Lumber Liquidators: Whitney Tilson's Comments Contradict Cantor Fitzgerald Upgrade

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Shares of
Lumber Liquidators Holdings InLL
spiked higher by more than 13 percent Thursday morning following an upgrade to Buy from Hold by analysts at Cantor Fitzgerald. The analyst, Laura Champine noted that that the risk to reward profile on the stock has "become much more appealing" following a nearly 80 percent year to date dip. The analyst also added that the stock is attractive as it is trading at a 0.3x 2016E EV/sales valuation, compared to the retail group's average multiple of 1.4x. Whitney Tilson of Kase Capital has made his bearish thesis (and short position) on Lumber Liquidators well known. In an e-mail to Benzinga, the hedge fund manager responded to Champine's upgrade by reiterating the following comments he made on August 8 after the company's second quarter print. Tilson acknowledged that "for the first time" he can understand (although not fully agree) why investors might characterize Lumber Liquidators' stock as "cheap." After all, he pointed out that the company has a "tiny" market cap of $364 million with a $339 million enterprise value. Tilson continued that at this point he "might be tempted" to cover his short position (although looming class action lawsuits and other regulatory hurdles might prevent him from doing so) as the company maintains 365 stores with a total revenue of around $1 billion. Moreover, the stock is trading at approximately $1 million per store and 0.37x sales which "might appear cheap to some investors looking to bottom-fish a potential turnaround."
Q2 Was Worse Than Expected
Tilson also commented on Lumber Liquidators' second quarter results and stated that while he was expecting "bad" numbers, the print came in "even worse than I expected." While revenue was a lone standout coming in above expectations, the reported gross margin of 25.1 percent and SG&A of 36.5 percent was "awful." In fact, even excluding a "litany" of charges, gross margin would have read 31.2 percent, marking a decrease from the 40.4 percent the company reported in the same quarter a year ago. "Lumber Liquidators has been mostly out of the news for at least a month, so I thought there was some chance that July sales might have stabilized or even picked up (from a very low base), which 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," Tilson wrote. "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." Tilson further commented on M&A speculation and stated that he is "quite certain" that "nobody will buy this company at any price" until there is further clarity on its liabilities. Finally, Tilson disclosed he is "content" to keep Lumber Liquidators as one of his largest short positions. He also added: "I see no reason to do anything" and "I'm neither covering any of my short nor adding to it today."
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Posted In: Analyst ColorAnalyst RatingsCantor FitzgeraldConsumer DiscretionaryHome Improvement RetailLaura Champinelumber liquidators
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