Lumber Liquidators stock skids after surprise loss

Lumber Liquidators' stock plunged 13 percent Wednesday after the flooring retailer posted a surprise quarterly loss and said it expects a state regulator to file a claim over formaldehyde allegations.

The stock had been down 22 percent in premarket trading. (Click here for the latest price.)

The California Air Resources Board (CARB) is the only agency regulating levels of formaldehyde—a known carcinogen—in flooring, though the federal Environmental Protection Agency is weighing similar standards. In March, the CBS News program "60 Minutes" aired a report—which the company vigorously denied—saying Lumber Liquidators' laminate flooring imported from China contained dangerously high levels of the substance.

A sign advertising a sale sits outside a Lumber Liquidators store in Chicago, Illinois.
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Now, in a quarterly filing with the Securities and Exchange Commission, Lumber Liquidators says CARB has informed the company that flooring samples obtained in March—after the CBS report—exceeded the state's limits in preliminary testing. The filing notes that the investigation is ongoing, but suggests the result could be costly.

"While we believe that CARB may assert a claim against us, we cannot estimate the reasonably possible loss or range of loss that may result from this matter given that CARB is still conducting its investigation and no notice of violation has been issued," the filing said.

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A CARB representative told CNBC on Tuesday that there was nothing new to report on the investigation, which includes other retailers as well. A final result could be months away.

The company has previously attacked the testing method used by the agency—as well as by "60 Minutes"—saying it does not represent "real world" conditions. But in the filing, the company says it is "fully cooperative" with CARB, and says it has removed the flooring in question from its California stores "for the time being." Previously, the company said it would no longer import laminate flooring from China.

The formaldehyde controversy triggered or intensified multiple government investigations. It has also sparked hundreds of civil lawsuits, which the company is fighting.

"We dispute the plaintiffs' claims and intend to defend these matters vigorously," the filing said.

The company again said it has been told by the Justice Department to expect criminal charges over its foreign sourcing, which the company disclosed in April. While the exact nature of the investigation is unclear, the company says it uncovered potential "compliance concerns" involving engineered flooring imported from China—but unrelated to safety. It says it pulled $4.1 million worth of the product from its stores "pending further investigation."

The company says the Justice Department has agreed to accept $3.2 million in civil forfeiture over the Chinese hardwood issue. But the broader sourcing investigation is ongoing, the filing says, at a potential cost of around $10 million.

The product issues and resulting inventory shortages led to a difficult quarter for the company, which reported a quarterly loss of 75 cents a share for the second quarter on revenues of $247.9 million. Wall Street had been expecting a profit of 6 cents a share on sales of $258 million.

Lumber Liquidators founder and Chairman Tom Sullivan—who also became acting CEO after Robert Lynch resigned in the wake of the controversy—said in a statement that the results "reflect the impact of challenges the company has faced, particularly over the last several months," but that the company will recover.

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"As we now endeavor to get the Company back on track, we are going to return to those principles that made us great. We're going to simplify the business, take care of our customers and deliver excellence at every level of the organization," the statement said.

On a conference call, the company said it is having "constructive conversations" with a variety of agencies to resolve the product issues.