Lumber Liquidators Surges on CPSC Settlement Without Recall

Updated on
  • CPSC says testing showed no unsafe levels of formaldehyde
  • Regulator began probe in 2015 after ‘60 Minutes’ allegations

Lumber Liquidators Holdings Inc. shares surged as much as 25 percent after the U.S. Consumer Product Safety Commission ended a probe of formaldehyde in the company’s flooring without issuing a product recall.

The agency called for corrective measures that Lumber Liquidators has largely undertaken already, according to a statement on Thursday. The company agreed to not sell laminate flooring made in China -- which it stopped offering more than a year ago -- and will continue offering free tests for any of the 600,000 customers who purchased the product.

The CPSC uses recalls to get faulty products off the market, but didn’t take that step in this case. The regulator’s examination of the product didn’t find unsafe levels of formaldehyde, backing up the results of a testing program the company instituted last year. However, additional tests, which will be monitored by the CPSC, could reveal flooring that doesn’t pass safety guidelines and would then need to be replaced at the company’s expense.

The settlement comes after the CPSC began an investigation in March 2015, shortly after the television news program “60 Minutes” reported that Lumber Liquidators sold Chinese-made flooring with unsafe levels of formaldehyde, which has been linked to cancer. The impetus for the report was a lawsuit funded by short sellers, who profit when a stock falls. Another Lumber Liquidators short seller, Whitney Tilson, also pitched the story idea to “60 Minutes.” He then appeared on the program along with the lawyer and environmental advocate who brought the lawsuit.

‘Very Pleased’

“This affirms what we did,” Lumber Liquidators Chief Executive Officer John Presley said in an interview. “We stopped selling the product, and we tested the product and the tests came back as we expected. We’re very pleased with how it turned out.”

The allegations by “60 Minutes” were devastating. Shoppers fled, hurting sales and plunging the company into losses. The previous CEO and chief financial officer exited, and the company was sued by customers across the country.

Shares of Toano, Virginia-based Lumber Liquidators rose as high as $16.49 in New York on Friday, the biggest intraday gain in six months. The stock had fallen more than 70 percent since the “60 Minutes” report through Thursday.

Resolving the CPSC inquiry is the third hurdle that Lumber Liquidators has overcome in its bid to revive its business. Earlier this year, it won a tentative ruling dismissing the short-seller-funded lawsuit. It also agreed to pay $2.5 million to the California Air Resources Board, one of the state’s regulators, to end an inquiry into its Chinese laminate flooring products. There was no formal finding of violation or any admission of wrongdoing by the company.

Home Tests

The company began a testing program after the “60 Minutes” report and has so far analyzed the air of 17,000 homes. Of those, 1,300 had elevated levels of formaldehyde and had flooring tested. None of the floors tested above the CPSC’s safety guidelines. The source of formaldehyde in the home can vary because it’s used in several products, including carpet, cigarettes and cleaning products.

Through testing, the government determined that eye, nose and throat irritation could occur with the higher-formaldehyde flooring samples in certain home environments, the statement said. The company hasn’t removed or replaced any floors related to the testing program.

Even with the CPSC victory, the company still has a long way to go. In the first quarter, sales fell 10 percent -- the fourth straight drop -- and its net loss was much wider than expected. Presley, a longtime board member who became CEO in November, is also in a battle with leukemia. He is undergoing treatment and says he’s only missed a few days of work.

“I hope these test results and this affirmation of our testing program goes a long way to settle in the consumer’s mind the issue of formaldehyde in our product,” Presley said. “Finally, the full story about formaldehyde and our products is being told.”