Wayfair and Peloton show we're getting ready to hunker down indoors for the long-run

Let's talk about "stay-at-home" leverage

[Note: originally posted May 7, 2020 on my now-defunct Substack]

Quarantine has been devastating to some retailers, as high fixed costs have become an anchor on companies like Macy's and Gap. Or especially Neiman-Marcus, which filed bankruptcy today.

On the other side of the coin are Wayfair and Peloton.

Both companies reported blowout earnings this week, all the while proving that we're getting ready to get comfortable indoors for the long-run. And unlike Gap, the (expensive) investments both companies have made in delivery and logistics and in content production (in Peloton's case) have proven to be a springboard as we all plan to stay indoors.

Cocooning is the hot new trend.

Accenture described cocooning as a broad retreat to safe spaces.

Everyone is being told to self-isolate. That means a return en masse to home as the epicenter of life and experience.

And Conor Sen argued in Bloomberg Opinion that for the foreseeable future, consumption is going to be centered around the home

Although some of that lost consumption might be saved, a lot of it will be spent where it can be — and for a lot of consumers, that will mean spending on their homes. Instead of going to bars and restaurants or jetting overseas, upgrade your kitchen and or bathroom. If large live concerts or sporting events are out for a while, upgrade your sound system and television. Instead of travel, buy new furniture or build a deck and patio area in your backyard. If cities are going to be a shell of themselves for the foreseeable future, maybe it's time to buy a house in the suburbs. It’s surely no coincidence that last week the New York Times said it was eliminating its Travel section on Sundays and replacing it with a section called At Home.

We're not going to Equinox anytime soon (and certainly not to Chapter 11'd Gold's Gym). And the concept of the "second living room" that is the local coffee shop or bar? That's dead, at least for the moment.

And since everyone is pretty much in agreement that reopening ≠ economic rebound (a Washington Post/Univ. of Maryland poll showed that just 33% of respondents are comfortable going into a retail clothing store, and only 22% eating out in a restaurant), we're likely to be spending a lot more time in our living rooms, whether on bikes or on mid-century modern inspired couches.

Back to Accenture (emphasis mine)…

Desire for cocooning, along with opportunities for those with creative strategies to enable it, will move centerstage for the same reason. Winners will be those who zero their sights on the home. At the height of the crisis, many—workers, especially— are spending more time at home. After, this pattern will endure with meaningfulness and comfort carrying a price premium.

If that's true - and the early evidence is looking fairly strong - companies like Wayfair (and Shopify - more on them in the future) have an amazing opportunity. In the course of a couple weeks, the total addressable market for both companies grew massively. Aren't going into the office every day? You're going to need a desk and chars. As gyms were shutdown across the country, Peloton bikes went from a luxury item for a few wealthy clusters in New York and San Francisco to an essential item.

But is there a longer-term business risk to cocooning?

Eventually the butterfly breaks out and flies away. When we're all vaccinated or immune, are we going to want to get out when we finally can. The reversal of cocooning might happen just as fast.

Peloton saw huge growth in high-margin Connected Fitness Subscriptions. Surely they'll convert some of the 1.1M people who signed up for the 90-day trial into paying subscribers. But analysts pointed out that even if 100% of those people signed up as paying subscribers, that is still below the company's implied outlook Hardware is also a potential hazard. Deliveries for bikes is now up to three months, while the company also said it won't deliver Treads at least through the next quarter. There's more competition out there, which would take those recurring revenue streams with it.

Wayfair is also an expectations story. For all the revenue growth it has seen, it still has never made money, and has burned cash for almost the entirety of the past eight years. It's also fairly leveraged, so if those revenue growth rates fall back down, there's a high price to pay for it's expansive distribution network.

The takeaway:

More of life will take place indoors. But watch out for overly-dramatic expectations that we’ll be shut-ins for good.

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