The hedge fund analyst who sparked the controversy over Lumber Liquidators flooring is now pointing similar allegations at Lowe’s, accusing the hardware giant of selling laminate floors that contain illegal levels of formaldehyde, a cancer-causing substance.
What’s the Problem?
Xuhua Zhou, the analyst who first brought the Lumber Liquidators issue to light in a June 2013 article published in Seeking Alpha, now claims in a new report that similar laminate flooring sold at Lowe’s may contain levels of formaldehyde greater than those allowed by the California Air Resources Board (CARB).
What is Formaldehyde?
Formaldehyde is commonly used to manufacture laminate flooring, but usually in quantities so low that it evaporates quickly. However, if too much is used, it can stay in the flooring and be emitted into customers’ homes.
Prolonged exposure to formaldehyde has been linked to serious health concerns ranging from respiratory problems to cancer. Children are more susceptible to the toxic effects of the chemical than adults.
Analyst Predicts Falling Stock
Zhou, who first raised doubts about Lumber Liquidators flooring in 2013, is now ‘shorting’ Lowe’s stock, meaning he’s betting it will decline in the near future. His original Seeking Alpha article was followed by lawsuits and an investigation by CBS News aired on “60 Minutes” that revealed illegal levels of formaldehyde in some products. This led to diminished sales, a federal probe and declining retailer’s shares.
“New evidence has come to my attention that Lumber Liquidators may not have been the lone violator when it comes to laminate floor sourcing,” Zhou said. “Lowe’s, a behemoth in home improvement, has been selling similar questionable products as recent as late March.”
Lowe’s Test Results ‘Similar’ to Lumber Liquidators
In his recent article, Zhou said he obtained test results from a source indicating that flooring purchased from a Lowe’s in Texas had formaldehyde levels similar to those of Lumber Liquidators’ products in the “60 Minutes” investigation. The testing was done by Benchmark International, one of the labs that CBS investigators used in their report, according to Zhou.
“What I find compelling, especially after ‘60 Minutes’ report on Lumber Liquidators noncompliant laminate product, is that Lowe’s was still selling this ‘toxic’ material weeks later,” Zhou said.
Lowe’s / Tecsun Halt Sales of Flooring
The same day Zhou published his new article, Lowe’s pulled its Tecsun laminate flooring off the market. The products were only sold online, not in stores, according to Lowe’s spokeswoman Connie Bryant.
“We take concerns like this very seriously,” Bryant said. Lowe’s plans to do its own investigation and testing on the floors.
Tecsun also confirmed that it had halted sales of the flooring, and that it will be conducting its own probe. The company contracts with factories in China and said its products are compliant with U.S. safety regulations. Lowe’s is Tecsun’s largest customer.
Home Depot Could Benefit from Chinese Flooring Controversy
Home Depot, whose reputation has remained intact amid accusations that Lowe’s and Lumber Liquidators sold toxic Chinese flooring, could gain new customers as a result of the controversy, according to Bloomberg News. Home Depot’s stock has climbed 2.9% this year, while Lumber Liquidators’ has dropped 59% since the “60 Minutes” report.