Lumber Liquidators (LL) Shares Soar After Tilson Covers Short Position

Shares of Lumber Liquidators Inc. (LL) were trading up +4.22 or +30.74 percent to $17.95 in Tuesday’s premarket after Whitney Tilson of Kase Capital Management announced in a letter late yesterday that he had covered a significant short position in the stock. Lumber Liquidators stock closed at $13.73 per share, down -0.16 or -1.15 percent in Monday’s regular trading session.

Toano, Virginia based Lumber Liquidators Inc. was founded by contractor Tom Sullivan in 1993 when he began selling excess wood bought from other companies out of a trucking firm’s yard in Stoughton, Massachusetts. The company’s first store opened in West Roxbury, Massachusetts in 1996 and subsequently growing to 220 stores with more than 1,000 employees. Lumber Liquidators had their initial public offering at $11 per share in November of 2007, raising $110 million. The company expanded in 2010, adding an additional 40 stores in Canada.

In 2013, a report by the Environmental Investigation Agency showed that the company’s poor and indiscriminate sourcing practices had led to the destruction of the forest habitats of endangered tiger species. Later that year, Whitney Tilson, founder and managing partner of Kase Capital Management and author of several financial books, announced a short position in the stock.

On March 1^st of 2015, 60 Minutes aired a report on laminated flooring manufactured in China, which contained twenty times the legal amount of formaldehyde permitted in the State of California. Founder Tom Sullivan refused to accept as valid the methodology used to determine the amounts and said that the company only deals with lumber mills certified by the California Air Resources Board (CARB). Later that month, on March 25, the Consumer Product Safety Commission (CPSC) said that it would be testing Lumber Liquidators products to determine any level of consumer exposure to formaldehyde.

In a letter from Whitney Tilson released yesterday after the market close, Tilson said that, “In the past week, I’ve received information that leads me to believe that senior management of Lumber Liquidators wasn’t aware that the company was selling Chinese-made laminate that had high levels of formaldehyde ... If there are no 'smoking gun' documents/emails, then the doomsday scenario for the company (and the stock) is less likely, so I covered my short position today.”

Tilson said that if the company was found to not have “evil intent”, that the downside scenario involving adverse publicity, pressure from regulators and inevitable lawsuits would be avoided. He continued, stating that, “This shift in the risk/reward equation has led me to cover my short position (for tax reasons, I have done so by buying in-the-money ($10 strike) call options expiring next month; I expect to close out these offsetting positions in the new year).”

Lumber Liquidators stock is currently trading over $18 per share, which, while significantly higher on the day, is still just a fraction of the almost $70 price the stock was trading at before the 60 Minutes report in March.

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