The situation keeps going from bad to worse for Lumber Liquidators (NYSE:LL), and the latest setback for the flooring specialist is particularly ominous.
The cause of Lumber Liquidators' malaise is well-known. Tipped off by hedge fund operator Whitney Tilson that there might be some funny business going on with the flooring retailer's Chinese suppliers and whether they were packaging product that didn't meet strict air quality standards, 60 Minutes broadcast an expose last March that sent Lumber Liquidators shares reeling.
What was worse was the company knew the program was going to air, but did nothing to prepare a rebuttal, allowing the allegations to fester and sit unchallenged for nearly two weeks. By the time it did respond, it was too late; the damage was done.
And in quick succession, the flooring specialist lost three top executives who bolted for the door, leaving the company seemingly rudderless and adrift.
And the hits keep coming. In addition to being fined last month for violating the Lacey Act by illegally importing wood from protected habitats, the Centers for Disease Control and Prevention now says a simple arithmetic error led it to underestimate the risk of cancer posed by Lumber Liquidators' laminate flooring. Oops.
The Consumer Product Safety Commission was supposed to be Lumber Liquidators' savior. Unlike 60 Minutes, which used controversial methods to test formaldehyde exposure -- destroying the samples and releasing fibers into the air, something that was virtually impossible to happen in real-world use of the flooring -- the CPSC was going to test them as they would be found and used in the home. It was to be a much more conventional and realistic test, one which Lumber Liquidators believed would vindicate it.
The safety agency did conduct the tests, and it was those results that the CDC based its numbers on. However, the health agency used an incorrect ceiling height because, according to 60 Minutes, it forgot to convert feet to meters in its calculations. So rather than the low levels of risk of cancer it originally found, or some two to nine cases out of every 100,000 people, it was instead ratcheted 3 times higher to between six and 30 cases per 100,000 people.
That's why Lumber Liquidators stock plunged 20% following the revision. It seemed so much worse than what we were first led to believe. Even so, while the risk of cancer is higher, there are some important caveats that are not receiving much attention.
According to the National Cancer Institute, the incidence of all types of cancer for both men and women in the U.S. is over 442 cases per 100,000 people. Even for lung cancer the risk of incidence is 54 cases per 100,000 people. And though the CDC report makes Lumber Liquidators' laminates seemingly high in comparison, the agency says it uses very conservative models to conduct the tests -- it's essentially running worst-case scenarios -- and it says "the calculated risk is likely lower than our modeled estimate."
That's why, even though the risks are higher than what was originally reported, the CDC isn't changing its recommendations on what laminate flooring owners should do. It continues to say simply, open your windows every few days to allow fresh air in, keep temperatures and humidity low in the house...oh, and don't smoke because tobacco smoke contains formaldehyde. The CDC says formaldehyde levels in a home "should return to typical levels within two years after the flooring was installed."
While it wasn't good news for Lumber Liquidators, it wasn't as bad as it's been made out to seem, and had the agency double-checked its math before releasing its report, the flooring specialist would probably be on the road to recovery. Instead, just as occurred after the original sensational report, the retailer is getting buried under a landslide of bad press that it's not countering. Without a forceful parry soon, Lumber Liquidators could very well be in danger of getting liquidated itself.
Rich Duprey has no position in any stocks mentioned. 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.