We reported Tilson’s Robin Hood pitch earlier but see Whitney Tilson’s further analysis in his own words. Excerpted from an email which Whitney Tilson sent to investors.
Also see Robin Hood Investor Conference Recap [Highlights]
I blasted through 74 slides in 20 minutes this afternoon at the Robin Hood Investors Conference, laying out:
An Hour With Ben Graham
This interview took place on March 6 1976. At the time, a struggling insurer, Government Employees Insurance Company (GEICO) was making headlines as it teetered on the brink of bankruptcy. Ben Graham understood the opportunity GEICO offered, and that’s where the interview began. Ben Graham and his partners had, at one time, been significant shareholders Read More
1) The performance of my stock picks at the last two Robin Hood conferences (I had the top short ideas two years ago (LL and IOC; I didn’t pitch a long) and both the top long and short ideas last year (EXAS and JBLU);
2) The long case for the newest addition to my portfolio, Spirit Airlines; and
3) The short case for Wayfair.
Attached is the full presentation (80 slides plus a 23-slide appendix on formaldehyde), which is also posted at https://www.valuewalk.com/wp-content/uploads/2015/11/TilsonRH151.pdf
Immediately after my presentation, I did a 10-minute interview about both stocks with Stephanie Ruhle of Bloomberg TV: www.bloomberg.com/news/videos/2015-11-16/kase-s-whitney-tilson-makes-long-call-on-spirit-airlines
Regarding Wayfair, the most relevant new information I revealed was:
- I had five items of Wayfair’s furniture tested for formaldehyde and, of the three I have results on, two showed toxic levels of formaldehyde.
- Worse yet for Wayfair, it is selling one of the products on the web sites of Walmart, Kohl’s, Staples and Shop Your Way, so it’s poisoning other companies’ customers, not just its own.
- Wayfair appears to do no compliance or quality control of its own, and instead appears to be relying on little more than assurances from more than 7,000 suppliers, supplying more than seven million items.
- This is a recipe for disaster.
This issue isn’t going to be a death blow to Wayfair. However, to me it is compelling evidence of Wayfair’s incompetence and/or a business that’s completely out of control. How could any company be selling Chinese-made laminate flooring without thoroughly testing it, after what’s happened to Lumber Liquidators??? The answer, I think, lies in two factors, Wayfair’s business model and extreme growth, that, combined, virtually guarantee a host of problems from customer service, timely deliveries, product quality and, as we now know, safety.
These problems might be manageable if the business were growing at, say, a normal, healthy 10-15% rate, but instead, in a frantic bid to justify its very high valuation, Wayfair is pulling out all of the stops to grow like wildfire, Sort of like Herman Cain’s “9-9-9”, the key numbers for Wayfair are 77% (growth rate), 7,000 (number of suppliers) and 7 million (number of SKUs). In my opinion, this is growth run amok. I’ve seen this story so many times by companies trying to justify their insane share prices – it’s a curse because it almost always ends in tears…
In light of the likely widespread product safety risks that are now clear, Wayfair needs to:
1) Immediately suspend sales of furniture and other wood products manufactured in China (and other similarly questionable countries), especially those that are constructed of wood composite materials such as MDF and particleboard; and
2) Make a substantial investment in compliance, which would include hiring a senior-level Chief of Compliance, engage firms that specialize in on-the-ground monitoring of suppliers (especially those in Asia), and regularly test products being sold on its site.
It will be interesting to see if it does these things or, like Lumber Liquidators did initially, go into deny-and-attack mode.
The rest of my presentation on Wayfair covers lousy customer service, the potentially serious deleterious impact of rising shipping rates, why I believe the company is fundamentally competitively disadvantaged against all of its major competitors, the company’s compensation shenanigans and massive insider selling and, lastly, why I’m not engaged in a short-and-distort campaign.