Lumber Liquidators Holdings Inc (NYSE:LL) held its business update earlier today in an attempt to quell the fears of investors. The bears, and some bulls, from some of the murmurs we’ve been hearing, were unimpressed with what management had to say in response to the allegations relating to the formaldehyde content in the company’s flooring products.
Nonetheless, shares of Lumber Liquidators rallied again today, climbing as much as 12.04% to $36.67 per share.
Testing method up for debate
There were two main defenses set forth by company management. One is that 60 Minutes and short-seller Whitney Tilson used the wrong method to test its products. They used what’s called the “deconstructive” testing method, which involves taking apart a finished product to test the core board.
The International Wood Products Association (IWPA) weighed in on the debate, releasing a list of answers to common questions regarding deconstructive testing. The organization said the California Air Resource Board (CARB)’s stringent guidelines for formaldehyde content do not require deconstructive testing to determine whether a product complies with the guidelines.
Further, the IWPA said CARB uses the method as a “rough” screening method and that the reason it offers only a rough estimation is because “the process can fundamentally change the emission properties of the panel substrate.” The organization also said it supports testing panels without removing the laminate. This form of testing has been proposed to CARB, which is now considering it.
The IWPA also said the deconstructive testing method is controversial because many believe it is unreliable and “prone to inaccuracy,” according to the organization. The organization also pointed out that CARB has acknowledged that results from deconstructive testing vary and that it hasn’t “independently validated” the testing method.
In addition to focusing on the testing method used, Lumber Liquidators also essentially said that the amount of formaldehyde in their products isn’t high enough to really matter.
No questions asked
Another complaint many had with Lumber Liquidators’ conference call today was that it did not directly address the issues raised by Whitney Tilson and 60 Minutes. Also no hard numbers were presented to refute the allegations.
“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,” Tilson told ValueWalk in an email. “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.'”
Lumber Liquidators promises answers
Lumber Liquidators stands behind its business update and promised answers to the questions that weren’t allowed to be asked on the conference call.
“Today’s presentation was detailed and substantive,” said a company spokesperson in an email to ValueWalk. “We are now in the process of gathering questions and intend to answer them in a timely way.”
Goldman Sachs analysts, who have a Buy rating and $40 per share price target on Lumber Liquidators, raised an interesting question in their report today. The company said during its presentation that sales have already begun to recover since the 60 Minutes broadcast.
Goldman Sachs has a question for Lumber Liquidators
Analyst Matthew Fassler and his team noted that the reduction in sales estimates from management is “directionally consistent” with their reduced estimates. However, they say it’s not clear why the high end of the range they provided is based on trends from the day of the 60 Minutes report through the end of the quarter and how they align with sales from the report.
The Goldman Sachs team said the high end suggests there was no improvement, while the low end suggests “incremental deceleration.” The reason for the lack of clarity here could be either good or bad:
“One possibility is that the sales metrics over the past few days reflect fulfillment of prior orders, while new orders have fallen steeply,” they wrote in their report. “Another is that the firm is taking a more conservative posture.”
The analysts also expressed concern that Lumber Liquidators did not directly address the findings of the tests conducted by 60 Minutes.
One other bull we’re waiting to hear from is Robert Chapman, whose long position triggered a substantial rally in Lumber Liquidators shares. He did not respond to questions at the time of publication.