Lawsuit Accuses Wayfair of Misleading Investors
PITTSFIELD, Mass. — While the city and state were courting Wayfair to bring some 3,300 new jobs to the state, investors felt they were being misled.
A class-action lawsuit has been filed against the Boston-based company alleging that Wayfair officials failed to disclose adverse facts about the company, deceived the public regarding its future business, artificially inflated the stock price and allowed Wayfair executives and insiders to sell off millions worth of their personally held stock at the inflated price.
Wayfair said it did not have a comment when contacted via email for a response on Tuesday night.
The case filed Jan. 10 in U.S. District Court in the name of Marilyn Goodstein and on behalf of her and others "similarly situated" claims that on Aug. 2, 2018, Wayfair released a press release emphasizing a 49 percent growth of its direct retail revenue and that it had 12.8 million active customers. The company reported spending $177.6 million on advertising at the time.
"We are pleased to report a record second quarter and our largest yet year-over-year dollar growth in Direct Retail net revenue. This recent quarter included our biggest revenue day in the history of the company as we introduced Way Day, the first-ever retail holiday for home," CEO and Pittsfield native Niraj Shah is quoted as saying.
Chief financial officer Michael D. Fleishe allegedly reported on a conference call with investors that for the next quarter, that net revenue from direct retail sales was expected to climb from $1.61 billion to $1.645 billion, leading to an approximate year-to-year growth of 36 to 39 percent, and other revenues to increase by $4 million to $1.662 billion.
He also allegedly reported to investors that the "Q2 advertising spend of $178 million, or 10.7 percent of net revenue, represents year-over-year leverage of over 30 basis points, as we invest in engaging both new and repeat customers and benefit from a growing base of repeat customers who require a lower level of ad spend per dollar of revenue."
The lawsuit alleges that during the conference call, Shah assured investors that advertising spending was "highly targeted, direct and profitable." The company filed reports saying advertising expense should decrease as a percentage of net revenue over time "due to our increasing base of repeat customers." Wayfair officials heralded the in-house advertising tools the company had built.
Following that report, the Wayfair stock rose from $107 per share on Aug. 1, 2018, to more than $150 per share by mid-September.
At that point, the lawsuit claims Wayfair's senior executives cashed out. The suit claims Shah sold 245,071 shares for $32.377 million, and Fleisher sold 20,565 shares for $2.576 million.
"Collectively, the Individual Defendants and other Wayfair insiders sold more than $87.75 million worth of their personally held Wayfair shares during the Class Period," the lawsuit reads.
The lawsuit alleges that Wayfair's previous statements were misleading. At that point the company was a third of the way through the new quarter and "that Wayfair had been experiencing significantly diminished demand for its online product offerings and had significantly increased advertising spending to grow sales."
The lawsuit claims that the company's touting of increased customers and thus advertising becoming a smaller percentage was false.
On Nov. 1, the company released its third-quarter report that reported a $151.7 million net loss. The company's advertising costs jumped to $202.5 million, an increase of 43 percent, and total operating expenses rose 52 percent to $538 million. In a subsequent conference call, the company told investors to expect a loss in the fourth quarter as well.
The stock price plummeted that morning to $96.16 per share.
The lawsuit cites a report on CNBC that said Wayfair added 3.6 million new active customers since 2017 but is spending a lot to do so.
"Over the same period, spend on advertising was around $707 million. This works out at $196 per new customer. When customers only spend $443 a year, this seems like a rather excessive, and completely unprofitable, acquisition cost," according to the lawsuit.
The lawsuit also cited stock analyst Tom Forte, managing director for D.A. Davidson & Co., being quoted in The Wall Street Journal saying, "The basic story of Wayfair has been we're going to invest for growth today and our growth will be so significant that in the future when we scale our investment spending, our profitability ... will be so much greater ..." Adding, "but the company needs to spend more [on advertising] to keep growing sales at the current rate."
During the same year, Wayfair had been working with state officials on securing $31.4 million in tax breaks for growth. In December, the Massachusetts Economic Assistance Coordinating Council approved the tax break that is expected to lead to 3,000 new jobs in the Boston area and the opening of a 300-employee service center in Pittsfield.
Local officials have been pitching Wayfair on a move to the city throughout the year and Wayfair executives were in Pittsfield on multiple occasions. Ultimately, the company announced it would open the center in Pittsfield though the exact location hasn't been formalized.
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