As reported Monday morning in Remodeling, Lumber Liquidators—the largest flooring retailer in North America—came under fire by CBS's 60-Minutes for selling Chinese-made laminate hardwood with unacceptably high levels of formaldehyde.
Chinese-made laminate flooring purchased in six states was tested and found to be out of compliance with standards set by the California Air Resources Board (CARB). While the California standards are more stingent than those in other states, CARB standards for formaldehyde emissions in wood flooring have been adopted by Congress and will take effect nationwide this year.
The 60-Minutes report caused Lumber Liquidator''s stock to plunge 30% by Wednesday (see chart above). As it turns out, the stock plunge was exactly the intent of investors looking to short Lumber Liquidator's stock. Builder magazine points us to a Bloomberg story that describes how a 25-year-old short seller uncovered the story and successfully turned it to his advantage. But as typically happens when a stock is shorted, there is often a bounce back as investors rush it to buy the stock at low prices. The Street reported today that Trade-Ideas LLC has identified Lumber Liquidators Holdings as a good "dead cat bounce" (down big yesterday but up big today) candidate.
Lumber Liquidator's, squirming for some kind of relief, initially issued a response disputing the 60-Minutes findings and stating that the CBS program used an improper test method. It claimed the destructive testing used to evaluate the formaldehyde emmisions from the MDF and particleboard core of the veneered flooring boards "does not measure a product according to how it is actually used by consumers."
However, Builder's Jennifer Goodman has shown how feeble a response that was. “To say we used the wrong tests is not accurate,” Goodman quotes Kip Howlett, president of the Hardwood Plywood & Veneer Association (HPVA), whose independent lab conducted some of the testing. “CARB regulations are very specific about laminated products like these--that the surface needs to be taken off so you can test the underlying core material.”
In a further blow to the beleaguered company, ABC News last night reported that Senator Bill Nelson of Florida, in a letter sent to the heads of the Consumer Product Safety Commission, the Centers for Disease Control and Prevention and the Federal Trade Commission, is calling for independent testing of the laminate flooring to see if it potentially poses a broad public health risk. Not surprisingly, this news has sent stocks tumbling further to a 48% fall for the week.