Can Lumber Liquidators Recover From Its 60 Minutes Scandal?

In a 60 Minutes report aired on March 1, an investigative segment alleged that Lumber Liquidators Holdings Inc (NYSE:LL) has been installing floorboards produced in China that contain high levels of formaldehyde, violating California regulations. 60 Minutes went into Lumber Liquidators’ factories in China and broadcasted footage of Chinese workers admitting to misrepresenting the formaldehyde measurements on the packaging.

Lumber Liquidators has defended its practices since the segment aired while shares plummeted more than 50% following the news. The hardwood flooring retailer insisted that 60 Minutes used unfair deconstructive formaldehyde testing because they stripped away outer layers of the floorboard, which is used to contain the chemicals inside. Lumber Liquidators has maintained that the controversy is exaggerated and has offered free air quality test kits to customers who are worried about the quality of their floorboards.

On Thursday, Lumber Liquidators faced the controversy head-on in a conference call in an effort to provide transparency to investors. CEO and President Rob Lynch reassured investors that their flooring is safe and went into great detail explaining the company’s sourcing practices and testing regulations. CFO Dan Terrell provided a sales update, noting that net sales in first two months of 2015 were 18.7% higher than the same period in the year prior. In the 9 days following the 60 Minutes broadcast, net sales decreased 7.5% from the same period last year. Terrell estimated that this will result in a 19.1% year-over-year net sales decrease for March. Lumber Liquidators will release its first quarter results on April 2.

On Friday, March 13 Goldman Sachs (NYSE:GS) analyst Matthew Fassler downgraded Lumber Liquidators from Neutral to Buy and decreased his price target from $40 to $35. After the conference call, Fassler was more concerned with “the hit to margin” than the drop in sales. He explained, “To the extent margin recovers moderately through the year from overall 1Q levels – implying a sharp recovery from softer March margins as consumers’ crisis of confidence subsides – it would still end the year sharply lower than we previously modeled.” Fassler also questioned 60 Minutes’ questionable testing method, but questioned why flooring “sold by others” passed the test.

Matthew Fassler has a 49% success rate recommending stocks with a +3.8% average return per recommendation.



Separately, analyst John Baugh of Stifel Nicolaus reiterated a Hold rating on Lumber Liquidators after the conference call on March 12. The analyst is confident in the company’s legal team. Baugh is not as concerned with declining sales because he does not think that non-Chinese made products will be impacted.

John Baugh has a 67% overall success rate recommending stocks with a +20.9% average return per recommendation.



Overall, the top analyst consensus for Lumber Liquidators on TipRanks is Hold.