What's the trouble with Lumber Liquidators?
Lumber Liquidators has generated its fair share of controversial headlines over the past year or two, but if its tanking share price is any indication, the retailer may soon be facing further repercussions for its alleged actions.
On one hand, the company may be smacked with criminal charges from the Department of Justice over an ongoing investigation into possible illegal logging practices. On the other, yesterday's earnings report fell way short of the company's guidance, sparking class action lawsuits on behalf of its shareholders.
Investors first caught wind of the potential for bad press during the company's earnings conference call, when executives cautioned that an upcoming episode of "60 Minutes" may damage the retailer's image.
"We now believe the news program '60 Minutes' will feature our company in an unfavorable light with regard to our sourcing and product quality, specifically related to laminates," said president and CEO Robert Lynch on the call, according to a Seeking Alpha transcript.
[See the 60 Minutes video and read the transcript here.]
The lawsuit alleged to be the topic of the "60 Minutes" episodes involves ongoing allegations that certain Lumber Liquidators products contain illegal levels of formaldehyde.
Lumber Liquidators also released a 10K SEC filing that announced the DOJ's intentions to charge the company for criminal violations of the Lacey Act, a law that prohibits the trade of wildlife or plants taken illegally from protected areas.
"We expect to continue to communicate with the DOJ regarding its intentions and possible courses of action in this matter," said the company in the filing. "At this time, we do not have enough information to estimate a reasonably possible loss or range of loss that may result from actions by the DOJ as a result of its investigation."
CFO and principal accounting officer Daniel Terrell said on the earnings call that the retailer is currently in talks with the DOJ, and that it expects to be charged with either a misdemeanor or a felony.
The Environmental Investigation Agency (EIA), which was responsible for the report that alleged the retailer was knowingly importing illegal wood from Russian forests, issued a statement on Wednesday following the release of the SEC filings.
“We were in Russia and China, and saw the devastation caused by illegal logging," said EIA executive director Alexander von Bismarck in the statement. "Lumber Liquidators was getting illegal wood from Russia, lots of it, and should be held accountable."
The EIA also noted that senior executives of Beryozoviy, the Russian timber supplier that had been working closely with Lumber Liquidators, had been recently convicted of organized crime.
Lynch added on the call that the company continues to "vigorously challenge any false allegations or [factually] incorrect presentations."
By the close of trading Wednesday evening, however, shares of Lumber Liquidators had fallen 26.39%.
At least two law firms have announced investigations of securities claims against the retailer, including Johnson & Weaver, LLP and The Rosen Law Firm. A possible class action lawsuit may follow if the company is found guilty of materially misrepresenting its financial position -- quarterly earnings of $0.64 per share missed Wall Street expectations of $0.76 per share.
Lumber Liquidators responded to HBSDealer's request for comment with the following statement: "The Company does not comment on releases of this nature by law firms."
All may not be lost, however, for Lumber Liquidators shareholders. According to CNBC, options traders are hedging their bets on a turnaround for the company's stock, as well as its management and supply chain.
The retailer has made moves recently to improve its compliance and sustainability team in the wake of the accusations.