Shares of Calhoun, Georgia-based Mohawk Industries fell 20% on Thursday over worries involving a lawsuit against the flooring giant related to alleged financial misconduct.
The class action complaint filed last month by the Public Employees' Retirement System of Mississippi alleges a "fraudulent scheme to fabricate revenues through fictitious 'sales' of products."
The suit said the products weren't delivered to customers and the intent was to conceal from investors the true reasons for the company's ballooning inventory.
"When the truth was finally revealed to investors through a series of partial disclosures beginning in July 2018, the price of Mohawk common stock plunged, wiping out $7.4 billion in shareholder value," the lawsuit said.
Throughout the period from April 2017 to July 2019 at the end of each financial quarter, the suit said that employees in Mohawk's North American distribution centers were instructed to load goods on company trucks on Fridays and pretend to deliver them on Saturdays to customers they knew were closed for deliveries.
"Mohawk would nevertheless book the revenue from these 'sales' as soon as the products were put on Mohawk's trucks," the suit said. "Eventually, many employees stopped even pretending to deliver the products and simply scanned them as having been delivered and recorded the 'sales' without the products ever leaving the company's warehouses."
The suit, filed in U.S. District Court in the Northern District of Georgia, said Mohawk also made repeated false statements to misrepresent and conceal the truth behind the company's rising inventory levels and slowing inventory turnover.
"Defendants attributed these developments to such things as 'geographic expansion' and 'rising raw material costs.' In reality, however, Mohawk's bloated inventory resulted from both a conscious scheme to overproduce inventory in order to report higher operating margins and from a glut of unsalable products caused by systemic flaws in Mohawk's production lines," the suit said.
The company did not return a phone call seeking comment on Thursday.
According to MarketWatch, J.P. Morgan analyst Michael Rehaut said in a note that while the veracity of the accusations will likely not be determined until after an extended legal process, which may take the next several months if not longer, "we believe that until this matter has been concluded, this lawsuit will likely remain an overhang on the stock...."
Mohawk shares closed Thursday on the New York Stock Exchange at $73.10, down $18.29, or 20.01%.
Mohawk, the world's biggest floorcovering company, earlier this year cut back some of its production following the coronavirus outbreak.
"While the effects of this global pandemic are unprecedented, the company has overcome severe business downturns in the past," Mohawk said in a statement in late March.
Contact Mike Pare at firstname.lastname@example.org. Follow him on Twitter @MikePareTFP.