LL - Lumber Liquidators

[Patmo]

Not buying but I wouldn't short this for anything. Would consider long under $20 or definitely at book (~$14). 60 min piece and future liabilities seem overblown (uneducated guess). Going long in these situations is where the big returns are, just wish it was a better business. Do folks really think this has asbestos potential?

When you see attorneys coming out of the woodwork and slobbering, it has potential.  ;)

 

The very large majority of attorney-led actions for shareholders result in wasted money/time and nothing to show for it for the shareholders (in my experience).

 

Here's my take for what it's worth. LL would have done much much better to admit to at least one major sourcing mistake in their conference call and then call into question the severity of the formaldehyde problem rather than deny any problem. But since they did not do that, they will be seen as liars and the shorts and government agencies will press harder to "get to the bottom" of LL. They and the longs seem to be using a government/shorts/greens are out to get us slant to shirk responsibility. The problem is this narrative is only appealing to maybe 30% of the population. The other 70% wants to know why the 60 minutes tests showed a difference in LL's product compared to that of others.

 

Here is an interesting write-up on the Jack in the Box E coli episode http://www.ou.edu/deptcomm/dodjcc/groups/02C2/Jack%20in%20the%20Box.htm

 

Here is the stock price right before e coli hit and for the subsequent five years.

http://finance.yahoo.com/q/hp?s=JACK&a=11&b=5&c=1992&d=11&e=5&f=1997&g=m

 

It appears it took about four and a half years for the stock to recover. And this is with the company taking responsibility and even hiring ex-government officials to do PR.

 

Of course, formaldehyde is not e coli. , but Lumber Liquidators has not shown the wisdom of Jack in the Box. So I expect their stock to stay somewhat depressed while the controversy rages. Still talking my book. Covered a big chunk at a nice profit but keeping a small part of the synthetic short, a part I believe is safer than the straight short was.

 

I'm curious if the nuance I made is legitimate re. the admission of guilt and how that plays in the eyes of the public and with LL's adversaries. In my mind they are being too warrior like and a little lesson in diplomacy and proper PR would have done them some good. Confrontation breeds confrontation and if this stays a battleground stock it will take years to recover as the shorts accuse LL of lying and the reputational problems they refuse to address linger.

 

I'm guessing it plays better with the public but it plays poorly into the hands of lawyers.  As soon as you admit guilt the class action suits come out of the woodwork (no pun intended) and you are now liable for testing and/or replacing floors for everyone who asks.  No admission of guilt and you can bury it in litigation for years while the public forgets about it.

 

I bet you can get a pretty decent price on flooring at LL for the next little while!

 

Bingo! Most companies do not comment on short sellers (even if it makes 60 minutes). If there were a serious health liability then LL would have been shut down immediately (well before 60 minutes). Most of these pieces are scare tactics that mutually benefit 60 minutes and Tilson. The piece was most likely factual but ultimately fear-mongering. I'm just not that big of a fan of the operating business but this might be too cheap to pass if we can get near $20. I can't see how LL is anything but a commodity retailer with a tarnished (unknown how badly) reputation. Below 10x PM (after-tax) seems necessary before buying for myself.

 

Last comment, the 5x reward/risk comment seems off because of the 'stop' in place. With the stop, your reward/risk calculation has a lot of assumptions built in that you may not be considering. Semantics but the stop always seems like a lack of confidence to me (and a good reason to pass!). I really can't see $0 as possible before litigation is settled. A severe drop in earnings power is the biggest near-term risk in my mind (and the potential over-expansion as a result of lowered ROIC). I think ultimately this will all fade and LL will be back to BAU.

 

Tarnished for investors maybe, but how much do customers care? Like, who is even aware of this in the public? Until it goes on national news or something, effect will be minimal in my opinion. It could easily blow out of proportion though.

 

Still even with this, is the price worth paying? At this point it looks more of a game of cat-and-mouse, trying to make a play on other investors' sentiment. If you were buying at 15x ltm earnings, you'd be saying it's worth close to 30x ltm earnings under normal conditions. I'm dubious that this company would be worth 30x earnings tbh...

[davidoosnk]

Here's my take for what it's worth. LL would have done much much better to admit to at least one major sourcing mistake in their conference call and then call into question the severity of the formaldehyde problem rather than deny any problem. But since they did not do that, they will be seen as liars and the shorts and government agencies will press harder to "get to the bottom" of LL. They and the longs seem to be using a government/shorts/greens are out to get us slant to shirk responsibility. The problem is this narrative is only appealing to maybe 30% of the population. The other 70% wants to know why the 60 minutes tests showed a difference in LL's product compared to that of others.

 

Here is an interesting write-up on the Jack in the Box E coli episode http://www.ou.edu/deptcomm/dodjcc/groups/02C2/Jack%20in%20the%20Box.htm

 

Here is the stock price right before e coli hit and for the subsequent five years.

http://finance.yahoo.com/q/hp?s=JACK&a=11&b=5&c=1992&d=11&e=5&f=1997&g=m

 

It appears it took about four and a half years for the stock to recover. And this is with the company taking responsibility and even hiring ex-government officials to do PR.

 

Of course, formaldehyde is not e coli. , but Lumber Liquidators has not shown the wisdom of Jack in the Box. So I expect their stock to stay somewhat depressed while the controversy rages. Still talking my book. Covered a big chunk at a nice profit but keeping a small part of the synthetic short, a part I believe is safer than the straight short was.

 

I'm curious if the nuance I made is legitimate re. the admission of guilt and how that plays in the eyes of the public and with LL's adversaries. In my mind they are being too warrior like and a little lesson in diplomacy and proper PR would have done them some good. Confrontation breeds confrontation and if this stays a battleground stock it will take years to recover as the shorts accuse LL of lying and the reputational problems they refuse to address linger.

 

I'm guessing it plays better with the public but it plays poorly into the hands of lawyers.  As soon as you admit guilt the class action suits come out of the woodwork (no pun intended) and you are now liable for testing and/or replacing floors for everyone who asks.  No admission of guilt and you can bury it in litigation for years while the public forgets about it.

 

I bet you can get a pretty decent price on flooring at LL for the next little while!

 

I respectfully agree to disagree with you guys about the merits of LL's strategy. In a sense what they are doing is ensuring a binary outcome. If the government and short sellers cave, LL will be fine. But if they don't LL will be accused of continuing to sell the offending product and not taking an ounce of responsibility. Given the fact that CARB probably doesn't like their guidelines to be flouted and mocked, and short sellers have a financial incentive, which do you think is more likely?

 

Tilson is out with another article on seeking alpha where he states http://seekingalpha.com/article/3001666-explaining-lumber-liquidators-reckless-strategy-and-rebutting-its-claims-about-deconstructive-testing

 

"Secondly, when untold number of lawsuits start reaching courtrooms, the fact that the company continued to sell tainted wood after the 60 Minutes segment aired will look very bad. Rather than perhaps earning some sympathy by claiming they were duped by lying Chinese mills, they will instead look like rogue actors."

 

I'm inclined to agree with him on the bit about LL's strategy and its likelihood of success.

 

Not to say that I would short the stock at $30 because at this point it is a battleground stock. But I would not go long either.

 

 

[cmlber]

Here's my take for what it's worth. LL would have done much much better to admit to at least one major sourcing mistake in their conference call and then call into question the severity of the formaldehyde problem rather than deny any problem. But since they did not do that, they will be seen as liars and the shorts and government agencies will press harder to "get to the bottom" of LL. They and the longs seem to be using a government/shorts/greens are out to get us slant to shirk responsibility. The problem is this narrative is only appealing to maybe 30% of the population. The other 70% wants to know why the 60 minutes tests showed a difference in LL's product compared to that of others.

 

Here is an interesting write-up on the Jack in the Box E coli episode http://www.ou.edu/deptcomm/dodjcc/groups/02C2/Jack%20in%20the%20Box.htm

 

Here is the stock price right before e coli hit and for the subsequent five years.

http://finance.yahoo.com/q/hp?s=JACK&a=11&b=5&c=1992&d=11&e=5&f=1997&g=m

 

It appears it took about four and a half years for the stock to recover. And this is with the company taking responsibility and even hiring ex-government officials to do PR.

 

Of course, formaldehyde is not e coli. , but Lumber Liquidators has not shown the wisdom of Jack in the Box. So I expect their stock to stay somewhat depressed while the controversy rages. Still talking my book. Covered a big chunk at a nice profit but keeping a small part of the synthetic short, a part I believe is safer than the straight short was.

 

I'm curious if the nuance I made is legitimate re. the admission of guilt and how that plays in the eyes of the public and with LL's adversaries. In my mind they are being too warrior like and a little lesson in diplomacy and proper PR would have done them some good. Confrontation breeds confrontation and if this stays a battleground stock it will take years to recover as the shorts accuse LL of lying and the reputational problems they refuse to address linger.

 

I'm guessing it plays better with the public but it plays poorly into the hands of lawyers.  As soon as you admit guilt the class action suits come out of the woodwork (no pun intended) and you are now liable for testing and/or replacing floors for everyone who asks.  No admission of guilt and you can bury it in litigation for years while the public forgets about it.

 

I bet you can get a pretty decent price on flooring at LL for the next little while!

 

I respectfully agree to disagree with you guys about the merits of LL's strategy. In a sense what they are doing is ensuring a binary outcome. If the government and short sellers cave, LL will be fine. But if they don't LL will be accused of continuing to sell the offending product and not taking an ounce of responsibility. Given the fact that CARB probably doesn't like their guidelines to be flouted and mocked, and short sellers have a financial incentive, which do you think is more likely?

 

Tilson is out with another article on seeking alpha where he states http://seekingalpha.com/article/3001666-explaining-lumber-liquidators-reckless-strategy-and-rebutting-its-claims-about-deconstructive-testing

 

"Secondly, when untold number of lawsuits start reaching courtrooms, the fact that the company continued to sell tainted wood after the 60 Minutes segment aired will look very bad. Rather than perhaps earning some sympathy by claiming they were duped by lying Chinese mills, they will instead look like rogue actors."

 

I'm inclined to agree with him on the bit about LL's strategy and its likelihood of success.

 

Not to say that I would short the stock at $30 because at this point it is a battleground stock. But I would not go long either.

 

I think this 60 minutes piece is way overblown.  If you actually read LL defense, it's completely logical.  CARB regulates the formaldehyde content of the raw core board.  Once heat and pressure are used, the characteristics of the core board are changed.  To deconstruct a finished piece of laminate and test the board is a meaningless test.  They said their suppliers have to test for CARB compliance every 8-12 hour shift.  My guess is the 60 minutes piece is factually correct, deconstructed core boards have more formaldehyde than raw core boards are allowed to have, but LL is also correct, the raw core boards don't, which is the only measurement that is regulated. 

 

I'm not long or short, my concern is more with the valuation.  It's almost 3x book value, what's so special about this business?  They buy a commodity product, slap their label on it, which can't have much brand value, and sell it in stores generally in locations where anybody can set up a competing store in a few weeks (not high demand retail locations and cheap build outs).  It seems like that should attract competitors given how profitable they are. 

[bookie71]

I think this 60 minutes piece is way overblown.  If you actually read LL defense, it's completely logical.  CARB regulates the formaldehyde content of the raw core board.  Once heat and pressure are used, the characteristics of the core board are changed.  To deconstruct a finished piece of laminate and test the board is a meaningless test.  They said their suppliers have to test for CARB compliance every 8-12 hour shift.  My guess is the 60 minutes piece is factually correct, deconstructed core boards have more formaldehyde than raw core boards are allowed to have, but LL is also correct, the raw core boards don't, which is the only measurement that is regulated

Even so would you want your two year old child or grandchild crawling around on the flooring?  I sure wouldn't.

[cmlber]

I think this 60 minutes piece is way overblown.  If you actually read LL defense, it's completely logical.  CARB regulates the formaldehyde content of the raw core board.  Once heat and pressure are used, the characteristics of the core board are changed.  To deconstruct a finished piece of laminate and test the board is a meaningless test.  They said their suppliers have to test for CARB compliance every 8-12 hour shift.  My guess is the 60 minutes piece is factually correct, deconstructed core boards have more formaldehyde than raw core boards are allowed to have, but LL is also correct, the raw core boards don't, which is the only measurement that is regulated

Even so would you want your two year old child or grandchild crawling around on the flooring?  I sure wouldn't.

 

I'm not arguing with what perception will do to the business, it will clearly be very negative. I'm sure 100% of 60 minutes viewers think LL is going to make their children sick (I did after watching it).  But it doesn't sound like there is a health risk when you read management's presentation.  Most parents would be better off worrying about the risks posed to their kids by bad eating habits than the laminate floor their crawling on, but that doesn't mean there won't be plenty of scared customers.  And that speaks to the point I was trying to make about the business, it's a commodity, so even if the fear is irrational, it's easier to go to Home Depot for your floor than spend the time trying to figure out whether or not it's really a health risk.

[rmitz]

Regardless of what this is worth as an investment, I say as a customer that I would still buy at LL.  Of course I'm only looking for real, solid wood anyway, but he prices and selection *anything* else I've seen.  Lowes and HD are a joke.

[Jurgis]

This thread is a great read for anyone interested in cognitive biases and reasons why investors get whipsawed out of their positions.

 

/gets more popcorn/

[Guest roark33]

Here is a more in-depth dive into the situation.

 

http://www.valuewalk.com/2015/03/lumber-liquidators-ll-bull-case/2/

 

To be clear: this isn't a strong "bull case" for the stock, but a more thorough explanation of the issue at hand.

[Patmo]

This thread is a great read for anyone interested in cognitive biases and reasons why investors get whipsawed out of their positions.

 

/gets more popcorn/

 

Just like this one contribution, where you can witness the Dunning-Kruger effect in all its glory

[Mephistopheles]

This thread is a great read for anyone interested in cognitive biases and reasons why investors get whipsawed out of their positions.

 

/gets more popcorn/

 

Just like this one contribution, where you can witness the Dunning-Kruger effect in all its glory

 

LOL

[Guest roark33]

FYI.

 

http://www.valuewalk.com/2015/03/lumber-liquidators-asking-the-right-questions/

[Guest Schwab711]

where you can witness the Dunning-Kruger effect in all its glory

 

I always thought it was funny that interviews look for confident candidates (beyond displaying required knowledge). Big corporations basically guarantee they will hire more idiots than smart folks who can fake over-confidence. :)

[Jurgis]

OT

 

I always thought it was funny that interviews look for confident candidates (beyond displaying required knowledge). Big corporations basically guarantee they will hire more idiots than smart folks who can fake over-confidence. :)

 

It is not at all clear that "confident candidates (beyond displaying required knowledge)" would bias the result towards "idiots". (BTW, "idiots" is a wrong word, since you assume that they do display required knowledge that may make them way above average person).

 

Assuming a population of candidates X who all have knowledge above level Y, you assume that the knowledge distribution of confident candidates is lower than knowledge distribution of not confident candidates. I assume you believe this as an outcome of Dunning-Kruger effect. There are at least two issues with your claim:

1. It is not clear whether Dunning-Kruger effect works within a population pre-selected to be above level Y.

2. It is not clear that interview situation where people know that it's beneficial to show confidence actually reflects the confidence.

[davidoosnk]

This thread is a great read for anyone interested in cognitive biases and reasons why investors get whipsawed out of their positions.

 

/gets more popcorn/

 

Well, if OT is the trend on this board, the trend is my friend.

 

The yin to "getting whipsawed's" yang is gracefully dancing around the market/stock and using its energy in your favor. While getting scared out of positions due to fear destroys portfolios, perhaps mildly adjusting in the face of new information is more of a kung fu like approach.

 

 

A big problem with many social scientific and psychological approaches is they capture a very brief moment in time. Incompetents can become competent and people who were heretofore fabulous traders fall by the wayside.

 

Could lead to a discussion re. rationality vs. reflexivity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[LC]

I'll be going to a presentation by Whitney Tilson tomorrow around noon, if anyone has question they would like me to pose to him please post them here and I will do my best to relay them.

[Guest roark33]

1. If LL has been buying non-CARB compliant products for years, how does this fit with your accusations that their operating margins "doubled" due to illegal sourcing.  If your accusations are correct, their margins would have remained the same, unless they went from buying CARB compliant product to non-CARB compliant products.

 

2. Sources indicate in my research that wholesalers and retailer flooring companies without a presence in California are opening selling non-CARB compliant products because they are not subject to California's regulations.  For example, Floor N Decor, a major competitor that you cite in your research, has actively (and openly) removed all of their CARB compliant stickers from their products being sold outside California.  Is it your contention that these other companies, which make up roughly 45% of the flooring market are also "evil" and are "poisoning" their customers.

 

Thanks....

[LC]

Roark,

 

1. Tilson claims this began in late 2011 when LL acquired a Chinese co called Sequoia and also when new management came in during that time. He cites their 2012 AR which attributed decreasing product costs to this acquisition. Op margins grew almost solely due to gross margin expansion, which began in 2012. He also cites an EIA report which accuses LL of buying from Chinese mills, who were in turn buying illegal hardwood from Russia.

[LC]

2. The guys selling non-carb product are very small players, the big flooring guys have agreed to adhere to carb nationwide.

[bookie71]

http://www.npr.org/blogs/thetwo-way/2015/04/29/403039727/lumber-liquidator-says-justice-department-seeks-criminal-charges-over-imports?utm_medium=RSS&utm_campaign=news

[racemize]

A friend of mine sells a lot of flooring in the Houston area.  This was his comment on it:

 

They got rid of everything way before that hit the headlines.  I knew about that 3-4months ago.  It wasn't just them.  They will take a hit in reputation only.  If we are talking business, now is the time to buy.

[racemize]

Question for those who looked into this: I largely agree (I think) that the deconstuctive test has issues.  However, what about the off-gassing testing, which appear to be at very high levels?  I guess this would be offset by the in-home tests sent out by LL, and perhaps they are artificially high since they came out of the box, but that bit is troubling to me, nonetheless.

[fareastwarriors]

Lumber Liquidators pleads guilty to environmental crimes, agrees to pay more than $13M

 

 

http://www.cnbc.com/2015/10/22/lumber-liquidators-pleads-guilty-to-environmental-crimes-agrees-to-pay-more-than-13m.html

[elc13]

I don't see a page for LL anywhere, and it seems to me that since they've fallen ~80% from their peak, there is a chance this might be a bargain. Any thoughts?

[Range]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ll-lumber-liquidators-holdings/msg213565/?topicseen#msg213565

[jm25]

Has anyone revisited this one? Tilson is now long LL.