We have exited Endor (E2N:MU). It is down about 60% from the time when we initiated our position in February 2023 (report here). It detracted from portfolio returns by ~350 basis points —making it our worst performer YTD.
Background & Thesis
Endor is a premium DTC sim racing brand. They manufacture an ecosystem of sim racing equipment from pedals to wheels to brakes. It has been the dominant sim racing brand for over a decade. Although they produce hardware, there is significant lock-in with their ecosystem— Endor’s products only work with other Endor products. Given the strong sim racing industry trend, and the track record of innovation and customer satisfaction with Endor, we believed it to be a sound investment despite supply chain issues we believed were temporary and isolated at the time.
What went wrong
After securing years’ worth of chips supply— which we had believed was the main supply chain issue— seven months later Endor’s supply chain problem continue to persist. The issues transformed from a singular nature to a multivariate one. Endor is now struggling with everything from assembly to logistics issues. The solutions to these problems are more encompassing, requiring changes in personnel, work processes, and the culture of the firm. Due to these out-of-stock and delayed shipments coupled with a lack of customer service, customers are turning to competitors and subsequently getting locked into their ecosystems.
Although the CEO and founder has a great track record in marketing and creating innovative products, he seems less equipped to instill the operational DNA necessary to run a larger company. The COO that was internally hired to replace the previous one has not made demonstrable improvement and the new ERP system is far from being finished.
It might be the case that Endor is on the verge of solving everything, or it might be the case that internally things are getting worse –the lack of investor communication and transparency on behalf of management has been disappointing to say the least. We have written and called HQ dozens of times with very few helpful responses to show for it. The growing operational mishaps and lack of investor communication has entirely eroded our confidence.
Would we have done anything different?
It is unfortunate to sell Endor – we are still big believers in sim racing industry growth (written about here) and of Endor as a consumer brand. Although we would still have invested in Endor, our position sizing should have been smaller given the lack of investor communication which prevented us from gaining a look-through into the company’s operations.