I'm going to make this one really quick because I think the thesis is simple.
$LL has been on a massive decline over the past few years. Lower lumber costs, slow home building activity, higher interest rates, high costs, and bloated SG&A have caused the stock to be a dud. Management received about 5 different buyout opportunities over the years and they rejected all of them. Now, the stock is trading at $0.75. Clearly management is completely incapable of running the business. Honestly, it might even be criminal what they are doing here.
Fast forward to today and F9, an investment company led by Tom Sullivan, the company's founder, just won three board seats. He owns 9% of the stock and clearly is interested in taking over the company. Over the past year he's made a number of offers to buy the company - all of course rejected by dumb management. Now, with Sullivan on the board, he can do three things:
Immediately cut bloated overhead costs
Sell the massive $80MM - $100MM real estate property the company owns
Negotiate a loan modification with the company's lender
Just the other day, management said the company might need to file bankruptcy. They don't have enough cash and are tripping their loan's covenant. I don't know who leaked the story of bankruptcy, but it doesn't make any sense. The company has hundreds of million of real estate + inventory. Yes, they are cash light and have plummeting sales, but I don't see why the lender wouldn't agree to a short-term covenant relief to give LL some time to raise cash via a sale of their real estate and liquidate some inventory.
They even telegraphed they'd sell their property in their May 10Q:
"To alleviate these conditions, management plans to sell and enter into a sale leaseback transaction for its Sandston distribution center, which, as a result, met the criteria for held for sale after the balance sheet date. Proceeds from the sale leaseback transaction are expected to be sufficient to fund the Company's operations and prevent triggering its fixed charge coverage ratio covenant for a period of at least twelve months subsequent to the issuance of these unaudited consolidated financial statements. "
They issued a press release saying they received robust interest (including from F9) to buy the real estate.
So, again, where is the bankruptcy if many people - including the new board member, F9 - are down to buy the real estate? Why would the bank not give them some short-term relief?
Let's take this a step further.
Tom Sullivan owns other real estate with LL as a tenant. If LL files bankruptcy he could have issues with those mortgages if they render an anchor tenant bankruptcy as a reason for default under his loans. Moreover, Sullivan is in contact with other big shareholders like Howard Jonas. He isn't going to solicit their votes only to let the company file bankruptcy and wipe out his and their equity. I just really don't see how bankruptcy is on the table.
So, if there isn't any bankruptcy risk, why isn't the stock trading for the pre-bankruptcy price of $1.30? I'm not really sure.
Right now the stock is at $0.75. Every day they don't file bankruptcy is another reason why the stock should go higher. Soon we'll also likely get a press release about entering into an LOI for the real estate. Next, we'll get some sort of press release about the game plan to restore LL to it's former glory.
All scenarios lead to a stock that should at least be 100% higher, really really really soon.
So there you have it. LL is a stock that was at $0.55 before F9 won the board seats and now is only $0.75 with no real risk of bankruptcy. I continue to buy more shares and plan to keep buying as long as the market still thinks the company is a zero. I'm sure other shareholders will do exactly the same thing.
See y'all at $2/share in a month or two.
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