Jehoshaphat Research has taken a fresh swipe at Techtronic Industries, alleging the Hong Kong-based power tools company is committing ‘‘systemic fraud’’ against one of its biggest customers, U.S. home improvement retailer Home Depot.
A little over three months after accusing Techtronic of inflating its profits through a ‘‘broad toolbox of accounting games,’’ Jehoshaphat returned on Tuesday with a new reason to be short the company’s stock.
‘‘We believe that Techtronic has been defrauding Home Depot on a massive scale for at least four years,’’ wrote Jehoshaphat, adding that it believes the allegation, if confirmed, would make Home Depot terminate the contract, and would result in a one-third reduction of Techtronic’s operating income.
Techtronic pushed back against Jehoshaphat’s report, calling it ”grossly inaccurate and misleading” and warning it may sue the activist.
Techtronic shares rose 6.7% Wednesday, more than recouping the losses suffered a day before when the short report was published. They still trade close to multi-year lows after plunging nearly 20% in late February following Jehoshaphat’s initial short report, which the company also ”vigorously’’ rejected.
The original report made a former Techtronic employee reach out to Jehoshaphat about the company using a factory outlet channel known as Direct Tools Factory Outlet (DTFO) for “back-door” inventory liquidation, said the short seller in its new report.
That discussion led to a broader investigation which has uncovered evidence Techtronic is running a ‘‘scam’’ involving the company mislabeling Home Depot-exclusive brands as “Factory Blemished” in order to sell them through DTFO, the new report claims.
Jehoshaphat contended that the practice has caused Home Depot to miss out on ‘‘billions in sales.’’ The short seller claimed to have confirmed its suspicions with a former Home Depot executive who was ‘‘intimately familiar’’ with the relationship between the two companies. Home Depot makes up for about half of Techtronic’s sales.
In its rebuttal, Techtronic claimed that the business made through DTFO is immaterial. Total revenue from the factory outlet channel accounted for less than US$100 million in 2022, representing less than 1% of the group’s sales of over $13 billion in the same period, the company said.