Lumber Liquidators Holdings Inc (LL) Downgraded On Uncertainties

Lumber Liquidators shares slumped again during regular trading hours today, falling as much as 2.88% to $25.63 per share after a big downgrade from Cantor Fitzgerald. The firm downgraded the stock from Buy to Hold and slashed its price target from $42 to $26 per share.

Lumber Liquidators

Too many risks for Lumber Liquidators

In their report dated May 19, analysts Laura Champine and Jason Smith said they just see too many risks to Lumber Liquidators Holdings Inc (NYSE:LL) right now. The flooring retailer has been struggling with allegations regarding the formaldehyde content of its Chinese-made products.

Since the issue was first raised by short-sellers earlier this year, the company has taken several steps in an attempt to disprove allegations but ultimately ended up halting sales of its Chinese laminate products. Regulators have begun looking into the allegations as well, and the Cantor Fitzgerald team thinks the legal and regulatory overhangs are too great.

Lumber Liquidators isn’t broken

The firm does remain positive on Lumber Liquidators in the long run, however, as they don’t believe the company’s business model is “broken.” They still see the value offered by the company’s products and the wide array of offerings will bring about recover and gains in market share—eventually.

Their near term view, however, is now “much cloudier” because of the uncertainty surrounding the multiple legal and regulatory problems. Further, they think that the negative news flow is still gaining momentum, which makes it difficult to gauge what customers really think about Lumber Liquidators and whether they are willing to switch to other product categories now that the company has halted sales of its Chinese laminates.

A hole in the product line

The analysts said there is now a hole in Lumber Liquidators Holdings Inc (NYSE:LL)’s offerings because of the removal of the Chinese laminate products. However, they also point out that just a little over 14% of the flooring retailer’s total sales in the two months before the damaging 60 Minutes report came from laminates. The company pulled the Chinese laminates from its stores on May 7 after penetration fell to 9% in March and then 10% last month.

Further, they see a lack of visibility in how Lumber Liquidators plans to transition customers away from laminates and toward its other products. They’re unsure how well the company will be able to convince customers to switch to hardwood or replacement laminate.

Currently the retailer is getting its laminates from Europe and the U.S., but they expect this shift to pressure margins because it’s more expensive to purchase the products from these areas. They also don’t think the way the new laminate products look is as good as the Chinese laminates looked when compared to the value proposition of both products.

Lumber Liquidators’ (LL) balance sheet in jeopardy

The company faces an increasing pile of lawsuits, which the Cantor Fitzgerald team believes puts its balance sheet at risk. Through April 27, 103 class action lawsuits had been filed.

One bit of good news for the company is that the first set of air quality test kits showed that very few customers had laminate flooring with formaldehyde content that was higher than the recommended levels. Just 3% of the 3,400 samples that were tested had levels that were higher than the World Health Organization’s guidelines.

Lumber Liquidators Holdings Inc (NYSE:LL) stock rallied a bit after the announcement about the test kit but has since declined by more than 8%. The analysts say this suggests that investors are more worried about all the lawsuits. Further, they think investors are waiting for a formal ruling from the Consumer Product Safety Commission or the Federal Trade Commission.