The impact of the perceived risks associated with Lumber Liquidators (NYSE:LL) laminate flooring is far worse than what anyone anticipated. The company reported fourth-quarter sales of $234.8 million, a 14% drop from the year-ago period as comparable-store sales tumbled 17%.
Of course, the flooring retailer previously gave up any hope of being able to judge how the health risk allegations would play out over time and suspended offering guidance, but analysts apparently felt that while it would be bad, it would still be manageable. They were wrong.
Wall Street had forecast Lumber Liquidators would be able to record more than $254 million in sales for the period, a still poor 6% decline, but one that would indicate the company could bounce back. That sales fell by more than double what they predicted indicates Lumber Liquidators has some big problems, and considering the reports out last month from the Consumer Products Safety Commission and the Centers for Disease Control & Prevention that showed an elevated level of risk of cancer from its flooring, these worries are not going to dissipate anytime soon.
Investors need to ask whether there is any hope Lumber Liquidators can recover. The CDC's analysis of the CPSC's test results were not in and of themselves devastating. They showed a risk of between six and 30 potential cases of cancer per 100,000 people, which is below the National Cancer Institute's assessment of 442 cases per 100,000 people for all types of cancer and lower even than the 54 cases per 100,000 people for lung cancer. But it was the way the CDC reported the information that could cripple the flooring retailer.
The health agency had originally reported the risks associated with the laminate flooring were negligible, just two to nine cases per 100,000 people. But then it was notified it made a basic math error and upon review it discovered it forgot to convert feet into meters and when it revised its calculations, the risks more than tripled.
While it's possible had the CDC gotten the data right from the get-go, it might have still been problematic for Lumber Liquidators. Yet the Center's guidelines for mitigating the health risks such as opening windows to allowing fresh air in, keeping temperatures and humidity in the house low, and permitting the ingrained formaldehyde smell to dissipate over time as it naturally will, doesn't suggest an immediate life-endangering threat. It's possible Lumber Liquidators could have recovered over time.
Instead, now it is dealing with headlines screaming its flooring's cancer risk is more than triple what it was originally thought, which sounds far more alarming than it otherwise might have been portrayed. It may also have made Lumber Liquidators damaged goods for good.
The flooring retailer's response to the report is just as muddled as it was when the scandal first broke. Back then it allowed allegations of dangerous and unsafe flooring to sit unchallenged for two weeks before issuing a rebuttal, but by then the damage was done and the perception that its flooring was a health risk was too ingrained.
Similarly, in the current instance, Lumber Liquidators is essentially pleading with the public by saying it doesn't use those Chinese suppliers any more and the rest of its products are fine (another problem is that it took so long to sever ties with the suppliers responsible for its predicament). It's not challenging the view that its products are a major risk to health, but even the CDC has said that its analysis is a worst-case scenario and the actual risks are likely much lower than what it has publicized.
The dramatic decline in sales suffered by the flooring retailer indicate it may not have reached, well, a floor in its stock price, which has lost more than 70% of its value over the past year and is down by more than a third just since 2016 began.
The dust on Lumber Liquidators crisis has not settled yet, making it an investment that's still much too risky.