5 questions Lumber Liquidators must answer on Thursday

On Thursday, Lumber Liquidators will hold a conference call with investors.

The company’s management is expected to address recent reports that some of its laminate flooring is unsafe for consumers.

On March 1, CBS’s “60 Minutes” detailed apparent violations in the company’s China factories. The the investigative reporters tested its flooring and found levels of formaldehyde, a cancer-causing chemical, that violate standards set by the California Air Resources Board (gauged by what’s called the CARB II test). It also spoke to a worker undercover, who said the flooring is unsafe.

The company has since said that all its products are CARB II-compliant.

In a note Tuesday, Stifel home furnishings analyst John A. Baugh wrote that given the report, “the company and its brand is guilty until proven innocent.”

Baugh said these are the 5 key questions Lumber Liquidators needs to address:

  1. How much the company has earned on imported Chinese laminate flooring that’s been sold or installed in the US? Stifel estimates that over the last 12 months, this amounts to $US100 million, or 10% of revenues. It could cost the company more than that to replace their customers’ flooring.
  2. What specific tests does Lumber Liquidators conduct to make sure it’s CARB II-compliant? Lumber Liquidators said 60 Minutes used an “improper” test, and published some data on its independent test results.
  3. Even if Lumber Liquidators flooring is compliant, how does its levels of formaldehyde compare with the competition? Customers may still distrust the company if its flooring is compliant but contains higher levels of the chemical.
  4. How much insurance coverage does the company have, and would there be significant financial costs?
  5. Have customers been flooding the company with questions or asking for their flooring to be removed?

“We have and remain on the sidelines on the stock until we feel better informed about the questions we raise in this note and the potential exposure,” Baugh wrote.

On Tuesday, the company’s shares rallied more than 11% after short-seller Citron Research said in a note that the sell-off may have been “largely overdone.” Shares fell more than 14% yesterday as a number of class action lawsuits emerged.

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