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U.S. Justice Department seeks criminal charges against Lumber Liquidators; company posts 1Q loss

A man walks past a Lumber Liquidators store, Thursday, March 12, 2015, in Philadelphia. The Justice Department is pursuing criminal charges against the retailer.
A man walks past a Lumber Liquidators store, Thursday, March 12, 2015, in Philadelphia. The Justice Department is pursuing criminal charges against the retailer. AP Photo / Matt Slocum

NEW YORK – The Justice Department is seeking criminal charges against Lumber Liquidators in an ongoing investigation over imported products.

At the same time, the company says it is continuing to diversify its laminate flooring offerings as it deals with fallout from a TV report that raised concerns over formaldehyde levels in Chinese-made flooring.

Lumber Liquidators revealed the Justice Department’s actions in a regulatory filing on Wednesday. It also reported a surprise loss for the quarter and the departure of its chief financial officer.

Its shares plunged more than 16 per cent shortly before the opening bell.

WATCH: 16×9’s full investigation into the trail of illegal lumber stolen in Russia, shipped to China and sold in Canada.

Lumber Liquidators told Global News in October 2014 that the sourcing, harvesting and manufacturing of all of its products is in accordance with U.S. and international laws. In fact, the company said it goes above and beyond industry standards by ensuring that every shipment of wood is legal.

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But shortly after 16×9 released its investigation online into illegally sourced timber by Lumber Liquidators the company announced important new policies on sourcing and oversight of wood procurement, saying it will “purchase from sustainably grown and harvested forests with independent certification and we will source from these forests whenever available.”

READ MORE: Lumber Liquidators releases new policies in wake of 16×9 investigation

In early March the CBS news show “60 Minutes” reported that Lumber Liquidators’ laminate flooring made in China contained high levels of formaldehyde, a carcinogen. Lumber Liquidators Holdings Inc. has said that it complies with applicable regulations for its products, including California standards for formaldehyde emissions.

The company said that its March sales declined 12.8 per cent due to the allegations.

WATCH: Environmental Investigation Agency Executive Director Sascha Von Bismarck discusses how the U.S. regulates illegal wood and what Canada should be doing.

CEO Robert Lynch said during a conference call Wednesday that Lumber Liquidators is expanding its sourcing for laminate flooring to parts of Europe and North America. It is not adding to its Chinese-made flooring product inventory at this time.

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Lynch said that the company has been diversifying sourcing across all of its product categories over the past three years.

Lumber Liquidators also said in the filing Wednesday that the Justice Department was seeking criminal charges against it under the Lacey Act, which is a U.S. law that includes a ban on illegally sourced wood products. The company had said in December that the Justice Department was contemplating criminal charges.

READ MORE: Lumber Liquidators may face criminal prosecution

The company said that its best estimate of the probable loss that may result from the Justice Department action is about $10 million.

Lumber Liquidators also said on Wednesday that it was aware of more than 100 pending class-action lawsuits against it related to its laminate flooring made in China.

WATCH: Don Finkell, chairman of the Hardwood Federation, worked with environmental and industry groups to develop voluntary standards for importers to make sure they are bringing in legally cut wood.

For the period ended March 31, the Toano, Virginia, company lost $7.8 million, or 29 cents per share, for the period ended March 31. That compares with a profit of $13.7 million, or 49 cents per share, a year earlier.

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The loss caught industry analysts off guard. They had projected a profit of 15 cents per share, according to a survey by Zacks Investment Research.

The hardwood floors retailer posted revenue of $260 million.

Sales at stores open at least a year dropped 17.8 per cent in March. For the first quarter, the figure slipped 1.8 per cent.

Lynch said that sales have started to recover between March and April.

BEHIND THE SCENES: Producer, Gil Shochat, talks about the Environmental Investigation Agency’s Sascha Von Bismarck and the access he gained in his undercover work.

CFO Dan Terrell will leave the company in June. He has held the position since October 2006. The company appointed Gregory Whirley Jr. as interim CFO. Whirley has been with Ernst & Young LLP.

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READ MORE: Think that new hardwood floor is made in Canada? Think again

Terrell said during the conference call that Lumber Liquidators has incurred $2.3 million in costs for the free air quality program it recently implemented in order to reassure customers about its flooring.

Lumber Liquidators’ stock tumbled $5.41, or 16.2 per cent, to $28.01 shortly before the market opening. Its stock has slumped 50 per cent since the beginning of the year.