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Zack’s Bear of the Day: Lumber Liquidators


Lumber Liquidators (NYSE:LL) was already facing sales weakness before the 60 Minutes expose rocked the shares. This Zacks Rank #5 (Strong Sell) has been struggling over the last year.

Lumber Liquidators is the largest retailer of hardwood flooring, with 350 locations featuring more than 400 flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate, and resilient vinyl.

What About Earnings?

On Feb 25, it announced fourth quarter results which again missed the Zacks Consensus. It was the third earnings miss out of the last four quarters.

Earnings were $0.64 versus the Zacks Consensus of $0.76.

Even before the 60 Minutes expose about the company’s Chinese manufacturing facilities aired, Lumber Liquidators was seeing sales weakness.

In 2014, it blamed the weather in the first half of the year but when the weather improved but sales didn’t, it had to come up with other reasons but none of those was very convincing.

In the fourth quarter, comparable store net sales were weak again, decreasing 4.2% for the quarter. This was due to a 5.3% decrease in the average sale which was only partially offset by a 1.1% increase in the number of customers invoiced.

But Are Things Turning Around in 2015?

The company tried to spin its recent earnings numbers by pointing out that sales improved in December 2014 and that improvement continued in 2015.

Through Feb 23, comparable sales were up 12.1%, which is a strong number given the weather conditions in some parts of the country.

Lumber Liquidators gave full year guidance of $2.50 to $3.00. The analysts were a little bit hotter, with the Zacks Consensus calling for $2.92, so some estimates have been cut to fall in the middle of the company’s guidance range.

Still, that is earnings growth of 18.2% in 2015. Analysts see the growth continuing in 2016 with another 20% earnings growth.

The PR Impact of 60 Minutes

But then came word about the 60 Minutes expose. Shares of Lumber Liquidators were crushed after 60 Minutes reported on the company’s use of Chinese manufacturing facilities, which supposedly use high levels of formaldehyde in its wood, to cut costs. The company denies the allegations.

Initially, it means further investigations and lawsuits are certain.

After the shares sunk, Lumber Liquidators would seem to be more attractively valued.

It now trades with a forward P/E of 14.2. When I last covered it as a Bear of the Day in November 2014 when it was also a Zacks #5 (Strong Sell), it was still trading at 22x.

But PR distractions are never good for a company.

Why buy a company that is bogged down in lawsuits and repairing its reputation when there are plenty of other companies not dealing with those issues that have rising earnings estimates?

If you want to own a company in the home remodeling space, consider one of Lumber Liquidators biggest competitors, The Home Depot,Inc. (NYSE:HD). It’s a Zacks Rank #3 (Hold) but it’s supposed to grow earnings by 13.7% this year.

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