Lumber Liquidators Holdings Inc (LL) Surges; Tilson Doomsday Scenario Unlikely

Lumber Liquidators

The stock price of Lumber Liquidators Holdings Inc (NYSE:LL) surged nearly 25% to $17.53 per share after Whitney Tilson, the hedge fund manager of Kase Capital Management ended its bet against the company.

Mr. Tilson shorted the shares of Lumber Liquidators based on his belief that the company is rotten to the core because it has major quality problems to its product lines. The company was accused of knowingly selling hardwood floorings with high-levels of formaldehyde.

The allegations severely impacted the stock price of Lumber Liquidators Holdings Inc (NYSE:LL).  The company’s shares declined from its highest trading price of $69.99 per share to as low as $11.62 per share over the past 52-weeks. The company lost more than 73% of stock value year-to-date.

Lumber Liquidators is naïve, but not evil

Mr. Tilson wrote a blog post indicating that he covered his short position in Lumber Liquidators, and recanted his allegation that the company willfully and knowingly sold floorings with high formaldehyde levels, which put customers’ health at risk.

According to the hedge fund manager, he received information that the senior management of Lumber Liquidators did not know that the company is selling Chinese-made laminate flooring with high levels of formaldehyde.

Mr. Tilson added that his sources informed him that the company’s management decided to continue selling the product despite the 60 Minutes story because they genuinely believed that the Chine-made laminate flooring was safe and compliant.

“If the information is correct, then the company was sloppy and naïve, but not evil,” he said.

Certain things remains

According to Mr. Tilson, there are certain things still remain even if the latest information he received is true. He said, there is no doubt in his mind that Lumber Liquidators was, in fact, selling dangerous, formaldehyde-drenched laminate.

The company completely bungled damage control efforts after the 60 Minutes story (most damningly by continuing to sell the product for 67 more days).

Mr. Tilson explained that a combination of three factors led him to maintain and add his short position in Lumber Liquidators before his decision yesterday.  These factors include:  the company’s brand was tainted by adverse publicity; it is confronting numerous investigations by regulators, and numerous lawsuits were filed against.

“The combination of these three factors led me to believe there was a material chance that the company could, ultimately, be forced into bankruptcy and the stock could be a zero,” according to him.

Mr. Tilson added, “If, however, there are no “smoking gun” documents/emails, then this doomsday scenario is much less likely (though the company, to be sure, still faces extremely serious issues).”