Wayfair and Bed Bath & Beyond saw sales skyrocket during the pandemic. Where are they now?

In the early days of the pandemic, when uncertainty loomed, the home took on a new meaning — an all-in-one venue for office, school, virtual happy hour and dining in.

To adjust to the new way of life and make the place they were spending the majority of their time more comfortable, consumers began investing more into their homes. This, in turn, gave a boost to retailers that sell products for the home — even those that were struggling just prior to the pandemic.

As demand across the sector rose, so did the benefits for home goods retailers, including boosted sales, more customers and, for some, profitability.

But as consumers felt more comfortable leaving their houses and some pre-pandemic activities like working from offices returned, spending started shifting away from the home to other areas, like experiences.

Retailers like Bed Bath & Beyond and Wayfair, which were uniquely positioned to benefit, are now facing declines as demand wanes. While year over year sales declines against a period of heightened demand was to be expected, did these retailers fully capitalize on the opportunity to right their businesses?

Years-old problems

The problems Bed Bath & Beyond and Wayfair experienced pre-dated the pandemic.

For years, Bed Bath & Beyond faced a decline in sales, market share losses and drops in foot traffic. To the latter point, the retailer’s weekly foot traffic almost always fell 30% or more below the baseline between January 2017 and July 2019, according to a blog post from foot traffic analytics firm Placer.ai. Comparatively, weekly foot traffic at TJX-owned HomeGoods steadily increased during that period.

Bed Bath & Beyond had a value proposition issue with customers, which helped lead to the declines, Wedbush analyst Seth Basham said.

“Customers didn’t see a good reason to shop at stores or online because they could get the products elsewhere less expensively and more easily. So they lost a lot of traffic,” Basham said, adding that retailers like Amazon were better able to compete on price to attract consumers.

Wayfair, however, consistently struggled to turn a profit. Since 2014, when the company entered the public markets, Wayfair failed to report an annual net profit in every year but one: 2020.

In the fiscal year ended Dec. 31, 2019, the company reported a net loss of $985 million. Because Wayfair does business almost entirely online, the company has continued to shovel money into its advertising in an effort to acquire customers. In 2019, Wayfair spent $1.1 billion on advertising, which represented about 12% of total revenue.

“They were spending really aggressively for growth, investing in a number of different areas that were not likely to pay off in terms of driving growth anytime soon,” Basham said.

Capitalizing on demand

At the height of the pandemic, home retailers experienced an flux in demand.

“During the lockdown, everyone was stuck at home and focused on doing things at home, so there was a huge surge in demand for anything home related, particularly in the categories of cooking, and then bed and bath became huge categories as well over the ensuing period of post-lockdown,” Basham said. “That provided [home retailers] a lot of free customers and a lot bigger market to go after for a period of time.”

Across the sector, from small businesses to larger companies, home retailers saw more consumers actively seeking them out. A home furnishings and appliance retailer that Alvarez & Marsal’s managing director Mike Simoncic works with was faced with tremendous uncertainty in March of 2020.

“They were fearful that they’d be out of business. They cut all of their advertising going into Memorial Day because they didn’t think the consumer would be there,” he said. “The stimulus checks hit in April and May. They had their best year ever — they had their best Memorial Day ever without advertising. It just shows you that there was a surge and now we’re seeing an offset in the demand.”

Wayfair was in an even stronger position by selling in an in-demand category, but also by selling primarily online where consumers shifted spending in the early days of the pandemic. In the second quarter of 2020, Wayfair was able to narrow its advertising expenses as a percentage of total revenue to 9.7% from 11.1% the year prior. During that quarter, the company’s active customers reached 26 million, up 46% year over year.

The increase in customers — and revenue — led Wayfair to its first annual net income since becoming a public company.

Caroline Jansen/Retail Dive; data from company filings

By the end of 2020, Wayfair was able to move to a low default risk from a high default risk in 2019, according to data from RapidRatings. The firm tracks two key indicators into how companies are performing: the Financial Health Rating (FHR), which measures the likelihood of default in 12 months, and the Core Health Score (CHS), which measures the medium- to long-term sustainability and operational efficiency of a company. In both metrics, 100 is the best score and 0 is the worst score.

Bed Bath & Beyond and Wayfair have a high risk of default after seeing sales increase during the early days of the pandemic

The retailers’ Financial Health Ratings, representing default risk over the next 12 months

The period of heightened demand also gave companies, particularly mature retailers like Bed Bath & Beyond, an opportunity to reconnect with lapsed customers and introduce themselves to new ones. But it also offered retailers an opportunity to create greater efficiencies in their businesses so that they could “operate more profitably in a more normalized environment” once demand came down from peak levels seen during the early days of the pandemic, RapidRatings CEO James Gellert said, adding however that opportunity was missed by several retailers, including Wayfair.

“If you can’t get your house in order during a time of peak business opportunity, it’s going to be really hard for you to do that in a more normal environment,” he said.

Lingering problems

As vaccines have become widely available and the economy has largely re-opened, spending has started to shift away from the home recently.

While spending in the home furnishings sector in January still increased year over year, by 6%, growth is slowing, according to data from the Commerce Department. At the same time, spending in categories like apparel is ticking back up. Apparel sales saw a 24% year over year increase in January.

Macy’s, which heavily sells apparel, is experiencing “almost the inverse of Wayfair,” Gellert said. “You’ve got a diversification in a company like Macy’s where you can get the home goods and you can get the apparel and you can get a variety of other things. … Whereas the narrowly focused online home product sales are now taking a beating. “

Macy’s FHR and CHS in 2021 was 26, making it a high risk for default, according to RapidRatings. However, its most recent FHR and CHS as of December 2021 were 73 and 76, making it a low risk.

On the other hand, Wayfair’s most recent CHS was 31 and its FHR was 37, putting it back into the high-risk category.

Macy’s is now considered a low default risk after being deemed a high risk early in the pandemic

The retailers’ Financial Health Ratings, representing default risk over the next 12 months

“What we’ve been saying for a long time is that companies that couldn’t improve their underlying operational performance during COVID, are going to fall back to their prior financial status once things ease up. And Wayfair has a really good example of that ,” Gellert said. “This is a classic example of a company that got a lot of boost and benefit during a concentrated period of time, but has not made operational improvements so they’re really reverting to their prior risk levels.”

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