Lumber Liquidators, the largest U.S. hardwood-flooring specialty retailer, reported another rough quarter of financial results Monday as it seeks to recover from claims it sold Chinese-made laminates containing possibly dangerous levels of formaldehyde.
The report comes after the Centers for Disease Control and Prevention said recently it had revised its earlier analysis of the suspect flooring and found a heightened risk of cancer. The CDC said its models suggested the formaldehyde could cause respiratory issues for people with asthma and could cause anyone eye, nose and throat irritation.
A "60 Minutes" investigation a year ago took aim at the makeup of the flooring and spurred regulators to dig deeper. Lumber Liquidators suspended its sale of Chinese-made laminates after the investigation aired, and the chief executive at the time, Robert M. Lynch, stepped down in May.
Still, the controversy sent the company's stock plummeting and spawned a host of consumer lawsuits. It also appears to be hurting sales. Sales at stores open at least a year dropped 17.2 percent for the three-month period that ended Dec. 31, the company reported Monday. Revenue came in $ 20 million short of analysts' projections, with net sales totaling $ 234.8 million.
Lumber Liquidators executives told analysts Monday that the company is reviewing its sourcing practices to comply with orders from the Justice Department. It also told investors it would leave its remaining inventory of Chinese laminate wood, which before the "60 Minutes" report made up about 20 percent of sales, in storage and would not return the product to shelves.
Chief executive John M. Presley warned that sales of the laminate would "unnecessarily pressure our reputation and create ongoing distractions for our customers."
"Over the past quarter we have taken meaningful steps to reestablish Lumber Liquidators with our customers and our shareholders," Presley said in a statement accompanying the company's earnings release. "While we have made some progress in key areas such as compliance and core operational efficiency, we still have a long way to go. That said, our business model is intact, we are addressing legacy issues with clarity and candor, and we are rebuilding our brand."
Presley was brought on in November to help right the ship, but he is now facing health problems. On Feb. 16, he told employees that he had been diagnosed with a "very treatable form" of leukemia and that he planned to stay active in the day-to-day management of the company.
The company announced Monday that Dennis R. Knowles, a former Lowe's executive, has been appointed chief operating officer.
The company did not respond to requests for comment.
Concerns over Chinese-made laminates are just one of the sourcing issues to surface at Lumber Liquidators, a Richmond-based discounter that has grown to more than 370 locations in North America since its founding in 1993.
In 2013, an environmental nonprofit group alleged the company illegally smuggled wood from Russian woodlands that are home to endangered tigers. A federal judge fined the company $ 13 million last October.
The CDC released a report Feb. 10 that linked the Chinese-made laminate to formaldehyde and warned that exposure could lead to a low risk of cancer, affecting possibly two to nine people out of 100,000. It later revised that finding, saying it underestimated the potential danger. Between 6 and 30 people per 100,000 are estimated to be at risk of cancer, though the agency said that the new analysis errs on the side of caution and that the actual risk is probably lower.
Since the controversy erupted, Lumber Liquidators' stock has tumbled.
The stock is down nearly 80 percent since this time last year. It dipped nearly 20 percent last Tuesday after news that the CDC issued its revised report. It wa down 7 percent in midday trading Monday.
"We are not recommending investors buy the stock right now," said KeyBanc analyst Brad Thomas, "but we are hopeful the company will survive through the regulatory and legal matters that are unresolved."
The company should benefit from a recovery in the housing market if it can put its sourcing questions behind it. Historically, Lumber Liquidators had not-too-shabby operating margins between 6 and 8 percent, Thomas said. They peaked at 12.3 percent in 2013 before supply-line issues surfaced.
Many shoppers warmed to the company's niche between big-box stores and the discounters, doing for flooring what Sherwin Williams or Benjamin Moore did for paint.
"I think there is a real company underneath there, but it might take a couple of years before it seems like that before the investment community sees that," Thomas said.
Jacob Bogage is a freelance journalist based in Missouri. He specializes in sports, business and technology.
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