Home Depot Poised to Gain as Flooring Debate Hits Rivals

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Home Depot Inc., which is already the largest seller of flooring in the U.S., stands to benefit from a formaldehyde controversy that has engulfed two of its competitors.

The home-renovation king hasn’t been tarnished by accusations that Lumber Liquidators Holdings Inc. and Lowe’s Cos. sold Chinese-made laminate flooring with excessive levels of formaldehyde. While Lowe’s isn’t as exposed to the furor -- it agreed to stop selling the product in question on Friday -- Home Depot may be in a position to attract customers while its rivals cope with the fallout.

“If Home Depot can stay out of the noise fray, it will benefit them,” said Jaime Katz, an analyst at Morningstar Inc. who tracks the retail industry.

Home Depot’s stock has climbed 2.9 percent this year, compared with a 2.4 percent gain for Lowe’s. Shares of Lumber Liquidators, which has a much larger portion of its business at stake, have plunged 59 percent.

Laminate flooring, which offers an alternative to hardwood or tile, has grown in popularity in recent decades. It’s easy to install -- pieces just click together -- and relatively affordable. But questions about the manufacturing methods, especially for products made in China, have dogged the industry. Formaldehyde, which has been linked to cancer, is an ingredient in the flooring’s glue.

Controversy Ignited

The current controversy ignited in March when the “60 Minutes” news show investigated Lumber Liquidators, following up on allegations first made by a short seller. That same investor, Xuhua Zhou, pointed his finger at Lowe’s on Friday, saying the retailer also sold a product with similar levels of formaldehyde. Both companies say their flooring is safe, but Lowe’s pulled the criticized product line entirely. The flooring, sold under the Tecsun brand, was offered on Lowe’s website but not in stores.

Home Depot, meanwhile, has been praised by the same investors who targeted Lumber Liquidators. Both Zhou and hedge fund manager Whitney Tilson, who helped publicized the formaldehyde issue, have said that Home Depot maintains higher standards. Zhou also said he owns Home Depot shares.

Vinyl Flooring

Home Depot further burnished its image last month when it agreed to phase out vinyl flooring with phthalates by the end of this year. The company made the move after working with environmental and health advocates, who found the chemical in flooring sold at Home Depot, Lowe’s and Lumber Liquidators.

Phthalates can pose risks to human health, including asthma, harm to male reproductive organs, brain development and the immune system, according to advocates fighting to remove the chemical from products.

Lowe’s and Lumber Liquidators both say they’re working with suppliers to seek possible alternatives to phthalates. By the end of this year, Lowe’s says 95 percent of its vinyl flooring won’t have the chemical. But Home Depot’s move to ban the chemical first underscored its reputation as a leader

Still, a new front has opened up in the flooring skirmish, and it’s one area where Home Depot isn’t ahead of rivals. Lowe’s and Lumber Liquidators are both dropping Chinese-made laminate flooring, aiming to reassure consumers that their products are safe.

Lowe’s expects all of its products in the category to come from the U.S. by July. Chinese-made laminate flooring previously made up less than 10 percent of its sales.

Stopped Sourcing

Lumber Liquidators also said last week that it has stopped sourcing laminate from China for now, though it may revisit its policy based on customer demand.

That’s turning Home Depot into an outlier, since the company still sells laminate from China.

Steve Holmes, a spokesman for Atlanta-based Home Depot, said it requires all suppliers to comply with health laws and regulations. The majority of its laminate is sourced from the U.S., Europe and Canada. He declined to give the percentage that comes from China.

The company hasn’t “made a determination” on whether it will continue selling Chinese laminate, Holmes said.

“The bottom line is we’re confident that our laminate flooring is safe,” he said.

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