Lumber Liquidators to halt Chinese laminate sales

Lumber Liquidators goes into damage control mode
Lumber Liquidators goes into damage control mode

Home improvement retailer Lumber Liquidators said Thursday morning it is halting sales of all its Chinese laminate flooring effective immediately, confirming a CNBC report overnight. The move comes in the face of dozens of lawsuits over the safety of the products, as well as looming criminal charges disclosed by the company last week concerning its foreign sourcing.

The company said in a statement that it is taking the action in light of "mounting industry concerns relating to laminate products sourced from China."

Lumber Liquidators has been under fire since early March, when the CBS News program "60 Minutes" aired a report saying the Chinese laminate flooring contained high levels of formaldehyde, a known carcinogen.

Whitney Tilson, the prominent money manager who first brought the story to the CBS program, extended his short on the embattled company following Thursday's news. The founder and managing partner of Kase Capital Management told CNBC he "materially" increased his short position this morning, and said shares of the company "should be down 20%" on it pulling Chinese laminate.

The company had insisted the products are safe. But last week, after reporting a surprise quarterly loss as a result of the controversy, CEO Robert Lynch announced the company would scale back its sourcing of laminate flooring from China in response to "customer demand." The new announcement goes further, eliminating the Chinese laminate entirely while a special committee of the board of directors reviews the allegations.

Lumber Liquidators faces DOJ investigation, CFO leaving
Lumber Liquidators faces DOJ investigation, CFO leaving

While the statement says the review is ongoing, the company appears to be laying the groundwork to blame its Chinese suppliers.

"Based on the review to date, it appears that the company's Chinese laminate flooring suppliers have sold product to the company that the suppliers have certified and labeled as compliant with California formaldehyde standards," the statement says. "However, the company is further reviewing the underlying certification and labeling processes and practices of its suppliers."

The "60 Minutes" report alleged the company knew the product was non-compliant but purchased it anyway to cut costs, which the company has denied.

In its announcement Thursday, Lumber Liquidators also said it was hiring former FBI Director Louis Freeh to review the company's compliance program. And it said free air testing kits it distributed to concerned customers after the allegations surfaced show "over 97 percent of customers' homes were within the protective guidelines established by the World Health Organization for formaldehyde levels in indoor air." The company said an independent lab had reviewed some 3,400 testing kits out of approximately 11,000 that have been returned.

But even the company acknowledges that the WHO guidelines are the subject of some debate, and at least one lawsuit has derided the testing program as a sham. The company continues to defend the indoor air tests as a "useful tool," but is halting sales of the flooring just the same.

"Despite the initial positive air quality testing results we have received, we believe it is the right decision to suspend the sales of these products," Lynch said in the statement. "We will work diligently to meet the needs of our customers and to ensure their satisfaction."

But the company has other concerns as well.

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In addition to more than 100 civil lawsuits, the company disclosed last week that it had been told by the Justice Department to expect criminal charges relating to its foreign sourcing. And the company said it had been notified by regulators in California that some samples of its flooring exceeded state formaldehyde limits. The California Air Resources Board—the only agency currently regulating formaldehyde levels in flooring—has said it is investigating multiple retailers.

The company is also contending with mounting costs from the controversy. It announced last week it is setting aside $10 million to deal with the Justice Department investigation. First quarter sales fell 1.8 percent, including a 17.8 percent drop in March alone, and profit margins fell to 35.2 percent compared to 41.1 percent a year earlier.

In its latest announcement, the company does not say how much the new measures are likely to cost. Scott Wapner contributed to this report.