Whitney Tilson from an email just sent to investors.

The Uphill Battle to Better Regulate Formaldehyde; Lumber Liquidators was down $6.66; Wedbush, Jeffries and Morgan Stanley reports; Is Lumber Liquidators “doing its best to…take care of the customer”???

Lumber Liquidators: The Uphill Battle to Better Regulate Formaldehyde

1) Wow, this article, The Uphill Battle to Better Regulate Formaldehyde, made the front page of today’s NYT (see below). It’s an outstanding piece of journalism that uncovers the scandalous (and, sadly, so far successful) efforts by the industry to continue business as usual, health effects be damned, so it’s great to see that the 60 Minutes story has literally put this issue on the front page (and, I have no doubt, greatly strengthened the hand of those seeking to more tightly regulate formaldehyde).

A decade after emergency trailers meant to shelter Hurricane Katrina victims instead caused burning eyes, sore throats and other more serious ailments, the Environmental Protection Agency is on the verge of regulating the culprit: formaldehyde, a chemical that can be found in commonplace things like clothes and furniture.

But an unusual assortment of players, including furniture makers, the Chinese government, Republicans from states with a large base of furniture manufacturing and even some Democrats who championed early regulatory efforts, have questioned the E.P.A. proposal. The sustained opposition has held sway, as the agency is now preparing to ease key testing requirements before it releases the landmark federal health standard.

The E.P.A.’s five-year effort to adopt this rule offers another example of how industry opposition can delay and hamper attempts by the federal government to issue regulations, even to control substances known to be harmful to human health.

Attached is a document the NYT story linked to entitled The Formaldehyde Fight.

Lumber Liquidators down $6.66

2) A friend pointed out that Lumber Liquidators was down $6.66 the day it reported earnings last week – and that 666 is the well-known sign of the devil. Definitive proof of what I’ve been saying: Lumber Liquidators Is Evil! LOL!

3) Attached are the post-earnings reports issued last week by Wedbush, Jeffries and Morgan Stanley. They all have Holds on the stock and have slashed earnings estimates for next year to $1.50-$1.74.

With only a few exceptions, the analyst community has correctly run for the sidelines, so they (and their clients) will avoid the next two bombs that are sure to drop:

a) Various government regulators confirming what we already know: That nearly all of Lumber Liquidators’ Chinese-made laminate has dangerous levels of formaldehyde; and

b) That senior executives of the company knew what they were buying – in other words, they were knowingly poisoning their customers to save ~10% on sourcing costs

If I’m right – and this information becomes public – the result could be not only an implosion of the company but also big financial penalties and even criminal charges against the company and its executives.

Even if I’m wrong, the stock, at $27.11, is far from cheap, trading at 10x peak earnings and 16x analysts’ 2016 consensus estimates of $1.66/share. The stocks of tainted companies with large potential contingent liabilities (Herbalife, for example) don’t tend to bottom until they’re trading at half these multiples, so just on valuation, the stock has ~50% downside from here.

Lumber Liquidators: Wedbush report

4) Not one analyst has had the courage to call the company out for its self-destructive and immoral decision to continue selling its toxic laminate. In fact, I had to rub my eyes when I read the opening line of the Wedbush report: “Lumber Liquidators’s business is clearly still under significant pressure, but the company is doing its best to grow sales and take care of the customer, which is the right thing to do for the longevity of the brand.”

If this company really cared about its customers and preserving the longevity of its brand, it would have immediately stopped selling its Chinese-made laminate after the airing of the 60 Minutes story, which had multiple Lumber Liquidators’s suppliers admitting on camera that the product they were shipping to Lumber Liquidators was not CARB2-compliant (not to mention the extensive test results)!

As I wrote in Did Lumber Liquidators Know It Was Selling Toxic Laminate?:

Since the 60 Minutes story broke, the company has, in my opinion, acted exactly as I’d expect a guilty company, not an honest and reputable one, to act. Imagine if this story was about Home Depot. Immediately after it aired, Home Depot would:

  1. a) Stop selling the product in question (even if it doubted the validity of the testing 60 Minutes did, why take any chances with customers’ health and the company’s reputation, not to mention future liabilities?);
  2. b) Offer a full refund to any customers who wanted to return unopened product;
  3. c) Set up a Special Committee of the board, made up of independent directors, to conduct a full investigation; and
  4. d) Hire an independent firm to do a wide range of testing, not just of Chinese-made laminate, but all of the company’s products.

This isn’t rocket science – it’s Crisis Management 101. Yet Lumber Liquidators hasn’t done a single one of these things. The only possible explanation, in my mind, is that they have a lot to hide – and they know it – in which case, the deny-and-attack strategy they’ve adopted, which I analyzed in my article, Explaining Lumber Liquidators’ Reckless Strategy And Rebutting Its Claims About Deconstructive Testing, makes perfect sense.

While for the health and safety of Lumber Liquidators’ customers I wish the company would stop selling what I believe is a dangerous product, as someone who is short the stock, I’m delighted that the company has adopted a strategy that I think is truly insane for two reasons. First, management’s credibility is plunging every day they continue to make the preposterous claim that there’s no problem at all. Perhaps the problem is minor, but there’s definitely a problem. Secondly, when untold number of lawsuits start reaching courtrooms, the fact that the company continued to sell tainted wood after the 60 Minutes segment aired will look very bad. Rather than perhaps earning some sympathy by claiming they were duped by lying Chinese mills, they will instead look like rogue actors.

The Uphill Battle to Better Regulate Formaldehyde

By ERIC LIPTON and RACHEL ABRAMS

NYT, MAY 3, 2015

Irvin Fox, working at StyleCraft Cabinets in Terre Hill, Pa., depends on wood glues, which contain formaldehyde.

WASHINGTON — A decade after emergency trailers meant to shelter Hurricane Katrina victims instead caused burning eyes, sore throats and other more serious ailments, the Environmental Protection Agency is on the verge of regulating the culprit: formaldehyde, a chemical that can be found in commonplace things like clothes and furniture.

But an unusual assortment of players, including furniture makers, the Chinese government, Republicans from states with a large base of furniture manufacturing and even some Democrats who championed early regulatory efforts, have questioned the E.P.A. proposal. The sustained opposition has held sway, as the agency is now preparing to ease key testing requirements before it releases the landmark federal health standard.

The E.P.A.’s five-year effort to adopt this rule offers another example of how industry opposition can delay and hamper attempts by the federal government to issue regulations, even to control substances known to be harmful to human health.

Continue reading the main story

Whitney Tilson Has "Proof" Lumber Liquidators Is Literally The Devil