It’s amazing what one 60 Minutes report can do.
While we still can’t say what the final damage of the show’s damning report on Lumber Liquidators Holding, Inc. (NYSE:LL) will be, what’s easy to say is that things clearly are still getting worse for the company and LL stock holders.
The latest? Lumber Liquidators CEO Robert Lynch unexpectedly stepped down Thursday, sending LL stock down another 14% to reach early 2012 lows.
It’s anyone’s guess as to what’s next.
From Bad to Worse
The aforementioned report put into question Lumber Liquidators laminate flooring, which is sourced from China, stating the material contained formaldehyde at levels which were unsafe to consumers. The U.S. Consumer Product Safety Commission has opened an investigation in the claims and will be performing its own tests on the laminate flooring dating back to 2012.
Through the whole ordeal, Lumber Liquidators has maintained the stance that 60 Minutes testing was incorrectly performed and that its products are safe.
We’ll find out soon enough whether that’s true or not, but until then, LL stock holders have plenty to worry about until then.
Lumber Liquidators faces a number of lawsuits over the formaldehyde issues (which one imagines won’t automatically go away regardless of the CPSC’s results), and the Department of Justice is seeking criminal charges. Lumber Liquidators estimates that legal costs alone would come to $10 million, and obviously more if they’re found guilty and required to pay penalties.
Considering that LL already was operating in the red last quarter, another $10 million spent on defense is $10 million that’s definitely needed elsewhere, as customers grow leery of Lumber Liquidator’s products. Lumber Liquidators’ sales started declining after the 60 Minutes report, with March 2015 sales coming out 12.4% lower than its March 2014 numbers.
And now, Lumber Liquidators is suffering a leadership exodus.
At the same time that those ugly figures came out, CFO Dan Terrell announced he would be leaving the company in June. That was a major red flag for me — a CFO announcing he would be leaving while the company was embroiled in scandal. This is a person who knows the ins and outs of the balance sheet, how long the company can last with declining sales, and how much the company could afford to pay in fees, fines and penalties … and he’s up and leaving? Not a good sign.
Now, CEO Robert Lynch — a man who pledged time and time again that Lumber Liquidators products are safe — is out. Lynch has been the steadfast face of LL during this rough time, and now he won’t be there to crush the fears of employees, consumers or shareholders.
Right now, the sirens are blaring as a warning: There has to be even more bad news yet to come.
How Much Worse Could It Get?
Let’s get one thing out first: If you’re a longtime LL stock holder and you haven’t already gotten out, it’s hard to see what you’re waiting for. Shares are off 67% in 2015 alone, and they’re down more than 80% from their 2013 peak.
But, if you’d like to entertain some possibilities of what could come next …
Despite LL’s massive hemorrhaging, there’s nothing stopping shares from getting halved or worse even from current prices, for any number of reasons. Sales could continue to decline regardless of a ruling. LL could be found guilty of illegally sourcing lumbers. The CPSC could find that formaldehyde levels were too high. Or a judge could rule against Lumber Liquidators in a consumer lawsuit, opening the floodgates for more claims.
And while it’s a ways off, remember — if LL stock gets hammered down to, say, the $10 level, you get to start worrying about exclusion from various funds and some institutional investors who won’t hold any stocks below that threshold. That danger grows once it nears the $5 mark.
At that point, Lumber Liquidators would be trading at roughly $150 million, and as it stands now, LL has $129 million in property and equipment (not including inventory).At that price, heck, maybe a buyout would look very attractive to a competitor or other investor simply for the asset values.But it’s not like you’d be made square from the losses you’d sustain from here.Bottom Line
There are a ton of ifs, but if I were a gambling man — and I did live in Las Vegas for a number of years — I would bet LL stock is a lot likelier to fall to $10 than it is to climb back to $30.
Lumber Liquidators is a risky mess. Look elsewhere.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
