• Spectacular near-term blowup in the making – awful competitive dynamics, slowing growth, sell side promotion exhausted, significant undisclosed litigation – all packaged nicely in the notorious SPAC structure
  • Far better run and funded competitors such as Uber and DoorDash (SoftBank) rapidly entering Waitr’s markets and the company’s recent results already reflect distress
  • HedgeEye and Jefferies (hugely conflicted) caused a ~40% rip but with the Jefferies initiation falling flat (red close), we think run is done
  • Business unraveling – after providing FY18/19 earnings guidance in a proxy filed November 2018, CFO “retired” and WTRH massively missed the FY18 earnings and refused to provide ANY FY19 earnings guidance
  • 10-K filed 3/15/19 didn’t disclose two major recent lawsuits – we suspect unwillingness to reiterate prior guidance is because of major wage legal problems – leverage + cash burn =  $1/sh  TP

Waitr Holdings, headquartered in Lakes Charles, LA, is a food delivery business.  The company employs mostly W-2 drivers (i.e. actual employees NOT independent contractors) to go to restaurants, pick up food, and bring it to customer doors.  We fully buy into the idea that food delivery is a secular growth story as millennials increasingly shift to hermit lifestyles in their city apartments.  As both friendly and hungry bears, we ourselves have become major customers of the food delivery industry.  We believe that Waitr Holdings is a stock stock running on fumes, backed by conflicted Wall Street brokers, and the worst way to play the trend in food delivery.

Waitr is a company that only came into existence in the past few years and may not even have clear title to the name Waitr (see more on the Waiter.com v Waitr litigation below)…how often do you come across a company that is burning cash, levered, and may not even have a clear right to its name? 

As we will show in this report, we view WTRH as a company teetering on the brink of extinction due to undisclosed litigation risks, high leverage, alarming cash burn, a complete unwillingness on the part of management to provide any color on forward earnings, and a competitive landscape that makes WTRH look like a JV high school basketball team facing the Kobe/Shaq LA Lakers.

There are a multitude of reasons to be short WTRH but rather than make you sit through a 15 page report we’ll get to the meat right now.  Waitr faces massive competitive threats – even the bulls acknowledge this point.  It is also levered and rapidly burning cash.  How in the world can anyone feel comfortable owning this stock given that in November 2018 the company provided both FY18 and FY19 guidance and then proceeded last week to a) massively miss their FY18 earnings guidance and b) refuse to provide updated FY19 earnings guidance!?

The Only Chart You Must Read In this Report

Source: Merger proxy

Company Refuses to Provide Updated Guidance On Call

Source: Seeking Alpha

We’ve seen some busted “new to the capital markets” growth stories in the past (i.e. TrueCar) but this one is the worst we have ever witnessed.  In that case as well, the Wall Street hype machine was out in full support of TrueCar even though it was already obvious at the time of the IPO that the company had hit a growth wall.  Lucrative banking fees seem to have a way with people!

WTRH was formed out of a notorious SPAC deal.  We have had great history shorting SPACs.  We are not alone in our distrust of SPACs – the New York Times has documented the SPAC structure’s “record of failure”.  In addition to all of these factors, we became even further intrigued when in February 2019, the CFO of Waitr decided to “retire” at age 53 just 3 months after completing the deal with the SPAC.

The powerful Wall Street forces that back this company have not presented a fair and balanced story about Waitr.  And yes – we’re short the stock.  But does that make us any more biased than Jefferies, a bank that advised on the SPAC deal, currently owns a ~7% stake in WTRH, and recently initiated on the stock with a $18 target price based on fluff (see more later)? 

We fully anticipate that in response to this report, Jefferies will be out “rebutting our claims” and “having even more conviction in its buy rating”.  We’re fine with their rebuttal – but we think Jefferies would be well served to put this disclaimer in the front and center of any rebuttal reports it decides to issue to this report rather than burying it on page 16 fine print:

Source: P16 of Jefferies Report on WTRH from 3/13/19

We recommend investors stay clear of this “Dine & Dash” in the making.

Following HedgeEye On Food Calls Has Lost You Money In the Past and Will Lose You Even More Money in This Case

With a stock like WTRH, the technical and sentiment dynamic on entry matter as much if not more than fundamentals.  We think the time has come to fully engage the short.  The sell side hype machine has been unchecked for the past two weeks, getting the stock up ~40%.  The most obvious sign that the hype train has run its course is that the Jefferies initiation piece fizzled out and saw the RED by mid-day. 

Source: Bloomberg

Not only is the sell side fanfare dying out, but so are the actual operating results.  There are clear signs in recent financial reports that the company is already seeing its growth rate fall precipitously.

GRUB is an obvious and direct comp to WTRH.  GRUB has been around a lot longer and generates gross food sales that are almost 17x higher than WTRH in 2018.  The law of large numbers tells us that GRUB should be seeing a slower growth rate than WTRH.

Not the case!  In fact, as you can see below, in time period between 3Q18 and 4Q18, GRUB grew its revenues at a 12% sequential rate off a base of almost $250M versus Waitr that grew its revenues a tiny $2MM in absolute terms and 9% in relative terms off an insignificant revenue base of under $20MM.  This is an unbelievable statistic that calls into question just how “hyper growth” the WTRH story really is.

Chart A

Source: Our analysis of public filings

The WTRH 4Q results were in our view a complete disaster that should have seen the company’s stock sell off 50% yet the street applauded the company’s performance.  Why a complete disaster?  Well, think about what time of year you most crave delivery – when it’s cold outside.  It is widely known – and can be demonstrated in the rich history of GRUB operating results – that 4Q is a seasonally strong quarter for delivery in America.  Below we lay out the sequential trend in gross food sales (i.e. the GMV through GRUB) over time on a sequential basis.  As you can see, 4Q is very consistently stronger than 3Q.  The winter sets in and people stay inside and order delivery:

Chart B

Source: GRUB SEC filings and our analysis. 2017 adjusted to exclude acquisition of Eat24

On the other hand, we lay out Waitr Holding’s sequential performance in gross food sales below.  As a reminder, the chart we laid out above (Chart A) is a revenue based chart (i.e. GRUB/WTRH’s take of the GMV that flows through their systems).  In both Chart B above and Chart C below, we are looking at just the total GMV flowing through the company’s order platforms.  Far less history is available for Waitr but one thing is glaringly clear – the company has seen a pronounced and significant slowdown in gross food sales in 4Q18 that should trouble any investor:

Source: WAITR SEC filings and only reflects Waitr standalone prior to Bite Squad deal

Any credible analyst should have spent the time trying to understand just why Lakes Charles, Louisiana based Waitr saw a pronounced slowdown in its sequential growth rate in 4Q18.  A tool known as Google would have revealed the answer – after years of going without competition, $7B food juggernaut GRUB and SoftBank funded DoorDash (now #1 player in the American food market) have entered the company’s primary market.  With a population of under 250,000, you can well imagine what competitive entry could do to a poorly capitalized company such as Waitr that lacks the strong VC backing of DoorDash or the strong balance sheet of GrubHub:

 Source: KPLCTV

We can’t drive this point home enough.  We are finding more and more examples of the big guns taking aim at Waitr’s cities.  For example, we reviewed the websites for UberEats, Doordash, and Grubhub and believe that all three companies are significantly increasing their presence in Waitr cities and that this has been occurring in recent history. 

We conducted a Google Trends analysis that supports our view that Waitr is rapidly losing relevance in its core markets as it cedes Google mindshare to DoorDash & UberEats.  See this link for more.

In the case of UberEats, the wayback machine worked well to allow us to look at Waitr overlap over time which we think makes the case that competition is rapidly rising in Waitr cities:

UberEats Overlap

Source: Using wayback machine on ubereats website to determine whether they had entered a new market and then cross checking that against Waitr website

We also found that DoorDash currently overlaps with Waitr in ~46% of markets by reviewing the websites, and that GrubHub now has 75% overlap in the state of Georgia with Waitr and 41% overlap in the state of Texas with Waitr.

These competitive shifts are happening while the company now nurses a significant debt load following the Bite Squad acquisition:

Pro Forma Cap Structure

Source: Our analysis poring through various SPAC related filings on WTRH

The company has around $123MM of debt against significantly negative EBITDA.  Yes there is cash on the balance sheet, but it is abundantly clear from the burn rate that the cash is not going to be there for long.  It is not often that a company with negative EBITDA and a huge debt balance refuses to provide earnings guidance!!!

We are therefore wondering whether the analysts at HedgeEye – who win the Friendly Bear “John Stockton Award for Assist King” in managing to get WTRH to rip almost 20% higher the business day after this highly levered company refused to reiterate EBITDA guidance on a call – bothered to do any work on the competitive dynamics in WTRH’s markets?

Source: Seeking Alpha

We just can’t understand how anyone could recommend a levered company that is seeing accelerating cash burn as a “top idea long” when far better operated and funded competitors are rapidly entering markets and the management team is not even comfortable enough with its positioning to provide earnings guidance!

Losses Getting Worse

 Source: WTRH SEC filings

If you just annualize 4Q18 losses (including Bite Squad, for which the company mysteriously failed to provide updated metrics), then EBITDA in 2019 could be significantly worse than -30M for the full year (we expect it will be much higher given the company’s refusal to provide guidance).  Even worse, the cash balance on WTRH balance sheet is only in the 50s million – so will the company need to hit the capital markets again soon to keep the growth dream alive?

Not only did WTRH’s revenues barely grow sequentially and materially underperform relative to much larger GRUB, but the company had to spend a lot more to achieve a pretty poor result!  EBITDA losses were staggering in 4Q18 and in combination with the company’s unwillingness to provide earnings guidance for 2019 call into question whether WTRH is even a stock worthy of investment.

So we looked into the history of the “Top Idea” calls from the HedgeEye restaurant team at HedgeEye and found this amusing call from September 25, 2018 – when the same team called GRUB their best long idea.

If you had followed them into their GRUB call on 9/25/18, you’d still be nursing significant losses despite the fact that the tech tape has materially rebounded. 

“Food for Thought” – Price Performance of GRUB Since HedgeEye “Best Idea” Call

What about Jefferies?  We reviewed their initiation report and found it to largely be a rehash of the presentation management already gave to investors.  To their credit and despite their conflicts, Jefferies did call out the significant competitive pressures at WTRH and did call out the lack of EBITDA guidance.  However the 7% owner of stock and financial advisor to the company still slapped a rich $18 TP on a company that did not even provide earnings guidance to the Street and that missed FY18 earnings out the gate!  We think lack of any forward earnings guidance from WTRH suggests Jefferies’ estimates lack credibility.

There was one highly material piece of very negative information that Jefferies did NOT call out in its report and that we go into great detail on in this piece – namely, litigation relating to how WTRH pays its drivers.

The Minimum Wage Litigation Looks Like A Potential Company Breaker

WTRH uses part time W-2 labor – a very different model than the 1099 model employed at most “disruptive” food delivery companies such as Uber and DoorDash. 

Investors therefore need to be aware and immediately conduct diligence on two lawsuits that were filed immediately preceding and immediately following Waitr’s first earnings call that have magically been missed by the analysts at HedgeEye and Jefferies:

Source: GizModo

Information on the second suit can be found here.  The cases are styled “Montgomery v. Waitr Holdings” and Halley v. Waitr Holdings”.

We have reviewed both of these suits and note that the law firms involved are real (have represented clients including major insurance companies).  The main allegation in the suit is that Waitr is not fulfilling its minimum wage obligations because they fail to reimburse drivers for mileage driven.  The tax code is very clear on this point – if you drive as part of your job and you use your own vehicle, you are effectively offering a kickback to your employer.  This has hit other food delivery businesses that rely on W-2 labor – namely, pizza – see this article below:

Source: BNA

If these allegations are true then Waitr’s already abysmal negative EBITDA margins could dip FAR lower.  The suits claim that Waitr’s effective wage payout is several dollars below federal minimum wage.  Furthermore, even if only a small proportion of Waitr’s drivers are currently “underearning” relative to minimum wage, Waitr will likely need to increase its hourly wage equally across all of its drivers to fix this error should the court rule against it.  This problem is particularly impactful to a company like Waitr, who operates in less densely populated areas and therefore has very large driving radiuses. 

Both suits against the company allege that Waitr failed to pay minimum wage after adjusting for the lack of mileage reimbursement.  We found this fascinating thread on Reddit from an individual claiming to be a Waitr driver.  He provided detail logs of his trips for Waitr as part of an analytical exercise he himself was doing.  The logs included mileage.  Therefore, using his logs, we decided to do our own “fact discovery” into the claims in the lawsuit – would the driver from Reddit have been paid a fair minimum wage based on his mileage?

Source: Reddit – these are his logs

Using his June, July, and August data, we compiled the analysis below that uses IRS code mileage reimbursement levels and arrives at what Mr. Reddit Drivers effective wage per hour is.  As you can see, we believe that the deficit for this driver could be as much as $3.50 – 4.50 per hour – i.e. a substantial deficit that may require Waitr to almost double its current hourly wage from the ~$5-6/hour it pays today (for readers wondering why Waitr currently pays only $5-6/hr, it is because IRS rules allow you to pay lower than the stated minimum wage because tips are included in your effective wage).  We included tips in our analysis below:

Source: Our analysis.  We got the $5-6/hr from the body of the lawsuit Montgomery v Waitr in which the following statement is pled: During the Relevant Time Period WAITR promised Plaintiff MONTGOMERY and all other similarly situated workers a cash wage of either $6.00 (Orleans and Jefferson) or $5.00 (all other markets) per hour.

Therefore based on our analysis, compensation expense could rise anywhere from 45-65% if the courts find that Waitr is in fact in violation of minimum wage laws.  Jefferies estimated that compensation expense through WTRH P&L is about $150MM – so if Waitr is in fact in violation of minimum wage rules, investors should brace for a P&L impact larger than the company’s entire cash balance – to the tune of $80MM or more.

On the topic of litigation, it is also worth noting that Waiter.com sued Waitr in 2016 for Lanham act violations (essentially for stealing the name “Waitr” from Waiter.com).  That suit survived a motion to dismiss and remains ongoing, again creating significant unknown risk for Waitr shareholders that they may be on the hook for payments to Waiter.com for name infringement.  It is hard to gauge how much liability is possible in this case, but speaks to the multitude of legal problems facing the company.  The magistrate judge reviewing the case also viewed the case as having merit, begging the question of whether Waitr would actually want to gamble at jury with these claims.  We are sure that it is not lost on the legal team at Waiter.com that Waitr’s valuation is now rich, making any potential damage claims far more lucrative.

Don’t take our word for it – unlike the labor lawsuits, WTRH actually disclosed this litigation with Waiter.com and admitted there is a chance it would have to make a large settlement payment to Waiter.com and/or change its own name.

Source: WTRH 10-K

Valuation:

Unlike SeamlessWeb (owned by Grubhub), WTRH is NOT a marketplace model.  It’s a company that employs labor to pick up food and bring it to you.  As such, using GRUB as a benchmarking multiple is a completely irrational exercise given that GRUB derives the bulk of its revenues from simply transaction processing rather than actually executing on a delivery (think of SeamlessWeb in New York).  Furthermore, given that WTRH is far worse capitalized and far less well known than any of GRUB, UberEats, or DoorDash, we believe the right valuation should still be at a 25% discount to peers.

On an EV/Gross Profit basis, GRUB is publicly traded and trades at 10x gross profit (7B TEV against around 705M of projected 2019 gross profits per Bloomberg).  Using that as a proxy and ignoring all of the various ways this company could completely blow up, we present THE BEST CASE outcome for investors in WTRH assuming the stock actually traded at a fair value multiple that was not artificially inflated by the hype machine of Wall Street:

Source: our analysis

Using an 8x gross profit valuation metric for WTRH and assuming they hit the Jefferies projected gross profit number of $95MM – which we HIGHLY DOUBT IS POSSIBLE – we get to a market cap of about $590M.  All of this assumes that Waitr actually hits the numbers Jefferies laid out in their initiation report which we think is next to impossible given the company wouldn’t even guide earnings.  This also excludes a) any payment they may have to make to Waiter.com to settle litigation, and b) any increase in compensation expense that may arise as a result of the recent labor litigation.

And on the topic of debt, we note that Jefferies does not once in its initiation report mention the significant indebtedness that Waitr faces.  We think this is a HIGHLY material risk factor for investors and – given the ongoing cash burn – suggest that Waitr will soon need to hit the capital markets again.

Conclusion

In summary, we view WTRH as a silly story that is unlikely to exist in 18 months as a result of fierce competition, mounting legal liabilities, and an awful balance sheet.  We view this as one of the most obvious shorts we have seen in years – brings back fond memories of the JOBS Act bonanza of 2014-15.

As such, we recommend investors stay away from this public markets Dine & Dash.

Disclosure: I am/we are short WTRH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are short WTRH. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. This article reflects the author’s opinion at the time of publication. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.