By Ciara Linnane, MarketWatch
NEW YORK (MarketWatch)—Shares of Lumber Liquidators Holdings Inc. fell sharply Monday, after a “60 Minutes” report alleged the U.S. retailer of hardwood flooring has installed Chinese-made laminate flooring in many American homes that contains far higher-than-accepted levels of formaldehyde, a chemical known to cause cancer.
Shares of the Toano, Va.–based Lumber Liquidators /zigman2/quotes/202539569/composite LL +8.55% closed down 25%, and were halted through the morning ahead of a news release.
In a damning report , the “60 Minutes” team said three certified labs testing formaldehyde levels in the company’s Chinese-made laminate found it far exceeded California emissions standards.
Formaldehyde can cause myeloid leukemia and other cancers at high levels, as well as respiratory issues and eye, nose and throat irritation even at low levels.
What’s more, all laminate flooring carried by Lumber Liquidators bears a label indicating that it is CARB Phase 2–compliant, referring to the California Air Resources Board, which sets standards for formaldehyde emissions in wood flooring. Those standards were adopted by Congress in 2010 in a law that is set to take effect across the U.S. this year.
Lumber Liquidators’ founder and chairman, Tom Sullivan, told “60 Minutes” that the tests weren't valid and said the company isn't required by law to test finished products, as the program did. In a filing with the Securities and Exchange Commission on Monday, the company reiterated that the testing method on which the CBS program based its report was improper. It said it is fully compliant with California standards. “Our laminate floors are completely safe to use as intended,” the filing said.
The company blamed the “attacks” on it as the work of short sellers, “who are working together for the purpose of making money by lowering our stock price.”
Short interest in the stock reached 30% ahead of the CBS program’s airing, according to FactSet data.
The company is being sued by environmentalists, backed by a group of Wall Street short sellers, who accuse the company of violating California’s toxic-warning statute. The nonprofit Global Community Monitor has launched a class-action suit against the company.
“Our goal is to sell a good product at a good price,” Sullivan told Anderson Cooper of “60 Minutes.” “And we don’t get the price by skimping on anything. We get the price by low overhead, huge volume and being very efficient at what we do. And we’re never [going to] sell something unsafe.”
The company also challenged on-camera accounts from Chinese suppliers, who were interviewed by “a 60 Minutes” reporting team posing as buyers and using hidden cameras. Employees of three Chinese mills said they were using core boards with higher levels of formaldehyde to save the company up to 15% on price. All three mills also admitted falsely labeling products as CARB 2–compliant.
In its filing, Lumber Liquidators said it was unable to identify the individuals in the video footage.
“The suppliers have confirmed that all products provided to Lumber Liquidators have been and are CARB compliant,” it said.
Investors have been skittish on the stock for some time, sending it down to about $40 from a peak above $120 in 2013.
“In 16 years of professional money management, I’ve seen hundreds of companies do all sorts of bad things to get their stock prices up,” hedge-fund manager Whitney Tilson told Cooper. “But this has got to be the worst.”
Tilson was one of the first people to raise questions about Lumber Liquidators in 2013, after he noticed it had far wider profit margins than its peers. He said he learned that the company was being probed for allegedly buying timber from Russia that had been illegally logged. The company denied those charges but said last week the Justice Department may file charges against it.
Lumber Liquidators has 352 stores in 46 states and Canada, according to its most recent earnings report . Sales totaled $1.05 billion in 2014, up from $1 billion in 2013. Net income fell 18.1% to $63.4 million.