Did Lumber Liquidators Just Dodge a Bullet?

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.

Fool contributor Jacob Roche holds no position in any of the companies mentioned. Berkshire Hathaway, Home Depot, and Lowe's are Motley Fool Inside Value recommendations. Lumber Liquidators is a Motley Fool Rule Breakers selection. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended writing covered calls on Lowe's. The Fool owns shares of Berkshire Hathaway and Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 29, 2011, at 5:09 PM, CPAVESE31 wrote:

    It is worth noting that over the last four years, 80% of all cases filed against China have resulted in a duty of some kind. Countervailing Duties have averaged 53% in these cases, so the 27% duty on multi-layered flooring is roughly half of that average.

    Importantly, Antidumping Charges have averaged a much larger 120% in these cases. The department is still reviewing the dumping charges, with an announcement expected in mid-May.

    Even assuming that multi-layered wood flooring is charged half of the average, the total cost increase for Chinese imports would be nearly 90% higher.

    An increase this large would still put low-cost distributors in trouble as other countries (i.e. Indonesia and Malaysia) have only a fraction of China’s capacity.

  • Report this Comment On March 29, 2011, at 8:18 PM, TMFTheDoctor wrote:

    Chris, thanks for pointing that out. However, even a total of 90% will still be significantly lower than was petitioned for by the Coalition, and expected by analysts. It will definitely be troublesome for LL, but not nearly as much as some though, especially as these products represent a relatively small slice of sales.

  • Report this Comment On March 30, 2011, at 3:07 PM, JDM62 wrote:

    I say the United States stops all imports from China. I'm sick of their junk and it would be a great boost to our economy. If you want to see what China is really like, google and read about Ai Weiwei. I don't ever see them changing from their communist ways, why do we do any business with them? Oh yeah, corporate America greed.

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