Lumber Liquidators Is Toxic Again, Literally

| About: Lumber Liquidators (LL)

Summary

The CDC reversed previous findings on the toxicity of LL laminate flooring.

The CDC's mistake is a boon for shorts and terrible news for bulls.

LL is in a lot of trouble now and I think it has a decent shot of going out of business over the longer term.

I've been an outspoken bear on beleaguered flooring retailer Lumber Liquidators (NYSE:LL) for years now. There have been many reasons why I was bearish in the past but more recently, after the stock had fallen roughly 90% from its all-time highs, the company's myriad legal woes were the reason du jour. However, LL has settled illegal harvesting charges so that headwind is out of the way, but the toxic laminate flooring the company sold in the past is still out there. The CDC said a couple of weeks ago that LL's flooring was basically a non-issue but last night, the CDC dropped a bomb on LL; as it turns out, the CDC's report used incorrect ceiling heights and it turns out that LL's flooring is indeed toxic.

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After a certain short covered his position in LL back in December, shares rose as high as $18. However, I said at the time, at a price of $17, that LL was still going lower based upon the menu of problems that it had at the time. This was even before we knew that the CDC would rule that LL's flooring is toxic, causing up to 30 cases of tumors in every 100K. This is terrible news for LL for a variety of reasons and it means the stock, once again, is literally toxic.

LL's business has never recovered from the damning 60 Minutes report that seems so long ago at this point. Shares continue to get hammered and after the CDC news, shares are now hitting $12 once again. LL has proven time and time again that each time it rallies, it gets crushed again. Each new investor or hint that the company is potentially out of the woods is met with tremendous selling pressure once LL reveals its true self once again.

Based upon LL's quarterly earnings reports since the 60 Minutes story came out, customers have been leaving LL en masse for greener pastures. After all, there are dozens of places to buy flooring; why buy it from someone that you don't trust? LL has completely lost the trust of consumers as it simply cannot look customers in the eye and tell them the company's laminate flooring was safe. With something as monumental and basic as safety, how can trust be repaired? I don't think it can and that is why I've been so adamant about shorting LL.

Now, the new development surrounding the CDC's findings not only creates a brand new headache for LL but it also reverses a significant positive the company had from just a couple of weeks ago. Bulls cited the CDC findings as a reason to sound the all clear on LL but that has simply turned out to be another dead end for LL shareholders. This particularly poorly timed article from last week sums up the frustration of the bulls with LL; every time it looks like LL is out of the proverbial woods, it isn't, and chasing the stock in search of value has proven a fool's errand.

LL is slated to report earnings next week and given the CDC development, the earnings call should prove to be very interesting indeed. I have a feeling that LL will need to be cryptic because at this point, it simply cannot estimate the damage from the CDC findings. However, I will take a crack at it because it is important for the investment case and why I think LL is going lower still.

The $13 million fine for the illegal harvesting LL performed is going to be a drop in the bucket for the penalties that are ultimately levied against LL for its toxic laminates. The harvesting broke a conservation law which, while undoubtedly important, did not impact the safety and health of customers. The toxic laminates the company sold in the past (hopefully it has pulled toxic flooring from its shelves at this point) could have caused very serious damage to certain susceptible consumers. That is 100% unacceptable from any business regardless of intent so even if LL didn't know it was buying toxic flooring - an assertion that I think will be difficult to prove - it is in a lot of trouble.

Depending upon just how many people were impacted by the toxic product and how many people can prove some type of adverse reaction to it, LL could be on the hook for tens of millions of dollars very easily. In fact, it wouldn't take much to see a nine-figure penalty including potential recalls, replacing existing customers' flooring and/or producing a refund, and simply paying fines for wrongdoing. LL doesn't have $100 million to spare at this point and while the fines would be paid out over time, the fact that it continues to see lower and lower sales and is losing money means it cannot hope to recover from such an event.

That is why I'm still bearish on LL have not simply declared victory and moved on. There is still some meat on the bone here from the short side as it is entirely plausible this company is literally worth nothing should the punishment for its toxic product be severe enough. It is also possible it gets off easy with a $50 million punishment but still, even that amount would seriously impair its balance sheet and its ability to fund capex and buy inventory.

And none of this addresses the fact that LL's traffic levels have taken a massive haircut since consumers have lost faith in the company's products. Comp sales numbers have continued to plummet and I expect we'll see the same thing when LL reports in the coming days. There are so many problems for LL right now that I don't even have to be right about everything I'm saying; so long as customers stay away the rest of it is just gravy for shorts and that is clearly where the risk/reward is skewed right now. Chase LL for value here at $12 if you want; I'll be there to take the other side.

Disclosure: I am/we are short LL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.