Whitney Tilson Sheds More Light On Lumber Liquidators In New Letter

Investor Whitney Tilson provided more details on Lumber Liquidators Holdings Inc LL in the latest Kase Capital letter to investors.

Tilson had assumed that once it was discovered that Lumber Liquidators was selling laminate flooring with high levels of formaldehyde that the company would "apologize, immediately suspend sales of the toxic product, fix the underlying problem, claim (however improbably) that its Chinese suppliers duped them, and make amends to its customers."

Instead, Tilson pointed out, the company denied the existence of a problem and then "adopted a no-holds-barred attack on its critics."

"Most shockingly, the company is continuing to sell its Chinese-made laminate to its customers, assuring them that it's ‘100% safe,' despite overwhelming evidence to the contrary."

'Good Reason'

Tilson claimed, "I have good reason to believe that for quite some time they've known exactly what they were doing: going to China and buying laminate flooring (and perhaps other types of flooring as well – I'm looking into this) that doesn't comply with California Air Resource Board (CARB) standards and thus may have dangerous levels of formaldehyde."

The investor letter attributed the reason for the company's actions as noting more than "greed." Tilson noted that the company's "founder, Tom Sullivan, and the CEO, Robert Lynch, recognized a golden opportunity when they saw it, dumping $37 million worth of stock at prices more than double today's level in early- to mid- 2013."

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Tilson said that if he was right, the company's strategy made sense as it could "muddy the waters" and rely upon the "uncertainty about the testing methods and the harm formaldehyde causes" while hoping "the storm passes."

Short Longer Than Expected

The investor acknowledged that Kase Capital had remained short longer than expected on the stock, shorting it at $102.69 in October 2013, with the expectation that the company would have stopped selling the flooring in question.

"I more than doubled our short position during the week after the 60 Minutes story aired," Tilson wrote, "making it a 3.5 percent position currently. I believe this is large enough to warrant additional time and attention, but not so large that it might cause me to lose sleep at night if the stock bounces around a bit (which I fully expect)."

Tilson said that for "the sake of the health and safety of Lumber Liquidators' customers," he wished the company would stop selling what he believed to be a dangerous product.

The investor concluded, however, that "as someone who is short the stock, I'm actually delighted that the company has adopted a strategy that I think is truly insane. First of all, management's credibility is plunging every day they continue to make the preposterous claim that there's no problem at all. Perhaps the problem is minor, but there's definitely a problem."

Lumber Liquidators Holdings Inc recently traded at $34.41, up 3.64 percent.