Spruce Point has returned with a short report on lubricant company WD-40, saying the business has deteriorated in the past two years, with financial pressures at an all-time high.
In early April 2020, Spruce Point reckoned WD-40 was facing “record bloated inventories and material financial strain,” predicting a 60% plunge in the stock price. However, the company’s shares initially fell 6% but then doubled in value over the next 10 months, trading as high as $333 in February 2021.
Still, Spruce Point said in a new report Tuesday that many of its forecasts proved accurate and that WD-40’s financial condition is “the worst in decades.” The short seller argued that WD-40’s market value is high due to share buybacks and unrealistic management guidance.
WD-40 shares closed Tuesday slightly up at around $175 each, despite Ben Axler’s firm putting a new downside target of 45% to 60%.
Spruce Point compared the business metrics in its previous and current WD-40 report . The company’s days inventory, a metric that indicates the average time in days that a company takes to turn its inventory, has jumped to 104 year-over-year, from 76, while its working capital to sales ratio is at 23.9%, an all-time high, Spruce Point highlighted in its follow-up report.
The short seller also noted that WD-40’s last twelve months [LTM] operating cash flow margin has sunk to 5.6%, with the year-to-date free cash flow sitting at just $0.5 million. Despite this, the company has paid $22 million and $31 million, respectively, to repurchase stock and pay dividends. Leverage is rising to fund “overly generous” shareholder return policies, said Spruce Point.
The short seller contended that WD-40 has failed to adapt to e-commerce and stands to suffer big losses in the upcoming economic downturn, particularly in markets with depreciating currencies such as Europe and the U.K., where the company does more than 40% of its sales.