Whitney Tilson’s fourth article on Wayfair

Two More Items Of Wayfair Inc (W) Furniture Fail Formaldehyde Tests by Whitney Tilson, Seeking Alpha

Summary

Two more items of Wayfair furniture have failed the formaldehyde tests I commissioned.

In total, 9 of the 10 Wayfair products I’ve had tested – five types of laminate flooring and five pieces of furniture, all made of composite wood and all but one from China – have failed formaldehyde tests.

This high failure rate leads me to believe that the problem is systemic.

Wayfair is, I think, learning what Lumber Liquidators learned the hard way: if you go to China and hit the low bid, odds are high that you will get tainted product of some sort: at best, very low quality; at worst, made of illegal or toxic materials.

The next products I plan to test are items of baby furniture.

To address this and protect American consumers, Wayfair (and other retailers of Chinese-made composite wood products, including Amazon) need to need to stop ignoring this issue and take action.

In my initial article on Wayfair, Why Wayfair Is My Largest Short Position, I wrote:

…this business is so poorly managed and/or spread so thin that they were selling Chinese-made laminate long after everyone in the flooring industry knew (thanks to the March 1st 60 Minutes story on Lumber Liquidators) that there were big issues – and potential liabilities – associated with this product, so extreme caution was called for.

Just as I did with Lumber Liquidators, I hired a testing company to purchase and test five samples of Ark laminate flooring from Wayfair’s web site. All five failed the California Air Resources Board (CARB2) limit in spectacular fashion (by a factor of 2-5x) [I’ve posted the test results here]. In fact, the test results were very similar to those for the three samples of Lumber Liquidators Chinese-made laminate that I had tested more than a year ago.

In my follow-up article, Wayfair Doubles Down On Poisoning Its (And Its Partners’) Customers, I shared the first three results of five samples of Chinese-made composite wood furniture that I had tested (this chart was part of a 74-slide presentation I gave at the Robin Hood Investors Conference on November 16th). As one can see, two of the three Wayfair furniture items failed by a wide margin:

Wayfair

Then, last week I received the test results for the other two Wayfair furniture products I had tested (I have posted all five of my furniture test results here) and, sure enough, they failed as well: a nightstand emitted formaldehyde at a level of 0.14 parts per million and an end table was at 0.48 ppm, both above the CARB2 limit of 0.11, as this page shows:

Wayfair

Note that the nightstand is made in Malaysia, evidence that the problem, while concentrated in China I believe, is not limited to that country. Note also that these two products are brands exclusive to Wayfair and were shipped to California before being tested, meaning that they are required to comply with CARB2 (California Air Resources Board) formaldehyde limits.

A Systemic Problem

I have no doubt that Wayfair and its defenders will claim that I’ve cherry-picked certain products to test and that they represent only a tiny fraction of the 7+ million products the company sells. And it is indeed true that, especially when I’m paying ~$1,000/test, I am not testing randomly. Rather, I have focused on products that I think are likely to be toxic – namely, those made in China of composite wood, which typically means medium-density fibreboard (MDF), a commodity product that’s at the core of products like laminate flooring and low-end furniture.

MDF can be manufactured at a meaningfully lower cost if resin with high amounts of formaldehyde is used. Hence, there’s strong incentive for manufacturers to cheat – and it’s well known that China is the Wild West and companies there, in pretty much any industry, will cheat like crazy if they’re not: a) paid a fair price; and b) monitored closely. Specifically, one industry insider with deep experience in China told me that the MDF manufacturers there are notorious for cutting corners.

For these reasons, I’ve focused my attention on composite wood products from China – and my suspicions have been confirmed, based on 9 of the 10 items that Wayfair is selling that I’ve had tested failing the CARB2 formaldehyde test.

There’s no shortage of potentially toxic Wayfair products to test, as a search under “MDF” on the company’s website last night yielded 18,457 items, as this screenshot shows:

Wayfair

Of course only a small fraction of these items are potentially toxic, but even if we look at only 4% of the total in the “Cabinets & Chests” category, that’s still 749 products.

How many is too many? How many more tests do I have to do before Wayfair (and, to be fair, other sellers of such products) come to their senses and realize that they have a big problem, not a little one???

Wayfair is, I believe, learning what Lumber Liquidators (NYSE:LL) learned the hard way: if you go to China and hit the low bid (as I think many of Wayfair’s suppliers are doing), odds are high that you will get tainted product of some sort: at best, very low quality; at worst, made of illegal or toxic materials.

What Wayfair Should Do

What would any sensible, honest, ethical and reputable company do when confronted with evidence that it is selling products that don’t comply with environmental regulations in the largest state, California, and therefore is likely jeopardizing the health and safety of its customers? Wayfair should:

  1. Immediately suspend sales not only of the products in question, but also any other products that might be toxic (in this case, at the very least, all furniture and other wood products manufactured in China that are constructed of wood composite materials such as MDF and particleboard);
  2. Ask the person who revealed the test results (me) for an official copy of them so that my results can be verified (I’ve posted all ten of them here and here);
  3. Once the results of the tests I commissioned are confirmed, contact all customers who bought these products, inform them of the potential danger, and offer a free return and either a full refund or replacement;
  4. Launch its own large-scale testing program to determine how widespread this problem is; and
  5. 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.

What Wayfair Is Actually Doing

Wayfair of course doesn’t want to do any of this because it would hurt both the company’s profits (well, to be accurate, increase its losses; it’s never earned a profit) as well as its stock price (the latter would be especially bad when the CEO, Niraj Shah, and the other co-founder, Steven Conine, each own Wayfair stock worth more than $600 million and the top eight executives at Wayfair have been selling an average of nearly $7 million of stock per month for

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