Lumber Liquidators Holdings Inc (NYSE:LL) shares climbed by more than 18% to as high as $15.67 after the Consumer Product Safety Commission released a positive ruling for the company. While it does remove a significant portion of the legal overhang, some analysts warn that the company still faces risks associated with the sales of its Chinese-made laminate flooring products.
Lumber Liquidators doesn’t need to do full recall
The CPSC said today that Lumber Liquidators doesn’t need to recall of the China-made laminate flooring products it sold in recent years because none of the air quality tests found that the formaldehyde levels in them were higher than federal guidelines. The agency also advised homeowners not to remove the flooring from their homes themselves because doing so could expose them to more formaldehyde than leaving it it. It did urge those who purchased the flooring products to contact Lumber Liquidators Holdings Inc (NYSE:LL) to participate in the air quality testing program. The retailer will send free tests to those who participate in the program. Consumers who bought the products in question between February 2012 and May 2015 are eligible to receive the free test kits.
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The flooring retailer has been under attack since early 2015 by short-sellers who triggered an investigation about whether its laminate flooring products that were made in China expose consumers to levels of formaldehyde that are higher than the guidelines. Whitney Tilson has a sizable short position in Lumber Liquidators, which was his biggest short.
As part of the agreement with the CPSC, Lumber Liquidators agreed not to resume sales of the China-made laminate flooring, which it halted about a year ago. Also the CPSC must approve any future sale, transfer or disposal of the leftover inventory of the flooring in question.
Still litigation risk for Lumber Liquidators
Wedbush analyst Seth Basham warned that although the agreement is a big positive for Lumber Liquidators, there is still risk that the retail chain will face litigation related to the issue. He pointed out that the most important aspect of the agreement is that the retailer won’t have to incur the massive financial liabilities associated with a huge recall, but he isn’t surprised by this because the decision was based on the results of tests conducted by the Centers for Disease Control earlier this year, which had already been announced.
What Basham is most concerned about is the Multi District Litigation class action products liability lawsuit, which is keeping him at Neutral on the company, although he also noted that there are still several legal issues open. He is particularly concerned about the MDL lawsuit because it doesn’t hinge on all the same issues as the Prop 65 case in California, which Lumber Liquidators received a positive final ruling in.
One of the biggest reasons he’s concerned about the MDL case is because part of it deals with the retailer’s labeling of products as “CARB Phase 2 Compliant” when they might not actually have been. He sees this as possibly being grounds for a claim, and if one is awarded, he said it could be quite sizable, depending on “how it is constructed and how the case is settled.” More than 600,000 consumers purchased the company’s China-made laminate flooring for a total of more than $600 million, and Lumber Liquidators Holdings Inc (NYSE:LL) had only $79 million in liquidity as of May 11.