Lumber Liquidators Holdings Inc (NYSE:LL) Complied with CA Guidelines

June 12, 2015, 10:30 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

I have obtained information from the California Environmental Protection Agency Air Resources Board as that relates to retailers of flooring to address the concerns about CARB2 compliance by Lumber Liquidators and specifically the allegations of wrongdoing by Lumber Liquidators Holdings Inc (NYSE:LL).  

My previous assertion was that Lumber Liquidators almost surely bought non compliant flooring from Chinese Manufacturers, and that remains true, but my follow up expectation as that relates to costs associated with that needs to be adjusted given what I have learned.

Regulations for Retailers From the

 California Environmental Protection Agency | AIR RESOURCES BOARD

 Who is subject to the Composite Wood Products Regulation?

The regulation applies to panel manufacturers, distributors, importers, fabricators, retailers, and third party certifiers of HWPW, PB, MDF. It also applies to retailers and fabricators of finished goods containing those products that are sold or supplied to businesses and consumers in California.

What is a retailer?

Retailers are entities that sell or supply finished goods that contain composite wood products directly to consumers that are intended for use in California. Retailers include small independently owned and operated businesses, as well as large national and international businesses.

What does the Composite Wood Products Regulation require?

The regulation requires manufacturers of composite wood products to produce products that meet increasingly strict emission standards. Fabricators of finished goods are required to take reasonable prudent precautions to ensure products they make comply with the emission limits and to keep records. Retailers need to ensure when ordering finished goods from a fabricator to request only products that meet the regulatory requirements for composite wood products.

Are retailers responsible for labeling finished goods?

No. Fabricators are responsible for labeling the finished goods that are supplied to retailers.

As a retailer, what should I do to comply with the regulation?

ü Make sure you request only compliant goods when ordering from a supplier.

ü Check for a statement of compliance on the invoices or bills of lading for any finished goods that are made with HWPW, PB, or MDF -- the regulation requires suppliers to include such a statement indicating compliance with the regulation.

ü Check to make sure any finished good containing composite wood products is labeled on the box or the item itself by the fabricators to show:

o Fabricators name

o Date of fabrication

o Compliance statement (such as “Complies with CARB 93120”)*

ü Keep records, such as invoices, of all regulated finished good purchases. Make sure the records show the date of purchase and the supplier.

ü Keep records for at least two years.

* CARB 93120 is a reference to the regulatory language of the California Code of Regulation, section 93120-93120.12.

Opinion:

The Regulations for Retailers as offered in the facts provided by the California Environmental Protection Agency Air Resources Board, who oversees CARB Compliance, suggests that retailers themselves do not need to verify compliance with CARB 2 over and beyond validating labels from the manufacturers. 

In fact, it is, according to The Board, the manufacturer's responsibility to properly label laminate flooring and it is the retailer's responsibility to properly inspect the labels and compliance statements from the manufacturers.

This does not absolve Lumber Liquidators completely, but it certainly suggests that Lumber Liquidators, as we saw on 60 minutes, may have been selling flooring that they believed was compliant but that was mislabeled by the manufacturer.  This absolves Lumber Liquidators from allegations of wrongdoing, but I still expect costs to be incurred.  The costs will not be related to fines imposed by the 'Clean Air Board.'

Obviously legal costs are one part of this, but I also believe that California will request that Lumber Liquidators satisfy consumer concerns monetarily.  Given California's stance on 'pulling up laminate flooring' I do not believe that California will request Lumber Liquidators to replace flooring that may have been sold with improper labels.

Statement from the 'Clean Air Board'

"Various studies have shown that laminated and engineered flooring and sealed surfaces and edges reduce the emissions from the platform materials and that the emissions generally decrease as the product ages. As a general rule, we do not recommend removing a flooring product unless there are noticeable health effects (i.e. nose and throat irritation, a burning sensation of the eyes, wheezing, and difficulty in breathing), and other measures taken to alleviate them have failed and there is good reason to believe the flooring is the source of the problem."

Given 'The Clean Air Board's' stance on removing flooring that is not causing problems and in light of the attention being paid to this matter by the public I do expect that Lumber Liquidators will incur costs, I have previously estimated them to be approximately $50 million, which included the removal of previously installed flooring and the replacement costs of compliant flooring, but given this information my estimates have been significantly reduced.  The costs to Lumber Liquidators will not include fines, and the costs to satisfy customer complaints will only likely be half of my previous estimate.

In addition, facts that painted Lumber Liquidators in a very negative light are discounted by the 'Clean Air Board's' statements and that is a material event given current public perception.

Based on current Valuation levels I expect Lumber Liquidators to trade near $40.

LL is a Strong Buy in my opinion.

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