. Day traders and meme stock conspirators, maybe — but not the big money of fundamentals-focused institutional investors.

It will be especially hard for a lasting uptrend to take hold when profitability likely won’t come anytime soon. The Street is braced for several more quarters of net losses, including a $1.70 per share net loss in the Q4 holiday shopping period.

Like most areas of retail, the purchasing of furniture, housewares, and home decor is shifting online. This is the main reason to be hopeful for long-term recovery. Naturally, though, a growing cadre of brick-and-mortar retailers and upstart e-commerce players will make competition fierce. 

To its credit, Wayfair has a solid collection of popular websites. But the macro and company-specific hurdles make it tough to get behind the stock right now. Long-term growth investors should couch the idea.