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Tilson's Lumber Liquidators Story Doesn't Add Up, Lemelson Capital CIO Says

Mark Meadows

Update: A previous version of this story quoted Lemelson as saying that CEO Tom Sullivan should "step down immediately." After personally speaking with Sullivan, Lemelson has since retracted that statement, saying, "I still think he can help rectify the situation... he should, and believe he will [try to help]."

Lemelson Capital Management Chief Investment Officer Rev. Emmanuel Lemelson told Benzinga that the appearance of a conflict of interest is troubling throughout "60 Minutes" story on Lumber Liquidators Holdings Inc (NYSE: LL). Despite that, Lemelson said that Tilson "deserves credit and recognition" for helping to protect the health of a "huge number" of American families.

Yet Lemelson was not sure that all of Tilson's arguments add up, specifically Tilson's argument that Lumber Liquidators is behind the cost cutting measures. Instead, he argued that Lumber Liquidators may be guilty of not having the policies and procedures in place to check quality.

Related Link: Whitney Tilson Thinks Lumber Liquidators Should Have Known Better

Further, Lemelson said that Lumber Liquidators' profit margin was not a result of this one product line, as Tilson argues. "A 10 pt. savings on cost of goods sold of just one product line cannot lead to a ‘doubling of profit margins' (as Tilson states) for the company as a whole." Instead, Lemelson said, the profit margin increase is more closely linked to the volume of goods, as Sullivan argued.

Lemelson said it is "likely that LL was not the source of the directive to use the toxic substance" since one of the samples passed the emissions test. If Lumber Liquidators had directed the cost-cutting measures, he argued, it is likely that all samples would have failed. "The cost savings was most likely initiated by the factories themselves (perhaps aware that LL was not required by law to test)," Lemelson added.

Finally, Lemelson cautioned investors to stay away from Lumber Liquidators' stock while this all plays out.

"LL is not cheap, has fairly low operating margins, little liquidity and ballooning inventory. [...] This fact, taken with the complete absence of any margin of safety in the company's financial showing represents unacceptable risk."

Shares of Lumber Liquidators closed Monday at $38.83, down 24 percent. Shares were up about 5 percent in Tuesday's premarket.

Mark Meadows and Brianna Valleskey contributed to this report.

Latest Ratings for LL

Date Firm Action From To
Mar 2015 Janney Capital Upgrades Neutral Buy
Mar 2015 Morgan Stanley Downgrades Overweight Equal-weight
Feb 2015 Jefferies Maintains Hold

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