Founded in 2002, Wayfair (W 6.93%) is an e-commerce platform that intends to provide shoppers with an extensive offering of home products at attractive prices. RH (RH 5.52%) also offers home furnishings and decor, but it focuses on a luxury experience for affluent shoppers, allowing the company to command higher profit margins.

Granted, RH's financials took a step back in its fiscal 2023 (ended Feb. 3). The company's net revenue fell nearly 16% for the year, while its operating margin shrank eight percentage points to 12.1%.

But according to management, some of these declines are a result of their plan. The company wants to expand beyond luxury home goods to various areas of hospitality, including overnight accommodations and foodservice.

RH recently launched restaurants and guesthouses with more on the way. This expansion, combined with a complete overhaul of its product inventory, hurt its operating margin the past year. But management expects a rebound to begin in the current fiscal year with adjusted operating margin rising to 13% to 14%.

RH integrates hospitality services into its furniture showrooms, which means these locations can be big. In the company's annual report, it says, "Most of our Design Galleries have approximately 30,000 to 40,000 leased selling square feet, inclusive of our integrated hospitality experience."

A large, physical space makes sense for a company like RH, but it'd be surprising for an e-commerce player such as Wayfair. However, Wayfair has taken a page from RH's playbook by opening its very first store and restaurant combo. Here are three things investors need to know.

1. Not quite Wayfair's first rodeo

On May 23, Wayfair opened a huge 150,000 square foot store in the Chicago area. Besides being described as a "one stop shop for all things home," the location will also have a restaurant called The Porch.

This will be the first physical store for the Wayfair brand but not the first physical store for Wayfair's business. The company owns multiple e-commerce platforms. In 2022, it started opening physical stores for its Joss & Main and AllModern brands. More recently, it opened three physical stores for its Birch Lane brand.

All told, Wayfair still owns fewer than 10 physical stores total across its business..

2. A competitive advantage?

While recently outlining the company's strengths, Wayfair's management said its physical spaces are a "moat" for the company, which is another way of saying competitive advantage. But I'll admit to being skeptical on this one.

Wayfair's management says many retail categories eventually split evenly between in-store and online purchases, and it believes the same will happen with spending for the home. That's why it wants to open up physical stores.

However, Wayfair had net revenue of $12 billion in 2023, mostly from e-commerce. Getting to an even split of sales from physical stores will take a lot more work if that's the goal. By contrast, it seems much easier for a brick-and-mortar home-goods store to reach an even split by launching an e-commerce platform.

Therefore, its small network of stores might not be a competitive advantage, but they could theoretically be a move in the right direction.

3. What about inventory?

One of the best things about Wayfair's business model is that it's inventory-light. Until the company makes a sale, it doesn't take possession of the inventory on its e-commerce platform -- the merchandise remains owned by the company's third-party suppliers.

Running a physical store could mean changes to its inventory-light approach. Logically, it would need to buy inventory to stock its shelves, but this might not be the case.

In its most recent annual report, Wayfair said that it had "supplier-owned inventory sitting in our supply chain." And then it followed this up by saying, "We already have everything one needs to be a nationwide brick & mortar retailer, other than the stores themselves."

A report from Axios says the store near Chicago will still leverage the company's inventory-light model. Therefore, it seems Wayfair is keeping one of the best aspects of its business intact as it branches into new territory.

Is this good or bad?

When evaluating Wayfair's push into physical retail, it's simply too early to know whether it will be worthwhile. On one hand, it could increase the company's market share or open new growth avenues. On the other hand, profit margins are often slim for physical retail, and Wayfair is entering a crowded space where it may be hard to find traction.

Therefore, Wayfair investors should withhold judgment for now and evaluate the opportunity based on actual results as they start coming in.