Wayfair continued to face the issue of growing sales and persistent losses in its latest quarter, but an analyst pointed out several signs of improvement as the company worked to improve its profitability.

The online furniture retailer reported a net loss of $116 million in the fourth quarter and $313 million for the full year.

While this is an improvement from last year’s loss of $492 million, GlobalData MD Neil Saunders said the bottom line is still a “painful reminder” that the company has a long way to go before the business model proves itself.

There were, however, some signs of optimism, the analyst continued, adding that there has been a material change in the composition of the losses. 

“This year, most of the red ink was down to debt extinguishment costs. When these are removed from the full year figure, the net loss reduces to a less painful $80 million. 

“And this still includes $53 million of exceptional restructuring costs, mostly related to the German operation. So, on an underlying basis, the business is going in the right direction,” he said.

Away from the profit numbers, the topline performance remains solid with sales up 6.9 per cent in Q4 and 5.1 per cent for the year. 

Saunders noted that the US business saw a 7.4 per cent growth during the quarter, which was well above the market and underlines that Wayfair is gaining share. He attributed some of this to an increased focus on value among shoppers.

The one concern is the modest 0.5 per cent decline in active customer numbers, the analyst noted.

“This is slightly worrying given the extensive amount Wayfair spends on advertising and marketing and the gentle expansion of physical stores which should increase exposure. If this trend carries forward it makes Wayfair more reliant on expanding share of wallet among existing customers,” he said.

On the competition front, Saunders said Wayfair’s position would come under more pressure in the medium term, amid the ongoing expansion of Ikea and the continued rise of value-oriented firms like Bob’s. 

“Overall, there is genuine progress at Wayfair,” he said. “The underlying business is improving, and time is being bought through debt restructuring. But the central challenge remains unchanged: with a weak balance sheet, Wayfair has little room for error.”