Excerpted from an email which Whitney Tilson sent to investors
Below is Whitney Tilson’s response to Lumber Liquidators’ slide presentation and conference call this morning, which concludes:
UPDATE 1:01PM EST (in italics)
A reporter just asked: “What do you mean that you are MOVING ON? Are you still short the shares – or not?”
My reply: For sure. I more than doubled my position last week (at a price slightly below today’s levels) for reasons I outlined in the article I published at the time, Why I Significantly Increased My Lumber Liquidators Short Position In The Last Two Days, and haven’t traded the stock since then.
I believe it’s a better short today than it was before the 60 Minutes story aired. I’m confident that the stock has much more downside ahead as the facts emerge and the company reports earnings over time, especially in light of the high valuation (currently more than 13x pre-crisis 2015 estimates).
By “moving on” I simply meant that I plan to stop writing emails, publishing articles, speaking to the media, etc. and allocate my time elsewhere going forward.
It’s been quite a battle royal – the bears have had their day/week/month/year and now the bulls are having their day/week – but I’m now going to do my best to move on, as: 1) I’ve now shared publicly my facts and resulting conclusions; and 2) It’s not about me (or 60 Minutes or anyone else) vs. the company. It’s about the company’s actions, what harm might have resulted, and what the consequences will be.
With numerous state and federal authorities as well as various law firms pursuing this vigorously, I’m confident that the truth will out so I’m going to go back to my regular job of trying to buy the occasional cheap stock of a good company.
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A Response to Lumber Liquidators
March 12, 2015
In its slide presentation and conference call this morning, Lumber Liquidators, as I expected, said all the right things – but don’t be fooled: in reality, it was just a continuation of the company’s campaign of distraction and deception in what I think will prove to be a vain attempt to mislead customers, investors and regulators.
The accusation against Lumber Liquidators is simple: that in order to save approximately 10% on its sourcing costs, the company has over an extended period purchased in China and sold to its American customers hundreds of millions of square feet of laminate flooring that has levels of formaldehyde, a dangerous chemical and known carcinogen, many times the limit set by the California Air Resources Board (CARB) that the company claims to adhere to – and that the company knew, or should have known, this.
Yesterday, I was 98% confident that Lumber Liquidators was guilty of this charge. After hearing the company’s defense, I’m now 99% confident.
It’s telling that, on its conference call, management simply read a prepared statement and didn’t take any questions, despite the fact that they have had weeks to prepare. This is highly unusual and an insult to investors and analysts. Other companies hosting a conference call to address criticism typically take a handful of pre-seeded questions from friendly sell side analysts, so the fact that Lumber Liquidators wouldn’t even do this speaks volumes. As one analyst said: “If you are 100% clean….you shouldn’t be afraid to talk.”
It really boils down to a simple question of credibility: whom are you going to believe? 60 Minutes, one of the most long-standing and respected news programs in the world, whose lawyers no doubt went through every word of the segment with a fine-toothed comb before it aired, or a company with every reason to lie, a terrible reputation (see here, here, here, here and here), and Chinese sourcing questions hanging over it that are so credible that Federal agents raided its headquarters in September 2013, which (as the company recently disclosed in its 10-K) could result in criminal charges?
Broadly speaking, Lumber Liquidators is making two defenses:
First, the company on its web site claims that “60 Minutes used an improper test method in its reporting that is not included in California’s regulations and does not measure a product according to how it is actually used by consumers.” In reality, it is Lumber Liquidators that is using improper test methods.
Those interested in the details of this “debate” can read my articles, Lumber Liquidators’ Campaign Of Distraction And Deception and Why Lumber Liquidators’ Wood Testing Doesn’t Comply With CARB, and this one: GeoInvesting Concurs With Tilson And 60 Minutes: Our Take On Testing Methods Used For Lumber Liquidators Study.
But for those who don’t have the time or interest, just apply common sense and ask yourself this simple question: if 60 Minutes’ testing (all of which is posted here) was improper, why did the tests show that 30 out of 31 samples of Lumber Liquidators’ Chinese-made laminate had formaldehyde levels averaging 6-7 times the CARB 2 limit, yet every sample of laminate flooring from Home Depot, Lowe’s and even Lumber Liquidators’ own flooring sourced from U.S. mills was below the limit? The answer is obvious: because 60 Minutes’ testing was accurate and valid.
Kip Howlett, the President of HPVA, which operates HPVA Laboratories, a CARB-certified lab that I hired to test samples of Lumber Liquidators’ laminate, commented:
When you have five labs all doing it the same way and getting the same results, it isn’t about the test method. The company either didn’t understand the SOP [CARB’s Standard Operating Procedure for labs], or did understand it and did a work-around. They’re either stupid or they’re lying – which is it?
Lumber Liquidators’ second line of defense (implied by the company and made explicit by its defenders) is that, even if its laminate has levels of formaldehyde above the CARB limit, where’s the harm?
For starters, read what the National Cancer Institute and the Centers for Disease Control and Prevention have to say about formaldehyde: it can cause “watery eyes; burning sensations in the eyes, nose, and throat; coughing; wheezing; nausea; and skin irritation,” “upper respiratory tract irritation [that] can potentially exacerbate asthma symptoms and other respiratory illnesses,” “chronic runny nose, chronic bronchitis, and obstructive lung disease,” and is a “known human carcinogen” associated with “several cancers, including nasopharyngeal cancer and leukemia.”
But at low levels, serious symptoms are unlikely – so the real question is, what is the actual, real-world level of formaldehyde Lumber Liquidators is exposing its customers to via its laminate and what harm might result from this?
The company, not surprisingly, says the level is very low, as shown in slide 16 of its presentation:
Lumber Liquidators claims that “The emissions from our laminate floors will typically only add approximately 5 ppb to a home when first installed.” If true, this would be good news since regulators have set 7 ppb as the limit to protect everyone, including children.
But the company’s claim flies in the face of the evidence. 60 Minutes (which, again, posted all of its test results here) hired a lab to test three samples of Lumber Liquidators’ laminate, using the California Department of Public of Public Health home model, which tests how much formaldehyde a typical homeowner would actually be exposed to. In sharp contrast to the company’s claims, these tests showed the following levels:
Sample 1: ~292 ppb/ .292 ppm OR 329.3 ?g/m3
Sample 2: ~101 ppb/.101 ppm OR 113.6 ?g/m3
Sample 3: ~57 ppb/0.057ppm OR 69.96 ?g/m3
In other words, the actual levels of formaldehyde were 11-58 times the levels claimed by Lumber Liquidators. Whose tests are you going to believe?
When 60 Minutes showed these results to Dr. Philip Landrigan, one of the world’s leading experts on this subject (see his bio here and here), he said (according to the transcript):
Dr. Philip Landrigan: It’s not a safe level, it’s a level that the US EPA calls polluted indoor conditions.
Anderson Cooper: Would you want that in your home?
Dr. Philip Landrigan: No.
Dr. Philip Landrigan of N.Y.’s Mt. Sinai Hospital, specializes in environmental pediatrics and exposure to toxic chemicals. He’s talking about the results of another kind of test Drury and Larson conducted measuring the concentration of formaldehyde emissions coming off the laminates into the air of a typical home.
Dr. Philip Landrigan: I would say long-term exposure at that level would be risky because it would increase the risk for chronic respiratory irritation, change in a person’s lung function, increased risk of asthma. It’s not going to produce symptoms in everyone but children will be the people most likely to show symptoms at that sort of level.
In light of these frightening risks, especially to children, it’s little wonder why Lumber Liquidators it trying to understate its customers’ actual exposure to formaldehyde.
Conclusion
It’s been quite a battle royal – the bears have had their day/week/month/year and now the bulls are having their day/week – but I’m now going to do my best to move on, as: 1) I’ve now shared publicly my facts and resulting conclusions; and 2) It’s not about me (or 60 Minutes or anyone else) vs. the company. It’s about the company’s actions, what harm might have resulted, and what the consequences will be.
With numerous state and federal authorities as well as various law firms pursuing this vigorously, I’m confident that the truth will out so I’m going to go back to my regular job of trying to buy the occasional cheap stock of a good company.
