Lumber Liquidators confirms possible criminal charges

LL says DOJ to seek criminal charges

Embattled flooring retailer Lumber Liquidators said Wednesday the Justice Department has informed the company it is seeking criminal charges over its foreign sourcing.

The disclosure comes in a regulatory filing on the same day the company reported that the controversy over the safety of its products—including multiple government investigations and a "60 Minutes" expose—is having a serious impact on its bottom line.

Lumber Liquidators reported a loss of $7.8 million or 29 cents per share for the first quarter of 2015 on revenue of $260 million. Wall Street had been expecting a profit of 16 cents a share, and revenue of $258 million. Lumber Liquidators officials said the loss was entirely the result of the controversy, which revolves around allegations the company's Chinese-made laminate flooring contains high levels of formaldehyde, a known carcinogen.

The stock was down 19 percent in late-morning trading Wednesday.

Read More

The company said it is battling more than 100 lawsuits over the issue, most of them filed after a "60 Minutes" report on March 1 highlighted the concerns.

On a conference call with investors, CEO Robert Lynch said the company had spent more than $15 million on the issue during the quarter, including $10 million it has set aside to deal with the Justice Department investigation, millions more in professional and legal fees and nearly $2 million for an indoor air testing program it is offering to concerned customers.

"We care deeply about our customers," Lynch said. Some 13,000 of them have ordered the free air testing kits, and while Lynch would not disclose the results thus far, he said they were roughly what the company was expecting. He said it is too early to say what the company will do in cases where the testing comes back positive, calling the test kits a "screening tool" that can capture formaldehyde emissions from many sources in the home—not just the flooring.

Lynch also announced that the company would be sourcing more of its laminate flooring from Europe and North America and less from China "in response to customer demand." But the change—which he acknowledged will hurt already declining profit margins—is unlikely to head off regulators, who appear to be closing in on the company.

Mike Blake | Reuters

Lumber Liquidators previously disclosed the federal criminal investigation, which began when federal agents raided the company's Virginia headquarters in 2013. But as recently as February, the company said the Justice Department was "contemplating" criminal charges. Based on the most recent SEC filing, it appears the investigation has progressed.

"In recent communications, the DOJ indicated that it is seeking criminal charges under the Lacey Act," the new filing said. The law governs the importation of fish, wildlife and plants including timber.

Lynch said the company is discussing a possible resolution of the charges with authorities, but the talks are in the early stages.

A Justice Department spokesman declined to comment on what he called "an ongoing investigation."

State pressures mount

The company is also dealing with pressure at the state level. In the SEC filing, the company said it is "fully cooperating" with information requests from various state attorneys general about its Chinese laminate flooring.

And the filing says that in "preliminary findings," tests by the California Air Resources Board (CARB)—the only agency currently issuing formaldehyde standards for flooring—found some samples of Lumber Liquidators flooring exceeded CARB's limits. The company says it is cooperating with the board as well, but has questioned the agency's testing methods, which are the same methods used by "60 Minutes."

A board spokeswoman confirmed to CNBC that the agency has tested samples from several companies and that some exceeded its standards. But the spokeswoman would not say which companies were involved in the ongoing investigation, or when it might be complete.

Despite the swirling controversy, the company has shown signs it is beginning to look past the issue. The Chinese laminate flooring, which accounted for around 15 percent of the company's sales before the controversy, made up less than 10 percent after the "60 Minutes" broadcast.

"We are committed to addressing the challenges presented while maintaining our focus on our core business and value proposition," Lynch said.

In a research note before the earnings report, Wedbush Securities analyst Seth Basham said it did not appear that customers were abandoning the company. He said the stock, which is trading at a fraction of its 52-week high of $92.49 a share, is compelling "if one can get comfortable that the regulatory and legal issues are manageable and the brand has staying power."

But the stock has also been a favorite target of short sellers, and they are showing no signs of giving up.