Last week, the U.S. Commerce Department announced the preliminary results of its investigation of Chinese dumping in the hardwood flooring market. The Commerce Department found evidence that China had, in fact, provided unfair subsidies to its hardwood flooring manufacturers, allowing them to sell in the U.S. market at anticompetitive prices.
Industry analysts had predicted that the investigation could result in duties on Chinese imports of as much as 242.2%, prompting many to worry about domestic resellers who rely on those bargain prices. However, the preliminary ruling set duties of as much as 27.01%, an unwelcome price hike, to be sure, but far lower than many expected.
This is good news for retailers like Home Depot (NYSE: HD ) , Lowe's (NYSE: LOW ) , and Lumber Liquidators (NYSE: LL ) . Lumber Liquidators, in particular, should be relieved, as its business focuses exclusively on hardwood flooring, and especially relies on being able to offer rock-bottom pricing.
Management has yet to comment on this development, but has previously stated that the products affected make up only about 7%-9% of sales. These products are at the bottom end of the company's price spectrum as well, so a 27.01% increase in price doesn't translate to a very high absolute increase, and likely won't affect demand very much.
Domestic manufacturers will probably be disappointed by the decision, though. While the group that originally petitioned the Commerce Department only had one member represented by a public company -- Berkshire Hathaway's (NYSE: BRK-B ) Shaw Industries -- I've previously mentioned Armstrong World Industries (NYSE: AWI ) as a company that would have benefited from a large duty imposed on the Chinese imports.
A large duty would have driven retailers like Lumber Liquidators to get more supply domestically, and Armstrong has some of the most domestic production capacity. Armstrong will probably still see some uptick in demand, if the duties do make domestic suppliers more competitive, but it won't be nearly as much as if the duties had been 10 times higher.
This outcome settles things back in favor of my thesis that Lumber Liquidators is the way to play flooring for now, while Armstrong hasn't really justified the surge in its stock price over the last couple of years. Sound off in the comments section below, or click the links below to add these companies to My Watchlist and hear about any future developments.