Summary
  • Facing a shareholder proxy fight, the Board has hired a proxy advisory firm to solicit votes in favor of company proposals.
  • The proposals are not shareholder friendly, as they would dilute the share count and lead to increased executive salaries.
  • A protracted proxy fight would be detrimental to the company, but may be required to achieve positive change.

The Board of Directors at Lumber Liquidators (LL) has recently hired a proxy advisory firm in an effort to contact and influence shareholders to approve proposals which will increase executive pay and dilute shareholder holdings. The Board is effectively using company money to help pass proposals which harm shareholders. From my perspective, it appears management and the board of directors may be more focused on self-enrichment and collecting stock options and equity incentive rewards than actually turning around the company to benefit all shareholders.

The Proxy Proposals

There are several normal proxy proposals which are to be tabled at the Lumber Liquidators Annual Shareholder Meeting to be held on May 22, 2019. They include the election of two directors, the approval of the company auditor and the advisory vote on executive compensation. As I have mentioned in another article, I am actively working with a group of large investors, as part of the Lumber Liquidators Value Committee, and we are urging all investors to vote against these proposals, as we believe they are not shareholder friendly.

Proposal 4

The most important proxy proposal to be voted on this year is Proposal 4. In this proposal the Board of Directors is asking shareholders for permission to increase the number of shares of common stock authorized for issuance by 1,750,000. This represents a dilution to current shares outstanding of over 6%. The company then plans to use these shares to grant higher equity-based compensation awards. The company contends that these equity grants are necessary to “attract, motivate and retain highly qualified talent,” but this is where I think shareholders should be very skeptical. From the Summary Compensation Table shown further below:

Directors at the company are collecting substantial stock awards as well, as shown in the following chart.

LL director stock awards

Money Won’t Buy Loyalty

The fact is that most of the best talent at the company has already left and the many thousands of dollars of equity based compensation which these executives had collected over the years didn’t seem to have factored in their decision to leave. Notable departures within the last 18 months include Marco Pescara, the company’s Chief Merchandising and Marketing Officer, who had been at the company for over 12 years, Carl R. Daniels, the Chief Supply Chain Officer at the company with 7 years experience and with many recommendations to his name and Jill Witter, Chief Legal and Compliance Officer. But this list goes on. Company founder, Tom Sullivan, resigned as a director, and just last month, the company CFO, Marty Agard decided to leave the company and forfeited almost $200,000 worth of unvested restricted stock awards and stock options.

Moreover, one must question the logic that granting more equity based compensation actual leads to better performance. Over the last 3 years, the top 5 executives at Lumber Liquidators have collected approximated $6 million in combined stock and option awards, yet growth and margins at the company are stalled and the share price recently hit an all time low.

Management equity compensation at Lumber Liquidators

Source: Lumber Liquidators DEF-14A Proxy Filing

Shareholders vs. Management

Considering the performance of the company and the high executive salaries and equity compensation, shareholders have little reason to be pleased. Asking shareholder to now dilute their holdings in order to pay management even higher compensation seems unfair and inappropriate. The Lumber Liquidators Value Committee is challenging these proposals and we have so far received very strong support from shareholder who are voting against all of the proxy proposals, and especially Proposal 4. Management at Lumber Liquidators has realized that the proposal is in jeopardy of being rejected by shareholders and they are now on the offensive. On April 23, 2019 the Board hired an independent proxy solicitation firm to “to provide strategic advisory services and to solicit proxies” in favor of the proposals. The cost of these services is “$25,000, plus costs and expenses.” The Board is effectively using company money to help pass proposals which harm shareholders.

Over the coming weeks the advisory firm will contact retail and institutional investors to solicit votes in favor of additional equity grants to management and a further dilution of the share count. As we have seen, not only are these proposals damaging to shareholders, but shareholders (via the company) will now actually be paying fees to an advisory firm to persuade them to approve them.

What Can Shareholders do?

We believe that in a battle between management and shareholders, there will be no winners, only losers. The turbulence of a proxy fight will be tumultuous for the share price. The resources wasted by management to fight off activism will inevitably cause distractions within the company. On the other hand, are shareholders expected to simply remain idle as they see a once great company like Lumber Liquidators stagnate amid fierce competition? Must we continue to watch silently as the share price falls, destroying our investment and savings?

The Lumber Liquidators Value Committee believes the best course of action is for management and the Board of Directors at the company to put their effort into turning around the core business and to only focus on proposals which are beneficial to shareholders. Until management is able to deliver results and drive a meaningful recovery in the business, we will not relent.

We continue to recommend that shareholders vote against all Board proposals to be tabled at the Lumber Liquidators Annual Shareholder Meeting in order to send a message to management and the Board of Directors that a change at the company is wanted and needed.