Lumber Liquidators (LL): Why Not Pull The Wood?

Lumber Liquidators (LL): Why Not Pull The Wood?

Lumber Liquidators: Why Not Pull The Wood? by Todd Sullivan, ValuePlays.

Watch Lumber Liquidators Tom Sullivan’s interview on CNBC last week:

Rather than focus on the “short” side of this, reverse the position and lets say I’m long (I’m not)

GrizzlyRock: Long Thesis For This European Travel Company [Q1 Letter]

TravelGrizzlyRock Value Partners was up 16.6% for the first quarter, compared to the S&P 500's 5.77% gain and the Russell 2000's 12.44% return. GrizzlyRock's long return was 22.3% gross, while its short return was -2.9% gross. Compared to the Russell 2000, the fund's long portfolio delivered alpha of 10.8%, while its short portfolio delivered alpha Read More

IF I was long, I’d be asking the following questions:

  1. Why is Sullivan the face of Lumber Liquidators? His interview with 60 Min was a disaster and the CNBC one was much worse. He honestly sounded so distracted on CNBC it was like he was watching TV on the other end of the phone while he talked
  2. IF the China made wood “only saves 2 or 3 cents” as Sullivan claims in the interview, why the hell are they still using it? So far its use has brought a DOJ probe (possible criminal action) and now this? It can’t be worth it for only “2 or 3 cents”
  3. Why not follow the Tylenol playbook? Pull it all and regroup and at least prove to the public you take their safety seriously? It would at least solve the problem from today onward.
  4. They like to remind us how strong the company is because the Chinese laminate is such a small part of it, again, why not pull it then?
  5. Rather than bicker over testing procedures, why not come right out and say the formaldehyde levels are below the limits? They have NOT said this yet, what they have said is that the test used to determine they were above “was not a real world test”. In fact, the CEO last week admitted CARB found “elevated levels” in their wood but then again complained about the test. You can’t admit your product contains elevated levels of a carcinogen and then say “but it doesn’t matter”……people won’t buy it

Not getting any even mildly reasonable answers to any of the above would put me in a panic. I would be especially bothered by their choice NOT to pull the Chinese wood or stop using the laminate from here on out until the debate is settled. This decision would lead me to believe the savings from it are FAR greater than “2 or 3 cents” and not using it would in fact put a large crimp in results. Further one has to then wonder if the reason they are being so stubborn about it is because they are scared of the blowback so the game plan is “deny deny deny”. The cost to rip out and replace all that laminate would be staggering and this is before the inevitable litigation exposure.

Finally, I am not of the opinion Sullivan even knows the wood is unsafe. Based on the generic almost incoherent rambling nature of all his answers, I think the possibility is he has no idea if it is or not. He may simply believe what those who made this decision are telling him. Think about, I’ve yet to hear him go into any detail regarding the wood, its selection, manufacturing or the testing procedure. I think this could be a very, very real scenario.

Whether he does or doesn’t is really immaterial at the end of the day, I’m just giving him the benefit of a doubt. Until Lumber Liquidators takes some type of action that does not involve simply saying “not a real world test”, they are going to be dogged by this.

Previous article Venture Capitalist Bill Gurley Warns Of Bubble In Tech Startups
Next article Microsoft Rolls Out Office 2016, Skype For Business Previews
Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

No posts to display