Lumber Liquidators is in the hot seat since an interesting development occurring in the world of laminate flooring, and it is not a new anti-scuff technology. It is the outcome of when the media may – or may not – take on the role of ethical watchdog. It was only about a week ago that the stock of Lumber Liquidators was trading for $70 a share. As I write this blog, the stock has 
plummeted to $36 and a few pennies. If you owned the stock a week ago, it is now worth half as much.
The reason for this flop was a “60 Minutes” report. In product testing, the television news program claimed that the product failed safety tests.
In a Market Watch report from March 4, 2015, it was stated:
“The…Chinese-sourced laminate 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 supposed to take effect across the U.S. this year…Chinese mills, admitted the products they supply to the company weren’t CARB Phase 2–compliant, and were falsely labeled as such to save the company up to 15% on price.”
I am not a chemist, but I do know that formaldehyde is pretty lousy stuff; in fact, it is toxic. The government has stringent regulations in place to protect consumers against emissions. Granted, the levels of the release of formaldehyde effect different people in different ways. One thing is clear: there are certain standards in place under the California Air Resources Board and despite how this particular laminate was labeled, the laminate failed to meet the standard.
Vigorous denials
Not surprising, Lumber Liquidators says that “60 Minutes” doesn’t know what it is talking about. They say they stand behind their products and that they are in compliance. They also claim that the way in which the tests were done are in error, that people don’t use flooring in that manner.
They have no choice but to stand behind their products, of course. If they didn’t, their shares would be worthless. It may also be true that the testing methodology that “60 Minutes” used is in error, but those really aren’t the points in question.
What is bothersome is the claim of the manufacturer: “were falsely labeled as such to save the company up to 15% on price.”
While I am not a chemist and I don’t know about environmental hazard testing, I do know an ethical problem when I see one. The ethical problem is that the manufacturer claims Lumber Liquidators has been falsely labeling in order to save money.
The Chinese manufacturer may be viewed as having nothing to gain by being truthful. After all, if they alienate their customer they could lose business, couldn’t they? Unless, of course, if Lumber Liquidators has been pressuring them to falsely represent their product.
Lumber Liquidators is a company that does about $1 billion in annual sales. They are undoubtedly a big customer of this Chinese flooring manufacturer; but I doubt they are the only customer. Suppose the manufacturer has 10 major customers, each of whom pay a premium for flooring that does meet the proper standard? Suppose two or three of those major customers have been upset that Lumber Liquidators is selling a substandard product yet claiming it performs the same as theirs? This is all theoretical, of course, but you can see where this might create a major problem.
Here’s the deal
For an investor, there is no crystal ball; there never was and never will be. We can do our due-diligence and hope our belief in a company is correct. Most of us won’t put all of our eggs in one basket; Lumber Liquidators is hopefully one stock in a diversified portfolio.
However, for Lumber Liquidators the eggs in their basket are all the same eggs. If they have made the bad choice to falsify their labeling the results of their poor ethical decisions will continue to haunt them. It will haunt them not just on the Wall Street level, but down to your decision to install their flooring in your basement.
Programming such as “60 Minutes” thrive on uncovering ethical scandals. It is possible to get away with poor choices for only so long. It invariably catches up. Whether a $1 billion company or the guy who sells hot dogs outside of the “Big Box” store, good ethics and good products sustain a company and the cheap stuff closes them down.
YOUR THOUGHTS ARE WELCOME!
