Lumber Liquidators frames its case, shares surge 10%

Flooring retailer Lumber Liquidators (LL), crippled by unfavorable media reports over high levels of formaldehyde in its imported wood, went on the offensive to repair its image Thursday, saying it will offer consumers free testing and other measures to ensure the safety of its products.

"We are confident all of our products are safe and none pose safety issues,'' said CEO Rob Lynch, responding forcefully to a March 1 60 Minutes report alleging Lumber Liquidators sold imported flooring from China tainted with dangerously high levels of the carcinogen formaldehyde. The company said it is compliant with safety standards.

"Because sensationalized reports provide little context, customers are understandably concerned,'' management said in a Thursday securities filing.

The company, which began selling products out of the back of a pickup truck, is North America's largest flooring supplier, with 352 stores.

ILumber Liquidators has been battered by hedge fund manager Whitney Tolson, who had taken a short position against the company and had been instrumental in getting the 60 Minutes report to air. But Lynch said the testing methodology used by 60 Minutes was flawed and misinterpreted. "It does not actually measure a product as it is used in the home,'' Lynch said.

In a Thursday statement, 60 Minutes spokesman Kevin Tedesco said "real world" tests were conducted on on the laminates. "The results of those tests showed very high levels of formaldehyde coming off some of the floors.''

Lumber Liquidators shares, which soared over 15% in morning trading, closed up 10% to $36.08, extending Wednesday's 6% rise after hedge fund manager Robert Chapman of Chapman Capital said he had taken a long position in the company and expressed confidence in its prospects.

Separately, money management giant BlackRock said in a corporate filing that it now holds a 10.1% stake in the company.

Despite the two-day runup, Lumber Liquidators shares are down 65% from March 2014's 52-week high.

Same-store sales have dropped nearly 13% since the 60 Minutes report, prompted largely by Tolson and his hedge fund, Kase Capital. Lingering fallout could push first-quarter sales down to $253.6 million from 265.6 million, down from prior estimates of $276.1 million.

CFO Dan Terrell said it's unclear how much the fallout will affect first-quarter and full 2015 sales and earnings until early April.

About 8% of consumers say they won't buy products from the company since the broadcast; previously, about 4% said they wouldn't buy from Lumber Liquidators, Lynch said.

Despite the p.r. offensive, Lumber Liquidators isn't out of the woods yet. Sen. Bill Nelson, D-Fla., has asked the Consumer Product Safety Commission and other federal agencies to investigate whether the company's flooring poses a health risk. And prior to the 60 Minutes segment, management warned that the company faced criminal federal charges over imported bamboo harvested illegally from protected animal habitats. That was on the heels of a 17% drop in fourth-quarter net income reported in late February.

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