More Evidence That Lumber Liquidators Is Rotten To The Core by Whitney Tilson, Seeking Alpha

Summary

  • Two former installers for Lumber Liquidators told me that the company has major quality problems across many of its product lines, especially bamboo flooring.
  • They said that the company is aware of this, yet rather than improving quality, it instead has set up a rigged inspection system that results in the company rarely standing behind its highly publicized warranty.
  • I added to my short position at numerous points on the way down and, though I’ve taken a bit of profits around today’s prices, LL remains a substantial short position in the funds I manage.

Soon after the 60 Minutes story on Lumber Liquidators first aired on March 1st, I heard from numerous people in the industry, including a number of the company’s current and former employees and contractors. Without exception, told me that Lumber Liquidators is a notorious bad actor: that it cuts corners at every opportunity, sells very low-quality products, treats customers, installers and employees badly, and, worst of all, is not serious about compliance.

Since then, I (and customers, the media and regulators) have been primarily focused on the most important and damning charge: that Lumber Liquidators sold its American customers hundreds of millions of square feet of laminate flooring sourced in China that contained high levels of formaldehyde, a dangerous chemical and known carcinogen – and that senior executives knew (or should have known) this.

I don’t have any new information on this topic – we’re all waiting for the Consumer Product Safety Commission and other regulators to complete their investigations and take action – so in this article I’d like to share what I heard from two former installers for Lumber Liquidators, who told me that:

  • The company has major quality problems across many of its product lines, especially bamboo flooring, which is consistent with the widespread quality and customer service problems highlighted on many review websites – see here, here, here, here and here;
  • The company is aware of this, yet rather than improving quality (which would raise costs and lower profits), it instead has set up a rigged inspection system that results in the company rarely standing behind its highly publicized warranty.

I was reminded of these issues when I read this recent article about a Canadian customer who bought Lumber Liquidators’ bamboo flooring that, soon after it was installed, was gapping, squeaking and buckling – yet a year later, the company still hasn’t fixed the problem.

This family’s tale of woe is very common among Lumber Liquidators’ customers based on everything I’ve heard and read, including what these two installers told me.

Installer #1

The first story I heard was from someone (let’s call him Jim) who’s been in the flooring installation business for decades and for four years from 2011-2014 installed thousands of floors exclusively for Lumber Liquidators. While installing laminate flooring was the largest part of his business (he guessed 40%), bamboo was a close second, in the 30-40% range.

Jim told me that Lumber Liquidators’ flooring had quality problems across the entire product line, which had been the case since the company was founded:

Lumber Liquidators is a pretty miserable company. Tom Sullivan founded it in the early 1990s by buying for ten cents on the dollar excess flooring that had often been sitting in warehouses for years and then reselling this junk for 20 cents. But that wasn’t a scalable or sustainable business model, so that’s when he started buying in China. But they’re still applying the same principles.

Lumber Liquidators’ products have huge warranty issues. The company had a production problem [when sales were booming in 2012 and 2013]: they couldn’t find enough cheapo product to sell, so they pushed their manufacturers to put out quantities of product that led to big quality problems.

[All of the quotes in this article are from my notes, not a recording, so I verified them with the two sources.]

Jim explained that it had to do with the moisture content of the flooring:

It’s really important that the moisture content of the flooring is in the 6-9% range because if it’s higher, then the flooring will dry out and buckle and gap when the humidity in the home declines, as it typically does in the winter.

Thus, the manufacturer is supposed to season the product for months: take the rough cut, then put in a big room or an oven to decrease the moisture content down to 6%, then put it through the finishing process.

But Lumber Liquidators pushed its manufacturers so hard that all of the company’s products were coming in wet: 20-28% moisture content. Thus, it contracts after it’s installed, causing it to look terrible.

Lumber Liquidators tries to deal with this problem by telling their customers to leave the flooring in their homes for a week before installing it, but this isn’t enough time. In a week, the moisture content only declines by 4-8%.

Jim said this is a particularly acute problem for bamboo flooring, especially when they switched to a water-based resin from a formaldehyde-based one:

The process of making bamboo flooring involves injecting resin into it to strengthen it. For years, the resin had formaldehyde, which produced a good product, but suddenly in early 2014 I started getting huge numbers of warranty calls from customers in whose homes I’d installed Lumber Liquidators’ bamboo flooring – it was insane.

I complained to a Senior VP at the company, and he was completely honest with me: he explained that they knew they had a formaldehyde problem with the bamboo line, so around the end of 2013, they told their manufacturers to switch to a water-based resin. But this resin is inferior, so the bamboo flooring was contracting and separating – just look online and you’ll find huge numbers of complaints about this problem.

If true, this is a stunning revelation: that Lumber Liquidators’ senior management was aware of a formaldehyde problem years ago and were so concerned that they instructed their suppliers to switch resins, even knowing that the new product was of terrible quality and would fail at high rates. In light of this (again, if true), it’s equally stunning that they didn’t deal with the formaldehyde problem in their laminate product lines.

[I cannot verify that Lumber Liquidators’ bamboo flooring had high levels of formaldehyde prior to 2014 because neither I nor the lab I hired was able to find any old product to test. But even if we had, I suspect that we wouldn’t have found high levels of formaldehyde today due to off-gassing (though it still might have been highly toxic at the time it was installed). As for the company’s current bamboo flooring, I’ve had numerous samples tested, none of which had any meaningful levels of formaldehyde. Thus, Lumber Liquidators’ customers who have bought this product likely only have to worry about lousy quality, not being poisoned.]

Jim told a damning story of how Lumber Liquidators handled customer complaints when its products failed:

When Lumber Liquidators’ flooring fails, they send in an inspector using a nationwide company called Inspect Solutions. This person is just a hired gun. The inspector can say the product failed for three reasons: a product-related reason (which is Lumber Liquidators’ problem), an installation issue (the installer’s problem), or a site problem (too much or not enough moisture in the air, etc., which the inspector will say is the homeowner’s fault). Guess what they determine? The inspector nearly always blames either the homeowners or installers. It’s a joke.

They know they’re sending product into customers’ homes that’s not been manufactured right. Then in the winter, when it gets dry, the flooring gaps. Then the inspector comes in with a moisture meter, says it’s too dry in the home, and blames the homeowner and refuses to fix the problem.

Or else they blame me, even though I always take all of the precautions and necessary steps. I’m a third-generation floor installer. I put down 6,000-8,000 floors prior to installing for Lumber Liquidators and didn’t have a single warranty claim. But in four years with Lumber Liquidators, I had warranty claims on 8-10% of my installations. It got to the point I couldn’t make any money.

Jim concluded:

I quit because of ethical issues – I couldn’t keep installing such a poor quality product.

Lumber Liquidators is a terrible, greedy company. Everything they do operationally relates to their bottom line: the way they source product, treat installers and treat customers. It’s a dirty, rotten company. I hate the company and what they stand for. They’re taking advantage of everybody.

Installer/Inspector #2

The second person I spoke with (let’s call him Steve) was an installer for Lumber Liquidators (also for four years) and then became an inspector. He told a similar story:

Only 1% of the oak floors I install fail, whereas 20% of the bamboo floors do. Most bamboo on the market is a low-end product – but Lumber Liquidators’ is the worst.

The moisture level in the bamboo flooring has to be in the 6-12% range before it can be installed, but it typically takes two months for it to reach this level and neither homeowners nor installers are willing to wait this long. If you told customers how long they should wait, they’d never buy it so Lumber Liquidators’ salespeople don’t say anything. And then once it’s installed, the company doesn’t want to deal with it.

I use a moisture meter, but it’s only good for the specific product it’s calibrated to, so I called all of the meter manufacturers and asked if their meter was calibrated for Lumber Liquidators’ strand bamboo. They all said no, that it’s impossible to accurately measure it [the moisture content in Lumber Liquidators’ bamboo flooring].

Nobody would say it, but it’s because Lumber Liquidators doesn’t control the sourcing of the bamboo stalks – they get bamboo from three different plants, which is all mixed into one batch. Each supplier has its own construction process, with different levels of formaldehyde (a lot of the issues with moisture in bamboo flooring is related to the resin used). To cut costs, the suppliers use cheap resin with lots of formaldehyde.

There is no meter that can read the moisture – and Lumber Liquidators knows this. I’ve talked to their head of tech services.

As a result, I stopped installing all bamboo flooring in the southeast – the hot, humid climate is bad for it. I also told customers to return the bamboo flooring they’d bought – that was the end of Lumber Liquidators sending me any business…

Steve’s comments about the inspection process also echoed Jim’s:

Overall, Lumber Liquidators’ products are crap, but when customers complain the company hires the worst inspectors who blame the customer or the installer – never the company. The inspectors, many of whom are low quality and unscrupulous, side with whoever pays them.

In one inspection I did, I determined that the problem was defective flooring, but when I submitted my report to The Home Service Store, Lumber Liquidators’ installation “partner”, they told me to amend it and blame the customer. When I said no, they backed down – but have never hired me again (and instead blamed the installer and made him eat the cost of fixing it).

Steve mostly blames Lumber Liquidators, but also its customers:

The American consumer is so dumb. People buy in droves from Lumber Liquidators because it’s so cheap. Their wood products are as inexpensive as carpet. Lumber Liquidators’ salespeople convince them it’s high quality, but it’s not. You don’t buy ground chuck and expect a fillet dinner.

Conclusion

Normally after a stock declines more than 80% from the price at which I first shorted it, I declare victory, cover the position, and move on. But in the case of Lumber Liquidators, I haven’t: I added to my short position at numerous points on the way down and, though I’ve taken a bit of profits around today’s prices, it remains a substantial short position in the funds I manage.

The primary reason for this is that I don’t think this is a case of a good company encountering temporary, isolated and fixable problems. Rather, everything I’ve heard, read and observed leads me to believe that Lumber Liquidators is rotten to the core. Tom Sullivan says, “Our goal is to sell a good product at a good price.” While the company’s prices are indeed low, all of the research I’ve done leads me to believe that this is more than offset by product quality that ranges from mediocre to outright defective (not to mention, in the past, illegally sourced or poisonous!). Worse yet, if the flooring fails, Lumber Liquidators is unlikely to stand behind it.

This business model isn’t sustainable in my opinion – and bringing back its architect, Tom Sullivan, only makes things worse.

Whitney Tilson Lumber Liquidators