How a Math Blunder Reignited Doubts About Lumber Liquidatorsby
The CDC revises findings about possible dangers of flooring
‘This brings formaldehyde back to the forefront,’ says analyst
It was a simple error -- mistaking feet for meters.
But that single false step by U.S. health officials managed to reignite the debate swirling around Lumber Liquidators Inc. and supposed dangers of its laminate flooring imported from China. The development is the latest twist in an almost yearlong saga that has pitted short sellers and the “60 Minutes” news program against the retailer.
The U.S. Centers for Disease Control and Prevention said earlier this month that tests on the company’s products showed minimal health risks, which renewed confidence in the chain as the stock rebounded.
Now the agency has corrected those findings because of the math flub, saying formaldehyde exposure is three times higher than previously projected, although the risk of cancer remains low. In response, investors fled the stock, with the shares tumbling 20 percent on Monday. The revised findings come just as Lumber Liquidators prepares to enter the time of year when spending on home improvement surges.
“It is really the last thing they needed,” said Seema Shah, a retail analyst for Bloomberg Intelligence. “This brings formaldehyde back to the forefront. This is really not good news.”
The initial “60 Minutes” report on Lumber Liquidators on March 1 was nothing less than devastating. It showed Chinese suppliers saying that flooring made for Lumber Liquidators wasn’t compliant with California regulations even though it was labeled as such. A lawyer and an environmental advocate, who were both backed by short sellers, were featured bashing the company, along with Whitney Tilson, the investor who pitched the story idea to the show.
The fallout from the story hitting a mainstream audience was massive. Sales tumbled and the U.S. Consumer Product Safety Commission opened an investigation. The company had to spend heavily on lawyers, consultants and sending out test kits to customers. Less than three months later, the chief financial officer and chief executive officer were gone.
The chain got a bit of a reprieve in December when Tilson said he had ended his short bet against the company because he believed that management was probably unaware of the formaldehyde problems. He declined to comment for this story, other than reiterating that he doesn’t have a current position in Lumber Liquidators.
Then on Feb. 10, the CDC, which has been working with the CPSC, weighed in. After testing the same flooring “60 Minutes” analyzed, officials found it had a low risk of causing cancer, though it could potentially trigger irritation and breathing problems.
“It was very reassuring,” Shah said.
But that goodwill evaporated when the CDC went back and checked its math after “60 Minutes” raised doubts. This correction by the CDC was highlighted by “60 Minutes” on Feb. 21 in an update to last year’s story.
The CDC’s error was on the calculation for ceiling height used to measure the intensity of formaldehyde exposure. So instead of using 8 feet as the standard height of a room, for instance, it used 8 meters, which is about 26 feet.
In the initial report, the CDC said risks of cancer were as many as nine cases in 100,000 people. Now it’s increased that to as many as 30 people. But it said the recommendations on dealing with the level of formaldehyde will likely remain the same -- stressing taking steps to reduce exposure.
“It was an error,” said Bernadette Burden, a spokeswoman for the CDC, who declined to elaborate further. There’s no timetable on when an updated report will be issued, she said.
The chain is preparing to report fourth-quarter earnings on Feb. 29. Analysts expect its sales to slide and losses to continue. The shares, down more than 80 percent in the past year, fell 1.1 percent Tuesday in New York.
“Lumber Liquidators will continue to be viewed poorly in the minds of the public with this new round of negative publicity, which will weigh on results at least in the near term,” Seth Basham, an analyst for Wedbush Securities Inc., said in a research note. “That is unfortunate, particularly as the business enters the key spring selling season.”
Lumber Liquidators said it supports the CDC’s recommendations and that it is “encouraged” that the agency is reviewing its conclusions. The company also repeated that it has strengthened its quality-assurance procedures, suspended sales of Chinese laminate and offered free air tests to customers.
“We remain committed to operating with integrity and delivering quality flooring to our customers,” the Toano, Virginia-based company said in an e-mailed statement.
Beyond potentially scaring away more customers, the increased risk assessment from the CDC may also make the civil lawsuits brought against the company more costly, even devastating, according to Basham.
“Should Lumber Liquidators have to pay compensatory damages for consumers’ health problems either in California or nationwide based on lawsuit outcomes, the company could be crippled in a worst case scenario,” Basham said.