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Investors, Meet Oppenheimer's Two Newest Initiations

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Oppenheimer has initiated coverage of two companies that are poised to benefit from increased control over logistics and a secular shift in favor of online purchases.

Wayfair Inc (NYSE: W), rated Perform, appears "well positioned to benefit from secular tailwinds as home and décor sales transition online," the analysts said.

The company addresses a large market, with US home décor being a $233 billion market in 2013 and a 7% online penetration of this translating to an addressable market of $16 billion. An industry CAGR of 2.5% would mean 12% online penetration, which represents a $34 billion market. "We estimate 11% US online share for W by 2020," the analysts added.

In the report Oppenheimer noted, "The company is able to source seven million merchandise items efficiently to consumers across the web. Wayfair offers an above average home furnishing SKU selection, at competitive prices, with an average ship-time of two days."

Despite all these positives, Wayfair witnesses pressure on its gross margins. This is because the company does not maintain inventory and, therefore, gets less favorable terms than other retailers that make purchases in bulk months before making the sale to the consumer.

Moreover, Wayfair's stock is at a 44% premium to peers. The analysts believe that the shares "are already discounting bullish market share assumptions." They added that the management has "limited control over gross margins, resulting in higher volatility in the stock."

Zulily Inc (NYSE: ZU) was initiated with an Outperform rating and a price target of $17.

In the report, Oppenheimer cited the factors driving a turnaround in late 2015 as:
"1. Improving the daily experience through personalization technology, adding new vendors and products, and enhancing features on the mobile app and mobile web properties.

2. Improving the accuracy and timeliness of orders.

3. Expanding gross margins."

Zulily is trying out an "FBA-like consignment model," in which inventory is stored at ZU fulfillment centers from where it can be either shipped to a customer directly or to other retailers. This model "should reduce order-to-ship times," the analysts said.

The company could enjoy gross margin expansion in 2015, driven by improvements in automation at the fulfillment centers. The consignment model could result in further margin expansion, as the company "takes on more inventory risk in fulfillment centers," the report mentioned.

"With a near-term focus on reducing shipping times and improving the consistency of inventory availability though new fulfillment centers, we believe ZU is well-positioned to benefit from the secular shift to online and mobile commerce. While many consumers favor quicker ship times over value, we believe ZU needs to maintain a 1% market share, in order to realize upside in the shares," the analysts added.

Latest Ratings for W

DateFirmActionFromTo
Jan 2017Credit SuisseInitiates Coverage OnNeutral
Aug 2016Bank of AmericaDowngradesBuyNeutral
Aug 2016Goldman SachsDowngradesBuyNeutral

View More Analyst Ratings for W
View the Latest Analyst Ratings

Posted-In: OppenheimerAnalyst Color Initiation Analyst Ratings

 

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