Home Depot Could Profit From Chinese Flooring Sold at Lowe’s, Lumber Liquidators

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Home Depot Inc., which is already the largest flooring retailer in the U.S., stands to benefit from the formaldehyde controversy surrounding two of its main competitors, Lowe’s and Lumber Liquidators.

What’s the Problem?

May 6, 2015 – Home Depot’s reputation has remained unscathed amid accusations that Lumber Liquidators and Lowe’s sold Chinese-made laminate flooring that contained toxic levels of formaldehyde, a known human carcinogen (cancer-causing substance). As a result, Home Depot may be positioned to attract customers as its rivals scramble to recover from the controversy.

Stock Prices

Home Depot’s stock has climbed 2.9% this year, while Lowe’s has gained 2.4%. Shares of Lumber Liquidators, on the other hand, have plunged nearly 60% since a “60 Minutes” report aired on March 1 that alleged the company had been selling Chinese laminate flooring that contained illegal levels of formaldehyde.

Laminate flooring, which offers a cheap, easy-to-install alternative to tile or hardwood floors, has grown in popularity in recent years. However, concerns about the manufacturing process — especially for products made in China — have dogged the industry. Formaldehyde, a chemical that has been linked to sinus infections, respiratory illness and cancer, is contained in the glue used to bind the flooring together.

“60 Minutes” Report

The “60 Minutes” investigation was the result of a June 2013 Seeking Alpha article written by hedge fund analyst Xuhua Zhou. Last week, Zhou wrote another article accusing Lowe’s of selling laminate flooring that had levels of formaldehyde similar to Lumber Liquidators products.

Both companies maintain their flooring is safe; however, Lowe’s has pulled the suspect products off the market until it can conduct its own investigation and testing. The flooring, sold under the Tecsun brand, was available by special order and on Lowe’s website, but not in stores.

Zhou, who is short-selling Lowe’s (meaning he’s betting the company’s stock will fall), has praised Home Depot, claiming that it maintains higher standards. He also owns shares in Home Depot.

Home Depot to Remove Phthalate Flooring

Home Depot further improved its image when it agreed last month to phase out phthalate-containing vinyl flooring by the end of the year. Phthalates, chemicals used to soften and increase the flexibility of plastic products, have been linked to adverse health complications ranging from asthma to brain damage.

Lumber Liquidators announced last week that it has stopped sourcing laminate wood from China for the time being, though it may return to the policy should customer demand warrant it. Home Depot, on the other hand, still sells Chinese flooring.

Steve Holmes, a spokesman for Home Depot, said the company requires all suppliers to comply with health standards and laws. Most of its wood products are sourced from locations in the U.S., Europe and Canada. He declined to give the percentage derived from China.

Home Depot hasn’t yet decided whether it will continue selling Chinese-made laminate, according to Holmes. “The bottom line is we’re confident that our laminate flooring is safe,” he said.

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