Notable short-seller Andrew Left of Citron Research, who's been criticizing online furniture retailer Wayfair (W) for at least two years, says the company's business model doesn't work and its internal controls are like Bernard Madoff's.
"The accounts payable, the cash flow, the business model -- it's stupid," Left said by phone Wednesday. "They'll never make money." In 2015, Left called Wayfair the "most mispriced" stock.
In an unpublished report obtained by Real Money, Left highlights that Wayfair's accounts payable (AP) constitute 50% of its total assets. The accounts payable exceed 10% of the company's revenue and are more than its cash on hand by $100 million.
"It's half their balance sheet and $100 million greater than their rapidly burning cash pile, but W never once mentions AP in the 10-K financial statement footnotes," Left noted in the report.
Still, the accounts payable problems aren't the least of the company's woes, he said.
For Left, Wayfair's free cash flow is an "illusion." He said growth in accounts payable and accrued liabilities in 2016 increased the company's operating cash flow, but had they not grown, the operating cash flow would be negative.
"As Wayfair's revenue growth slows, I would expect the trend in accounts payable and accrued liabilities growth will reverse, hurting their operating cash flow trends," according to the report.
As of February 2017, Wayfair's unique visitors from mobile U.S. internet fell by just under 1%, the first year-over-year decline in that category for at least a year. The company's unique U.S. visitors, using both desktop and mobile devices, has fallen 11.4% year over year to 16.9 million. For unique global desktop users, traffic has dropped nearly 8%.
Though Wayfair's principal business is selling furniture, customers never get to test it out in a showroom. Wayfair competes with companies including Restoration Hardware (RH) , whose online sales make up approximately 45% of net revenues.
Another part of Wayfair's business is selling home goods including appliances and kitchen supplies, forcing it into direct competition against retail giants Amazon (AMZN) , Walmart (WMT) and Target (TGT) -- all of which focus on offering the lowest prices.
Perhaps more concerning, especially for shareholders, is Wayfair's manual internal controls.
The company says, "Our testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weakness ... we currently rely on manual process in some areas, which increases our exposure to human error or intervention in reporting our financial results."
Considering that Wayfair has over 10,000 suppliers and millions of stock keeping units (SKUs), it's curious that a retailer of that size uses manual control where errors can be introduced. SKUs all have bar codes that are used to track sales and inventory.
By way of comparison, Left noted that convicted Ponzi schemer Bernard Madoff had a manual process of internal controls by which he personally "examined the process by which all trading is supervised."
Calls and emails to Wayfair weren't returned by the time of publication.
Left says he is still short W stock (he is also still long RH). According to Bloomberg data as of March 31, 36% of all Wayfair shares are available for short-sellers.
Separately, Wedbush analyst Seth Basham noted Wednesday that Wayfair is a takeover target with a "number of potential acquirers." Basham sees Bed Bath & Beyond (BBBY) -- likely with new equity -- Target, Walmart, Home Depot (HD) , Lowe's (LOW) , Amazon and Steinhoff as possible acquirers.Wayfair shares rose by more than 4% during the trading session on Wednesday to close at $45.68.