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

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