Lumber Liquidators (LL) plunged Friday after federal officials raided the hardwood flooring retailer's Toano, Va., headquarters as part of a probe into possible illegal imports. But management told one analyst the company doesn't know why it's been targeted.
The Department of Homeland Security, along with the U.S. Fish and Wildlife Service, executed a sealed court-issued search warrant on Thursday at its Toano, Va., headquarters and at a Richmond, Va., store.
Lumber Liquidators shares tumbled as much as 11% Friday, closing down 5%. The stock had risen 114% this year amid a resurgent homebuilding market and remodeling upgrades by more confident consumers.
"I talked to their management 20 minutes ago and they were scratching their heads" as to why Lumber Liquidators was raided, ISI Group analyst Matt McGinley told IBD on Friday afternoon. "Nobody in the company knows what the scope and size of the investigation is. The only thing they know is the feds showed up and took documents," he said.
The flooring retailer, which operates more than 300 stores na tionwide, said in a statement that it would give investigators information and documents related to certain wood-product imports.
Lumber Liquidators said it gets products from more than 110 U.S. and international mills and has more than 60 people who monitor imports.
"The company takes its sourcing very seriously, and is cooperating with authorities to provide them with requested information," it said.
Further details on what Homeland Security was searching for were not immediately available. The company and government officials declined comment beyond initial statements.
The raid could involve the century-old Lacey Act, which requires U.S. companies to comply with other countries' laws when trading certain animal parts. Wood was added to the act in 2008 to try to curb illegal logging.
Gibson Guitar Raids
The unannounced search was reminiscent of raids on Gibson Guitar facilities related to wood imports under the Lacey Act.
The most recent was an Aug. 24, 2011, raid by armed Fish & Wildlife agents on two of Gibson's Tennessee production facilities and its Nashville headquarters.
Agents seized nearly $1 million in rare Indian ebony, finished guitars and electronic data, according to Gibson CEO Henry Juszkiewicz.
In August 2012, the guitar maker agreed to pay $610,000 in fines and confiscated goods to avoid criminal charges.
ISI Group's McGinley said the Lacey Act could apply to Lumber Liquidators, depending on the wood's origin. "If it's actually related to product sourced from Russia, where certain areas are protected because of the Siberian tiger, it would be a violation of the Lacey Act," he said.
Glenn Reynolds, a University of Tennessee law professor who runs the popular Instapundit blog, said he didn't know why the Lumber Liquidators raid took place, but noted the similarity to the Gibson case, saying, "There's some complicated statutory and regulatory law around this subject.
There also could be political implications.
"With Gibson, there was pretty good evidence they were targeted politically" after contributing heavily to Republican candidates, he said.
Reynolds noted that Lumber Liquidators is a sponsor for conservative talk radio host Rush Limbaugh. But the flooring retailer states on its website that it has never sought to run ads on the Limbaugh show specifically, but it works with an agency that places ads in certain markets.
McGinley said he expects the investigation will not have a big impact because no single lumber mill supplies more than 4% or 5% of its product mix.
"It's just a bump in the road," he said. Lumber Liquidators receives about 250 container loads of wood materials from around the globe every week, he said.