Whitney Tilson just released this publicly:
Comments on Lumber Liquidators’ Announcement
Lumber Liquidators’ announcement this morning is being misinterpreted by the market as good news, when it’s not. In fact, we may look back upon this day as a decisive point in the eventual collapse of Lumber Liquidators.
In the 60 Minutes story that aired on March 1st, the board and senior management of Lumber Liquidators were confronted with overwhelming evidence that their Chinese-made laminate didn’t comply with California Air Resources Board (CARB) standards and was emitting a dangerous level of formaldehyde, a known carcinogen that was likely causing serious adverse health effects among a significant percentage of people exposed to it, especially children.
Yet, rather than taking the obvious step of immediately suspending sales of the product in question, they, shockingly, did the opposite, slashing prices to dump this toxic product as quickly as possible on unsuspecting customers, all the while assuring them “all of our products are 100% safe.”
This is one of the most immoral, reckless and truly insane decisions I have ever seen a company make.
Halting sales now – after selling thousands of American families tens of millions of dollars of toxic flooring in the 67 days since the 60 Minutes story aired – is too little, too late, as the damage has already been done.
Importantly, it also likely means that Lumber Liquidators is under immense pressure from regulators, who will, I expect, take decisive action to rein in and punish this rogue company. I simply don’t believe it would halt sales of its own volition, given that it will have to write off ~$13 million of inventory and be out of stock on some of this high-margin product for many months.
If my supposition is correct that a regulator (my best guess would be CARB) has contacted Lumber Liquidators and is about to take action, then this is very bad news for the company and increases the odds that this stock eventually goes to zero (perhaps from 20% to 40%).
As for Lumber Liquidators’ claim that 97% of the initial tests it’s commissioned show formaldehyde levels below the limit set by the World Health Organization, this is meaningless for three reasons:
First, the testing program, according to expert testimony, is “the cheapest possible way to test,” “cannot be considered valid” and “will likely provide some consumers with poor data that give them a false sense of security,” as I detail in my article, Lumber Liquidators’ Offer to Do Indoor Air Quality Testing Appears to Be a Sham.
Second, for many customers, the formaldehyde will have off-gassed – a process that can take anywhere from a few months to a year or two. Thus, even if the testing program was rigorous and legitimate, it would show low levels of formaldehyde in the air of most customers’ homes (I’d guess pretty much all of them who’d installed their flooring more than a year ago). But that doesn’t mean that they weren’t being poisoned to a significant degree in the first year or so after the flooring was installed. And it certainly doesn’t mean that the Chinese-made laminate that Lumber Liquidators is selling right now is safe – in fact, all of the evidence indicates that it’s not.
Lastly, the WHO standard of 81 ppb that Lumber Liquidators chose is for “30-minute average concentration”, which is not the appropriate standard for flooring in one’s home, where babies and children might be playing/crawling on the floor for many hours every day. As I discussed in my article, More On Lumber Liquidators And Formaldehyde, four different regulators have set limits for homes ranging from 7-33 ppb.
Finally, I’m delighted that Lumber Liquidators has hired the firm run by former FBI Director Louis J. Freeh “to serve as an independent compliance advisor to the Company,” as this makes it even more likely that the truth will come out – and that truth, I believe, will be damning: that senior executives of Lumber Liquidators knowingly sourced non-CARB-compliant laminate in China, thereby poisoning their customers, in order to save ~10% on sourcing costs, and then tried to engineer a massive cover-up, which has now failed.
If I am right, then founder and chairman Tom Sullivan, CEO Robert Lynch and Senior Vice President, Chief Compliance and Sustainability Officer Ray Cotton (and perhaps others) should be fired and appropriate regulators should investigate them and, if warranted, bring civil and criminal charges.
In conclusion, the stock should be down 20% on this announcement. The fact that the market is totally misunderstanding what’s going on here and driven the stock up on the day is a gift that I will gladly take, so I materially increased my short position this morning.
