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Lumber Liquidators Holdings Inc Stock Down 19% on Elevated Cancer Risk

By Jason Hall - Feb 22, 2016 at 4:51PM

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"Cancer risk" and "flooring" aren't something you'd expect to see in the same sentence. The impact on Lumber Liquidators -- just when the smoke was starting to clear -- could be bad.

What: Shares of flooring retailer Lumber Liquidators Holdings Inc (LL 6.70%) are down more than 18% on February 22 after the U.S. Centers for Disease Control and Prevention released a statement saying that its February 10th report on the risks from formaldehyde exposure related to certain Chinese-made laminate flooring sold by Lumber Liquidators understated the projected risks. 

So what: This updated statement from the CDC said that the health risks associated with formaldehyde exposure related to the particular laminate floorings was likely higher than first reported, due to an error in the calculation used. From the CDC press release:

The original report found:

  • Exposure to the low end of the modeled levels of formaldehyde in indoor air could cause increased frequency of asthma symptoms and other respiratory issues for people with asthma and COPD;
  • Exposure to the higher-end levels could result in eye, nose, and throat irritation for anyone; and
  • Low risk of cancer (2-9 cases per 100,000 people).

After correcting the measurement in the model, CDC/ATSDR is revising the possible health effects. The final results are not yet available, but are estimated to be closer to these:

  • Exposure to the range of modeled levels of formaldehyde in indoor air could cause increased symptoms and other respiratory issues for people with asthma and COPD;
  • Exposure to the lowest modeled levels of formaldehyde could result in eye, nose, and throat irritation for anyone; and
  • The estimated risk of cancer is 6-30 cases per 100,000 people. Because of the very conservative (health protective) nature of the models used in this analysis, ‎the calculated risk is likely lower than our modeled estimate.

Needless to say, the market isn't happy with these findings. 

Now what (customer version): This is part of an ongoing story with Lumber Liquidators that started more than one year ago, and relates only to a handful of Chinese-made laminate flooring products that the company sold (opens PDF) between 2012 and 2014, and excludes the vast majority of products that the company sold during that time. In other words, the vast majority of the company's customers are unaffected. Furthermore, the company stopped selling Chinese-made laminate flooring last year, specifically because of the concerns.

It's also worth noting that these are preliminary findings, and a number of factors affect the actual levels of exposure one home could see versus another. The report also pointed out that flooring that has been installed for more than two years is likely no longer releasing higher levels of formaldehyde, and therefore no longer creating a higher risk, and that removing the flooring could actually increase exposure to formaldehyde. Instead, the report suggests taking steps to improve air exchange and ventilation in the interim in order to reduce exposure, until the flooring has been installed long enough to reduce emissions. 

In other words, the CDC is saying that there is an elevated risk for some customers, but it's still preliminary, and that there are steps that can be taken to mitigate that risk. 

Now what (investor version):This isn't good news. The reality is, this is likely to drive even more potential customers away from the flooring retailer. 

Yes, Lumber Liquidators no longer sells Chinese-made laminates that are at the heart of this issue, and none of its other products -- which made up the vast majority of sales even when Chinese laminate was in the sales mix -- have ever created a potential health risk. This is the kind of bad press that will likely weigh on the company's business for months to come. 

Furthermore, it probably also increases the legal risk for the company, and it's growing more likely that there will be class action lawsuits. Those suits will result in the company paying millions of dollars to customers who bought Chinese laminate from the company. 

The good news? Lumber Liquidators has fully cooperated with the Consumer Product Safety Commission -- which has led the investigation, and worked with the CDC to conduct its study -- and made numerous changes to keep this kind of thing from ever happening again. At the same time, the company has a rock-solid balance sheet, with a lot of cash and very little debt, and should be able to generate enough cash from operations to ride out this mess. 

What remains unknown, however, is how much this will cost the company:

  • In lost sales while this is in the news.
  • In legal costs when it's finally settled. 

Put it all together, and I'm not buying shares today. I'm holding my current position because I think the company will eventually see its way clear of this, but there are a lot of stocks on sale today, with a lot less uncertainty.

Jason Hall owns shares of Lumber Liquidators. The Motley Fool recommends 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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