LUMBER LIQUIDATORS: There is no guarantee our wood suppliers will play by the rules

On Sunday, “60 Minutes” aired a damning report showing potential health and safety violations from flooring retailer Lumber Liquidators.

Following that report, the company responded and said the “60 Minutes” report used a testing method that was not valid to draw the conclusion that certain of the company’s products contain unsafe levels of formaldehyde, a known carcinogen.

Another part of the “60 Minutes” report involved the company’s founder and chairman Tom Sullivan watching hidden video captured by “60 Minutes” at a Lumber Liquidators supplier in China showing products that appeared intentionally mislabeled.

In its statement following the report, Lumber Liquidators said its Chinese suppliers confirmed that all products supplied to the company are compliant with California safety standards.

But a review of the company’s latest 10-K filed with the SEC, and you know that this is the sort of situation the company prepares investors for.

Here’s the relevant passage:

If our suppliers do not use ethical business practices, comply with applicable laws and regulations and ensure that their products meet our quality standards, our reputation could be harmed due to negative publicity and we could be subject to legal risk.

While our suppliers agree to operate in compliance with applicable laws and regulations, including those relating to environmental and labour practices, we do not control our suppliers. Accordingly, despite our continued investment in quality control, we cannot guarantee that they comply with such laws and regulations or operate in a legal, ethical and responsible manner. Violation of environmental, labour or other laws by our suppliers or their failure to operate in a legal, ethical and responsible manner, could reduce demand for our products if, as a result of such violation or failure, we were to attract negative publicity. Further, we require our suppliers to adhere to our quality standards. While we do monitor our suppliers’ adherence to such standards, there is no guarantee that we will identify every instance of non-compliance, if any. Moreover, the failure of our suppliers to adhere to applicable legal requirements and the quality standards that we set for our products could lead to litigation and recalls, which could damage our reputation and our brands, increase our costs, and otherwise hurt our business.

In every company’s 10-K there are extensive risk factors, many of which use borderline boiler plate language. But the 10-K is where you find out everything you need to know about a company, and just because it can be boring does not mean that a company’s warning is any less forceful.

Lumber Liquidators is clearly letting investors know that at some point, it needs to trust its Chinese suppliers.

Just as investors at some point need to trust the company.

Which is why Warren Buffett says a good investor trusts no one but themselves.

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