Lumber Liquidators: Sell-Off Overdone, Analyst Says

Lumber Liquidators Holdings Inc. (NYSE:LL) got socked by a “60 Minutes” piece earlier this month that said its hardwood laminate flooring contained illegal levels of the carcinogen formaldehyde, according to California emission standards. The stock has since been cut by more than half, dipping as much as 60% from about $52 a share to $28.

But what the “60 Minutes” piece failed to mention is what the regulators advise. And that is, you don’t have to yank out your wood flooring, says the California Air Resources Board.

Lumber Liquidator plans to address its product safety, plus deliver new guidance for its current quarter on an upcoming conference call with analysts. It has defended its products as “completely safe,” and says short sellers are attacking its stock (it’s estimated more than a third of its shares are sold short). The company is facing a torrent of liability lawsuits. The Consumer Product Safety Commission is expected to weigh in Tuesday on action it might take about the company’s laminate flooring.

Take note of this exchange Citron Research points out between CNN’s Anderson Cooper, who spoke on camera with Denny Larson of Global Community Monitor (Citron is closely followed by Wall Street short sellers):

Cooper: "You want the company to remove all the flooring?"

Larson:  "Every single board. At their cost and replace it with clean flooring.”

However, the California Air Resources Board (CARB) posted on its website this guidance after the piece aired (for the full note, see here: CARB is “the only currently active formaldehyde emission regulatory agency in the U.S.” specializing “in products like wood flooring,” as it appears 49 states and the federal government, including the Environmental Protection Agency, do not have any regulation that applies to this issue, Citron says.

“CARB clearly states that it does not recommend removing non-compliant flooring products,” Citron says, if there are no health reactions. It also doesn’t appear to date that CARB has advised customers to rip out their wood flooring.

“They have not even ordered Lumber Liquidators China import product off the shelves in California,” Citron says. “If in fact the company was ‘poisoning’ people, as some investors would have you believe, than at the least CARB would immediately halt all sales of non-compliant product.”

Instead, CARB advises ventilating closed-in indoor spaces until the formaldehyde “gasses off”:

“As a general rule, we do not recommend removing a flooring product unless there are noticeable health effects (i.e. nose and throat irritation, a burning sensation of the eyes, wheezing, and difficulty in breathing), and other measures (see below) taken to alleviate them have failed and there is good reason to believe the flooring is the source of the problem.”

CARB continued: “There are several steps that can be taken to alleviate emissions from indoor air pollutants such as formaldehyde. Proper ventilation, such as opening up windows, bringing fresh air through a central ventilation system, and running exhaust fans will expedite formaldehyde off-gassing from finished goods in your home as well as the odors from any finishes such as varnish or lacquer. Extended ventilation may be needed.”

CARB also advised: “Keeping indoor temperatures and humidity low, such as by using an air conditioner and/or dehumidifier to draw the moisture out of the air when humid, may help decrease the amount of formaldehyde that off-gasses into the indoor air. You may also leave your new product(s) in the garage or under a covered carport for a while to let it off-gas before bringing it inside the house. Panel products, flooring products and other finished goods that are covered with impermeable facing such as synthetic laminates may further reduce emissions.”

Still, there’s the question of whether or not Lumber Liquidators properly disclosed the use of formaldehyde, which the tort bar will likely pursue.

However, Citron says: “The CARB position calls into question the basis of a substantial number of consumer class-action lawsuits. If ultimately, Lumber Liquidators’ laminate flooring products are found to be non-compliant with CARB standards, the resolution most likely isn’t going to be the unlimited liability of removing all affected floors, as was suggested on the ‘60 Minutes’ episode.”

Lumber Liquidators’ laminate products amount to about a little more than a fifth of its overall sales, Citron estimates. But a fraction of those sales, less than 2.5%, are made in California.

“Even if tighter formaldehyde compliance narrows future margins in its laminates sales, with those only 22% of revenues, clearly the effect on overall margins will not move the needle that far,” Citron says.