Tilson's Quick Thoughts On Lumber Liquidators Earnings

Shares of Lumber Liquidators Holdings Inc LL fell 27.75 percent on Wednesday trading after the company reported -in the morning- a huge earnings miss on a slight revenue miss. After the call, Whitney Tilson, founder and Managing Partner of Kase Capital Management, sent an email to investors sharing his quick take on the results.

The expert concludes, after going over the new information the company released in the morning, that the situation is “more dire” than he had thought. However, the stock’s tumble strikes him “as a reasonably accurate response to the new information,” he assured. So, he sees no reason to do anything.

In fact, Tilson assures he is content to have it remain one of his largest short positions (although he trimmed it by 26 percent since Tuesday evening). Consequently, he will be neither covering any his short stake, nor adding to it on Wednesday.

Some Highlights

Tilson highlights a few points after the report.

He notes that Lumber Liquidators has not been on the news much in the last month, so he believed there was a probability for July sales having stabilized or even picked up (from a very low base). If this was the case, however, the expert thinks “the company would then trumpet in its earnings release and/or conference call in an attempt to put a silver lining on this very dark cloud. The fact that it didn’t report open orders or July numbers is therefore very significant, as it’s strong evidence that revenues and margins continue to be horrible.”

Oh the other hand, he notes the company is taking the right steps from a capital allocation standpoint: management drew down $20 million from the company’s line of credit in the first quarter, leaving $79 million available; reduced inventory, which generated $34.2 million in cash in the second quarter, while expanding inventory consumed $25.4 million in cash; trimmed cap ex to the just $5.3 million (down from $13.9 million, $27.9 million, $14.9 million and $9.0 million in the previous four quarters); and suspended all share repurchases. “Thus, free cash flow (operating cash flow minus cap ex) in Q2 was slightly positive ($6.1 - $5.3 = $0.8M). But the massive inventory liquidation in Q2 (accomplished in large part by slashing prices – hence the abysmal gross margin) isn’t sustainable, so the company will start burning a fair amount of cash in the near future unless the fundamentals turn around.”

“All of this said, for the first time I can now at least understand (if not agree with) the argument that some investors might think that LL’s stock is cheap,” Tilson concludes.