Spruce Point Capital publishes short report on Floor and Decor

Well, joining us now is CNBC exclusive Spruce Point Capital Management's founder and CIO Ben Ackler on set. It's good to have you. Why Florin Decor? Well, Florin Decor has both a cyclical and structural issue right now. They're very much tethered to the home improvement cycle. They sell floor flooring and tiles and accessories. We think the consumer's a little bit strapped. There's evidence that that that home remodeling is declining based upon some other peers are talking about, but that's only part of why we like it. We think it's a they have a structural problem because they're they're expanding their store count into new geographies where tile is less accessible for the foundational structure. They're moving to lower income markets, they're ceasing disclosures that they typically live, changing some accounting language. So, you know, we like it as a short both for the the cyclical exposure to the home remodeling cycle, which we think is under pressure, but also structurally we don't think they're well positioned to hit their financial goals and targets. OK. I mean, we know housing is cyclical. We know we're in the middle of this downturn. You got a Fed holding rates higher for longer just this morning, construction, construction spending falling unexpectedly. As a company, wouldn't it behoove you to expand at a time of softness so you're ready for that upturn? Well, we think they're going to be less levered to the upturn. Part of the problem is their capital expenditures and their store operating expenses are growing substantially. We think that's going to weigh down on their earnings potential if and when their customer comes back. So they have two type of customers, the homeowner kind of do it yourself, but the pro professional contractor, that pro contractor is being courted heavily by home depots, by Lowe's, by MSI, which is a direct distributor. So we don't think that customer may come back when the economy recovers. And also there's going to be more debts on the books because they're entering the long term expensive leases. So we see a lot less upside and a lot less leverage to a recovery. It sounds like quite a vanilla short. I mean it's not like you're you're claiming there's some wild card hole in in the financial statement or anything like that. Is it expensive as well? Is it, is it actually fairly cheap already? Well, that's a great question. So part of the reason we like it is it treats at the highest valuation among home improvement retailers. And if you look at a broad array of building product companies almost three times revenues based upon some of our adjustments. So we want to be sure companies that we think are poorly positioned with a weak management and weak governance and a high valuation and leverage that really isn't appreciated. So it kind of checks a lot of our boxes as to why we like it as a short. So I do want to just go back to this because you do raise questions about some of the folks on the board and management and their history of accounting raising questions about misstatement or understatement, I should say, of debt. I mean, do you see material or I guess financial accounting wrongdoings potentially here? Are there are the red flags for you? We see a lot of red flags. And so we look at the people, the strategy and what happened in the past. So a couple board members were associated with Linens and things. That was a strategy that talked about big store formats, everyday low prices, broad SKU selection. That's exactly the same sort of strategy that Florin Decor has now. Ultimately, once linens and things store growth declined below 20%, they started missing numbers. They did some financial restatements. Floor and Decor just lowered their store growth below 20%. They're retracting a lot of claims. They no longer report adjusted EPS. They're making some other accounting revisions. So we kind of see a pattern here, a behavioral pattern of what happened with Lindsen, things with Ultra ultimately went bankrupt. And what could happen here at Floor and Decor, which could, you know, could befall the same fate. Warren Buffett disagrees with you. Well, Mr. Buffett is one of the best investors of all time, and he's got an enormous Berkshire, has an enormous equity portfolio. This is a small sliver. We fail to understand how this stock reconciles with a lot of his investment principles and Maxim's. So, you know, I think Warren Buffett's famous for saying never invest in a business you can't understand here. We're seeing floor into court retract a lot of statements, a lot of claims they used to make. So the the transparency is declining and certainly we don't think it's a value stock trading at the highest premium multiple in the industry. So yeah, we disagree with Berkshire's assessment on this stock and you know, that's part of the reason we're short.