Monday, March 2, 2015

WHEN OUR CHILDREN FAINTED, WE KNEW THAT SOMETHING WAS WRONG WITH THE LUMBER: FACTORY IN CHINA MAKING LAMINATE FLOORING FOR LUMBER LIQUIDATORS WAS DELIBERATELY MISLABELED TO SHOW THAT IT COMPLIED WITH CALIFORNIA REGULATIONS




MARCH 2, 2015


In premarket trade Monday, shares of Lumber Liquidators were down as much as 20%. 


The "60 Minutes" report showed a factory in China making laminate flooring for Lumber Liquidators that was deliberately mislabeled to show that it complied with California regulations — it did not. 


The report centered on elevated levels of formaldehyde, a known carcinogen, in Lumber Liquidators laminate flooring products sold in California.


"60 Minutes" spoke to plaintiffs in a lawsuit that accuses Lumber Liquidators of selling laminate products in California with formaldehyde levels that exceed that state's standards by six or seven times, and the news program noted the state's standards were set to be adopted nationwide later this year. 


Lumber Liquidators, which saw its stock nearly double in 2013 and has seen shares fall more than 50% since the beginning of 2014, said on its earnings conference call last week that the coming "60 Minutes" report was likely to be tough on the company.  Lumber Liquidators shares fell about 20% last week.


On its earnings call, CEO Robert Lynch said,  "We now believe the news program '60 Minutes' will feature our company in an unfavorable light with regard to our sourcing and product quality, specifically related to laminates."


The investor reaction on Monday morning seemed to confirm this view.

The deadly and/or sick home environments we have created are truly punishing.  They wreak havoc to our health with all the volatile chemicals (such as formaldehyde), heavy metals, fire retarder chemicals, polyurethane chemicals, and so on.  All in the name of profit and jobs.  It is literally and figuratively sickening. 

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On Sunday, "60 Minutes" released a damning report on Lumber Liquidators and its practices at factories in China.  

Following the report, analysts at Piper Jaffray said the report was worse than they had expected. 

Analysts at Morgan Stanley have responded to the report by downgrading shares of Lumber Liquidators to "Equal Weight" and removing its price target on shares.  Previously, the firm had had an $85 price target and "Overweight" rating. 


And so in short, Morgan Stanley isn't really sure what Lumber Liquidators shares are worth anymore.


Morgan Stanley said the "60 Minutes" report now creates a binary outcome for Lumber Liquidators shares: legal risks and the ensuing sales fallout define the downside risk, while the potential for an overblown legal risk and media scrutiny could result in no financial fallout for the company. 

But the big change in Morgan Stanley's view on Monday morning? They thought quality issues were behind Lumber Liquidators.

From Morgan Stanley's note:

If there were any prevailing quality issues in LL's supply chain, we had assumed they were largely behind the company. The quality allegations are 2-3 years old and the company has seemingly taken many actions to resolve them. But, after watching the 60 Minutes episode, we are concerned that quality issues may still exist. We recognize we are reacting to one interpretation of the situation, one that is clearly being influenced by investors who have a stake in the outcome. But, nevertheless, the piece suggests that the legacy issues may not have been fully resolved. It is this uncertainty that is pushing us to the sidelines.

The firm added that much of what it heard last night was not exactly new, as issues related to formaldehyde first surfaced about 2-3 years ago. In response, Lumber Liquidators has "significantly beefed up its compliance," in Morgan Stanley's view, and the firm adds that "something would really have to be awry if there were still product quality issues, in our view."