Lumber Liquidators Gets Nailed as It Suspends China-Made Flooring

By Markets Fool.com

Once again, Lumber Liquidators has bungled its response to the health-risk scandal involving its Chinese-made laminate flooring.

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Just as it took the flooring specialist 11 days to issue a response to the 60 Minutes news program alleging there were problems with formaldehyde exposure from its flooring, last week Lumber Liquidators belatedly suspended sales of all flooring sourced from China.

Lumber Liquidators might be a professional when it comes to flooring, but it's looking amateurish when dealing with a crisis. It's not just investors who keep getting hosed by the missteps -- and they've lost 60% of their stock's value since this debacle began. The company itself is damaging its brand.

Late is worse than never
Almost three months to the day after it first warned shareholders something was up, and more than 10 weeks since the 60 Minutes program aired, Lumber Liquidators suspended sales from its Chinese suppliers as it all but admitted that it's been bamboozled by them.

The announcement of the sales suspension is curiously worded. After noting a special committee of independent directors is investigating the allegations, the statement says:

Based on the review to date, it appears that the Company's Chinese laminate flooring suppliers have sold product to the Company that the suppliers have certified and labeled as compliant with California formaldehyde standards. However, the Company is further reviewing the underlying certification and labeling processes and practices of its suppliers. In light of this and mounting industry concerns relating to laminate products sourced from China, the Company this week decided to suspend sales of all laminate flooring sourced from China pending completion of the Special Committee's review.

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First, how does it "appear" your suppliers sold you product that's labeled as CARB-compliant? Of course they did, that's why you're looking into it. It's an odd way to phrase it, no?

But then Lumber Liquidators goes on to say it is reviewing its suppliers' practices (something it's presumably been doing from the start) and that with others in the industry expressing concern about China-sourced flooring, out of an abundance of caution it is suspending sales.

Investors ought to be asking, what took you so long?

He who hesitates is lost
Lumber Liquidators waited until the dike had broken open to begin looking into its critics' charges, and then it still dawdled. It should have had a response well in hand by the time the 60 Minutes program aired, and it should have made a determination long before now on whether its Chinese suppliers were mislabeling product. Instead, it seems to have hoped the whole thing would blow over.

The crisis is spiraling out of control. Investors are abandoning the company, regulators are investigating the situation, the criminal justice system is probing its sourcing program, and the retailer's insurance carriers are reportedly balking at covering the liability. It doesn't help that Lumber Liquidators itself is contributing to an air of impropriety.

Yet for all the miscues, Lumber Liquidators maintains that its products are safe. In addition to the sales suspension, the flooring specialist also said an initial review of the results of the thousands of test kits it mailed out to customers shows that virtually all fall within safety guidelines.

Lumber Liquidators noted that between early March and May 1 it sent out 26,000 air quality kits to nearly 15,000 customers. Approximately 11,000 kits were returned for testing, and of the 3,400 reviewed so far, 97% met World Health Organization guidelines for formaldehyde exposure.

Homeowners have become hesitant to install Lumber Liquidators' flooring after questions about health risks were broached. Photo: pauljoehancock via Flickr.

Good news: but it adds a new wrinkle, too. In its March 12 update, Lumber Liquidators cited its compliance with standards from the EPA, OSHA, and even with the California Air Resources Board, or CARB. In trying to clear its name, it's bringing a whole new regulatory standard from WHO into the picture. The WHO standards seem to be even more restrictive than some U.S. standards.

The Goldilocks recovery
The flooring retailer still has a chance to come out of this crisis with minimal damage, even if the interim is a mess. If regulators' tests confirm Lumber Liquidators' position that its flooring is safe and meets regulatory standards, the company will get a boost, as it will if the criminal probe comes up with naught. The insurers may also eventually agree to cover Lumber Liquidators for claims arising out of the crisis.

That's a lot of variables requiring all the pieces to fall just so, making an investment in Lumber Liquidators far too risky. There may come a time when it reaches an inflection point -- but so long as it keeps stirring the pot on its own, that time will remain a long way off. Any attempt to pluck it while it's still falling could result in getting stuck with a big splinter.

The article Lumber Liquidators Gets Nailed as It Suspends China-Made Flooring originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple and Lumber Liquidators. The Motley Fool owns shares of Apple and Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.