Goldman Sachs has downgraded Lumber Liquidators to "Neutral" from "Buy," and cut its price target to $35 from $40.
Lumber Liquidators hosted a conference call on Thursday to address the concerns that were raised in the "60 Minutes" report earlier in March. Through tests, the reporters found that Lumber Liquidators' laminate flooring sourced from China contained levels of formaldehyde that exceed California state regulations and are potentially hazardous.
The company said total net sales fell approximately 7.5% in the nine days following the broadcast.
In a note Friday, Goldman's Matthew Fassler wrote that Lumber Liquidators has more problems than just falling sales:
"We anticipated a hit to sales from recent reputational challenges, but the hit to margin was more severe. To the extent margin recovers moderately through the year from overall 1Q levels – implying a sharp recovery from softer March margins as consumers’ crisis of confidence subsides – it would still end the year sharply lower than we previously modeled. We cut 2015-2017 EPS to $1.60/$2.05/$2.25 from $2.18/$2.35/$2.64, respectively."
Fassler wrote that since Goldman upgraded Lumber Liquidators to "Buy" in December 2013, bad weather, supply chain issues and "reputational challenges" caused the stock to underperform the S&P 500, falling 62% vs +16% for the broader index.
During Thursday's call, after which the company did not take questions, it detailed the testing procedure for its laminate flooring. The company said "60 Minutes" used an improper method that has not been independently accredited and does not produce consistent results.
Fassler wrote that Goldman has talked to industry experts who also raised concerns about the testing method. Still, there are outstanding questions.
"Those flaws notwithstanding, it did not indicate why its flooring would not pass that test, while floors sold by others did, or address the assertion, via on-camera interviews by 60 Minutes, that it was sold wood that was improperly certified by third-party inspectors," Fassler said.
Shares of Lumber Liquidators were down by as much as 4% in pre-market trading.
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