Whitney Tilson: Why I’m Again Short Lumber Liquidators

Whitney Tilson is not done attacking Lumber Liquidators. Below is the latest email from Tilson on the topic.

n a 48-slide presentation at an investment conference yesterday, I revealed why I’m once again short the stock of Lumber Liquidators (causing its price to fall 15%). While it may seem odd to reestablish this position at a lower (i.e., less attractive) price than when I covered a couple of months ago, I changed my mind because I have new information that leads me to believe that the odds of very bad outcomes for Lumber Liquidators and its stock have risen materially based on new information in six areas:

 

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1)    Widespread media coverage of the CDC’s error and increased cancer risk appears to be having a severe impact on the business

2)    The cancer risk is likely significantly greater than even the CDC’s revised estimate, which could result in further damaging publicity and increased liabilities

3)    A “Prop 65” trial has just begun that LL is likely to lose, resulting in further adverse publicity

4)    Likelihood of even larger legal and regulatory liabilities

5)    Operating performance of the business in Q4 was much worse than I expected – and I think meaningful improvement is unlikely for quite some time (if ever)

6)    Lack of confidence in company leadership

 

Here’s the summary of the article I published this afternoon (click here to read it):

  • After being very publicly short Lumber Liquidators’ stock for 26 months, during which it fell by nearly 90%, I exited the position in December. At the time, I had no expectation of shorting the stock again, yet in the past week I reestablished a meaningful (~4%) short position in the stock.
  • Yesterday, I gave a 48-slide presentation explaining the reasons why. I believe the odds of very bad outcomes for Lumber Liquidators and its stock have risen materially based on new information in six areas.
  • Most importantly, my best source tells me that the recent cancer scare associated with the toxic, formaldehyde-laden Chinese-made laminate flooring that Lumber Liquidators sold for years is having a devastating impact on the business.
  • The company was already in a precarious situation, so I question whether it can withstand this new blow. I now believe that there is at least a 50% chance that Lumber Liquidators eventually goes bankrupt.
  • The most likely scenario for the stock, I believe, is that it drops to ~$8 after Q1 earnings late next month, when I expect the company to acknowledge that its business has weakened further; then, I think the stock will continue to fall over the course of the year as the business remains crippled, and approaches zero within a year.
  • If you have information that either confirms or is contrary to mine, I’d love to hear from you at WTilson@kasecapital.com.

 

If you’re interested in the details, here is further information:

  • The slides I presented yesterday are here (followed by the three previous public presentations I made on this company in 2013, 2014 and 2015)
  • A video of my 20-minute presentation is here
  • Afterward, I did a 10-minute interview with CNBC, which is posted here; a transcript is here
  • All 20 articles (including today’s) that I’ve published on Lumber Liquidators are here