Whitney Tilson On What will Happen Next To Lumber Liquidators

Updated on

Whitney Tilson just presented his latest slides on Lumber Liquidators at a conference here in Minneapolis of all of the lawyers suing Lumber Liquidators.

Excerpted from an email from Whitney Tilson

Basically, it’s all of my old slides from his presentations at the last two Robin Hood Investors Conferences, but starting on page 32 are all of my new slides – most of which are drawn from the 16 articles I’ve written since the 60 Minutes story aired, but also some new stuff, in particular some new reasons why I think the company was knowingly sourcing toxic laminate (pages 34-39), what I expect to happen next (page 71) and why I think it’s possible but not likely that LL will go bankrupt (page 72).

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What Whitney Tilson Expects to Happen Next

  • I see nothing but bad news emerging for the company over the short-, intermediate- and long-term horizons.
  • Ithink regulators (most likely the California Air Resources Board and the Consumer Product Safety Commission) will announce that their tests of Lumber Liquidators’ Chinese-made laminate show the same (very high) levels of formaldehyde shown by the tests 60 Minutes, myself and others commissioned.
  • At that point, I expect regulators to take strong action against the company, including fines/penalties, requiring proper testing, and remediation steps.
  • I think that the legal liabilities will be enormous, especially once hard evidence emerges that the company was knowingly poisoning its own customers.
    –I see the largest legal exposure in two areas: a) damages to customers who suffered adverse health effects and b) damages to investors who bought the stock at inflated prices based on information (the true source of margin and profit expansion) that management knew was false.

It’s Possible But Not Likely That Lumber Liquidators Will Go Bankrupt

  • My best guess is that there is a 30% chance of Lumber Liquidators eventually filing for bankruptcy.
  • If it happens, it would likely not happen for a while (maybe two years).
    •As of Q1 ‘15 (March 31), the company had $44 million of cash and only $20 million of debt (it drew down its credit line), so it has net cash of $24 million.
  • The company is consistently cash flow positive:
    –Cash flow from operating activities was $57 million in 2014 vs. cap ex of $71 million (but most of this was for growth and can be cut)
    –Cash flow from operating activities was $13 million in Q1 ‘15 vs. cap ex of $9 million
  • Only two things could cause a bankruptcy filing:
  1. Sales collapse 20-30% or more and stay depressed (likely due to revelations that the company was knowingly poisoning its customers) and the company is forced to slash prices to maintain foot traffic, resulting in significant negative cash flows
  2. Costs associated with legal and regulatory action (remediation, penalties, settlements, judgements, etc.) swamp the company.

See full PDF below.

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