Photographer: David Paul Morris/Bloomberg

Lumber Liquidators Turmoil Shows No Sign of Letting Up

  • Company fails to provide 2016 outlook, citing unknown demand
  • Revenue still under pressure from formaldehyde allegations

Lumber Liquidators Holdings Inc., dogged by allegations that its flooring is unsafe, reported more dismal sales and said that it can’t forecast this year’s results amid the continued turmoil.

Fourth-quarter revenue declined 14 percent to $234.8 million, the Toano, Virginia-based company said Monday in a statement. Analysts projected $251.4 million. The quarterly loss was 73 cents a share. Analysts estimated 19 cents a share. The two figures may not be comparable.

The retailer’s sales have been plunging since short sellers and the “60 Minutes” news program accused the chain of selling Chinese-made laminate flooring with cancer-causing levels of formaldehyde. The company has cut prices, increased discounting and tried to ease health concerns by pulling the Chinese laminate from stores. Yet the deterioration of its business accelerated last quarter, with revenue at established locations plummeting 17 percent -- the biggest drop yet.

“Given uncertainty related to customer demand, our long purchase cycle, and outstanding legal and regulatory issues, we are not able to provide an outlook for 2016 at this time,” interim Chief Financial Officer Gregory Whirley said on a call with analysts Monday. “We remain focused on improving the parts of the business that are within our control in order to rebuild our brand and drive improved performance in our core business.”

CDC Error

The health issue came back into the spotlight this month after the U.S. Centers for Disease Control and Prevention said it had miscalculated the risk of cancer from the company’s flooring, and that it was three times higher than the agency’s original estimate. “60 Minutes” reported the CDC’s error on its highly viewed broadcast on Feb. 21. The company said it couldn’t yet determine whether the report is hurting sales.

“The fallout from the China laminate investigation remains an overhang on fundamentals, even as we approach the anniversary of the original ‘60 Minutes’ report,” Bradley Thomas, an analyst at Keybanc Capital Markets, said in a research note. “We expect results to remain under pressure in 2016.”

The shares fell early on Monday before rebounding to gain 2 percent to $11.33 at the close in New York. The stock has tumbled about 80 percent since “60 Minutes” made its allegations in a story last March.

‘Material Weakness’

The company also said in a filing Monday that it had discovered a “material weakness in internal control over financial reporting” related to its enterprise resource planning system run on SAP software. The weakness didn’t result in changes to previously reported results, including last quarter’s, the company said. This is not the first time the company has had issues with SAP. Its implementation in 2010 gummed up the supply chain, causing a decline in same-store sales.

Lumber Liquidators also said on Monday that former Lowe’s Cos. executive Dennis Knowles was joining the company as chief operating officer. Knowles most recently served as Lowe’s chief store operations officer.

Results last quarter took a major hit from the company’s decision to write down the $22 million of remaining inventory of laminate flooring made in China, which is at the heart of the formaldehyde allegations. That lowered gross margin by almost 7 percentage points.

California Regulators

In a filing, the company also put a dollar figure on what its dealings with California regulators may cost. The California Air Resources Board has tested the company’s flooring, and some didn’t meet its standards, the retailer said. The chain estimated that may result in a loss of $1.5 million, which it booked as an expense last quarter.

The company is also waiting for the U.S. Consumer Product Safety Commission to conclude its investigation into the Chinese laminate. So far it has employed the CDC to analyze tests it had done by certified labs. That analysis was published earlier this month and then corrected to add a higher risk of cancer.

To help fund its operations, the retailer continued to dip into its credit revolver. After using $20 million last year, it took out an additional $10 million this quarter to buy inventory for the spring selling season and now has about $57 million in borrowing capacity.

Another hurdle facing the company is that Chief Executive Officer John Presley has leukemia, though he’ll remain involved in day-to-day operations while he undergoes treatment. Presley did speak on Monday’s call with analysts.

“We still have a ways to go, but we are making progress,” Presley said about the company’s future.

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