Stocks

Lumber Liquidators Holdings (LL) Downgraded Due to Mounting Legal, Regulatory Risks

Analysts at Cantor Fitzgerald downgraded their stock rating for Lumber Liquidators due to mounting legal and regulatory risks confronting the company.They also lowered their price target for the stock.

Lumber Liquidators

Cantor Fitzgerald analysts Laura Champine and Jason Smith said it is hard to justify a Buy rating for Lumber Liquidators Holdings (LL) Downgraded BY Analysts amid its current situation. They recommended a Hold rating and price target of $26, down from $42 per share.

The analysts issued their bearish recommendation following the sudden resignation Lumber Liquidators CEO Robert Lynch. The company immediately appointed its founder Thomas Sullivan to serve as interim CEO.

Raymond James analysts also downgraded their rating for Lumber Liquidators from Outperform to Market Perform based on their perception that the company currently has no timetable to resolve the controversies confronting it given the unexpected departure of its CEO.

Negative PR against Lumber Liquidators continues

Champine and Smith emphasized their belief that the business model of Lumber Liquidators is” not broken, and its value and broad assortment will drive a sales recovery over the long-term.” However, their near-term view for the company became cloudier because it faces uncertain results from multiple legal and regulatory issues.

“We think the overall negative PD continues to gain momentum, making it extremely difficult for us to gauge customers’ willingness to shift into product categories now that the company has discontinued the sale of Chinese laminates,” according to the analysts.”

The company decided to stop the sales of its laminate flooring products from China earlier this month. According to the analysts, Chinese laminate flooring sales suspension leaves a “top-line void” for Lumber Liquidators. The analysts were concerned about the ability of Lumber Liquidators to shift customers to hardwood or other laminate products.

They suggested that Lumber Liquidators could experience a margin squeeze as it sources laminate products from Europe and the United States. They explained that the cost of procurement from these regions was higher. They said, “We do not think the balance of look to value is on par with much of the assortment LL sourced from China.”

Lumber Liquidators legal and regulatory risks

Lumber Liquidators is facing allegations that its Chinese-made laminate flooring products have a dangerous level of formaldehyde, which does not comply with the standards of the California Air Resources Board (CARB).

The hardwood flooring retailer also revealed that the Department of Justice (DOJ) intends to file criminal charges in connection with the ongoing investigation regarding its imported products.

Lumber Liquidators is also having a problem with its insurance carriers as they refuse to defend that company in accordance with the terms of the commercial liability insurance policies they issued. The company filed a lawsuit against nine insurance carriers.

The analysts noted that Lumber Liquidators was the subject of 103 class action lawsuits as of April 27.

Lumber Liquidators quality test kits result

Champine and Smith noted that only 3% of the approximately 3,400 kits tested by Lumber Liquidators on May 1 showed formaldehyde levels above the guidelines set by the World Health Organization (WHO).

They noted that the news about the result of test initially helped the stock price of Lumber Liquidators move higher on May 7, but it wasn’t able to hold that momentum. The stock declined, which showed that investors are more focused on the increasing list of litigation and waiting for regulatory ruling from the CPSC or FTC.

The shares of Lumber Liquidators are trading at $21.44 per share, down by more than 15% at the time of this writing, around 12:17 in the afternoon in New York. The company lost more than 67% of stock value year-to-date.