LUMBER LIQUIDATORS AS A “SELL”
AT THE CFA SOCIETY OF VIRGINIA LOCAL FINALS
University of Virginia1
OVERVIEW OF LL’S BUSINESS
University of Virginia2
A NEGATIVE FUNDAMENTAL OUTLOOK OFFERS ADVERSE RISK/REWARD
University of Virginia3
STORE COUNT GROWTH WILL CONTINUE…
University of Virginia4
… AND SALES PER STORE WILL INCREASE…
University of Virginia5
… YIELDING IMPRESSIVE TOP-LINE GROWTH
University of Virginia6
HISTORICALLY, LL HAS SUCCESSFULLY EXPANDED GROSS MARGINS…
University of Virginia7
… BUT FAVORABLE SHIFTS IN LL’S PRODUCT MIX ARE UNSUSTAINABLE, …
University of Virginia8
… AND LL’S SUPPLY SIDE COST ADVANTAGE IS EPHEMERAL…
University of Virginia9
… AS SUPPLIERS SEEK TO DIVERSIFY THEIR CUSTOMER BASE…
University of Virginia10
… AND COMPETITORS REPLICATE LL’S SOURCING STRATEGY, …
University of Virginia11
University of Virginia12
… HENCE LL’S GROSS MARGINS WILL COMPRESS
FURTHERMORE, LL’S LEASING EXPENSES WILL INCREASE
University of Virginia13
CUSTOMERS ARE UNIMPRESSED BY LL’S PRICES…
University of Virginia14
… SINCE LL ONLY PARTIALLY DIFFERENTIATES ON PRICE
University of Virginia15
LL PRODUCTS ARE OF QUESTIONABLE QUALITY…
University of Virginia16
… AND COMPLAINT LEVELS INDICATE CUSTOMER DISCONTENTMENT
University of Virginia17
VALUATION MODELS INDICATE 18.4% DOWNSIDE
University of Virginia18
FINANCIAL PROJECTIONS FORM BASIS FOR DCF ANALYSIS
University of Virginia19
DCF ANALYSIS IMPLIES 10.4% DOWNSIDE
University of Virginia20
DCF EXIT MULTIPLES CONVEY 8.5% DOWNSIDE
University of Virginia21
LL IS OVERVALUED RELATIVE TO ITS PEERS
University of Virginia22
LL IS OVERVALUED RELATIVE TO ITS HISTORICAL MULTIPLES
University of Virginia23
CUMULATIVE VALUATION INDICATES 18.4% DOWNSIDE
University of Virginia24
PRICE PROJECTION PRESENTS DOWNSIDE FOR LL SHARES
University of Virginia25
SIGNPOSTS WHEN CONSIDERING A CHANGE IN RECOMMENDATION
University of Virginia26
RECOMMEND “SELL” RATING
University of Virginia27
APPENDIX
University of Virginia28
APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012)
University of Virginia29
APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013)
University of Virginia30
APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012)
University of Virginia31
APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013)
University of Virginia32
APPENDIX: LL HISTORICAL GROSS MARGIN DRIVERS
University of Virginia33
APPENDIX: LL PRODUCT MIX AND GROSS MARGINS
University of Virginia34
APPENDIX: LL HISTORICAL ADVERTISING EXPENSE
University of Virginia35
APPENDIX: LL STORE COUNT GROWTH BY REGION
University of Virginia36
APPENDIX: LL INSIDER HOLDINGS AND TRANSACTIONS
University of Virginia37
APPENDIX: LL’S EXTANT LEGAL TROUBLES
University of Virginia38
University of Virginia39
APPENDIX: LL COMPLAINT LEVELS EXCEED RETAILERS OF ALL SIZES
APPENDIX: MACROECONOMIC CONSIDERATIONS
University of Virginia40
APPENDIX: CORRELATION OF VARIABLES WITH LL’S REVENUE
University of Virginia41
APPENDIX: LUMBER PRICE CHART
University of Virginia42
APPENDIX: HISTORICAL AND PEER ANALYSIS SUGGEST LL’S WACC IS 10.5%
University of Virginia43
APPENDIX: PRICE COMPARISON IN OTHER PRODUCT CATEGORIES
University of Virginia44
APPENDIX: COMPETITIVE PEER GROUP FINANCIAL ANALYSIS
University of Virginia45
APPENDIX: PEER GROUP COMPARABLES CALCULATION
University of Virginia46
University of Virginia47
APPENDIX: PEER GROUP COMPARABLES NOTES
APPENDIX: DCF LINE ITEMS (Q4FY2010 – Q3FY2012)
University of Virginia48
APPENDIX: DCF LINE ITEMS (Q4FY2012 – Q3FY2014)
University of Virginia49
APPENDIX: DCF LINE ITEMS (Q4FY2014 – Q3FY2016)
University of Virginia50
APPENDIX: DCF LINE ITEMS (Q4FY2016 – Q4FY2018)
University of Virginia51
APPENDIX: DCF ASSUMPTIONS
University of Virginia52
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CFA Institute Research Challenge - Lumber Liquidators (LL) Presentation - University of Virginia Team

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PowerPoint presentation accompanying the University of Virginia team’s sell recommendation on Lumber Liquidators (NYSE: LL) at the local finals of the CFA Institute Research Challenge hosted by the CFA Society of Virginia. The team representing the University of Virginia included Kunal Arora, Nik Khanna, Rahul Madhu, Ryan Rechkemmer, and Kevin Wang.

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  • 325 store count as of February 17, 2014 (LL’s FY2013 Form 10-K)
    10.2% market share cited in LL’s Q4FY2013 Conference Call (data from Catalina?)
  • These are overall themes in our fundamental outlook. Granularization and other items follow.
  • Mention loss of gain from Sandy-related sales spike in Northeast.
    Q1FY2014 dip in YoY comparable store net sales growth expected (guided by management) due to weather-related push-back in demand, expected to recover towards end of Q2FY2014.
  • Update with 2013 figures when available.
  • Quantify the total impact: LL’s occupancy costs equaled 3.8% of FY2012 net sales, 3.6% of 1H 2012 net sales, and 3.4% of 1H 2013 net sales ($16.575M in 1H 2013 occupancy costs, or $33.15M annualized). Increase in monthly lease costs from $0.78 to $1.39 per square foot represents a 78.2% increase. Applying just a 50% increase to LL’s $33.15M estimated occupancy cost in 2013 would increase occupancy costs to $49.725M (an increase of $16.575M, equal to 21.8% of our estimate for LL’s FY2013 net income.
  • -”Now shifting gears, [we will discuss our valuation….]”
    -Assigned different weighting to each methodology according to relative representativeness
  • Implied share price represents the weighted average of LL’s implied share prices based on the valuation multiples of HD, LOW, BLDR, and STCK – with company weights of 45%, 30%, 15%, and 10%, respectively – which are themselves calculated using weights of 40%, 30%, 10%, and 20% for EV/EBITDA (TTM), P/E (NTM), P/S (TTM), and EV/Sales (TTM) multiples, respectively. See “Appendix: Peer Comparables Analysis” for further details.
  • Peer group comparables and historical valuation are included in cumulative target price calculation, although with lower weights, to correct for potential saliency bias in DCF methodologies and to account for the possibility of mean reversion in LL’s valuation multiples.
  • Include relevant chart (mortgage rates trends)
  • 1.57% risk-free rate represents the yield on run-rate 5-year Treasuries
  • Include relevant chart (mortgage rates trends)
  • HD, LOW, BLDR, and STCK are all four of the publicly-traded companies with market capitalizations greater than $50M that are listed in the SEC EDGAR database under SIC code 5211 (retail-lumber & other building materials dealers).
  • CFA Institute Research Challenge - Lumber Liquidators (LL) Presentation - University of Virginia Team

    1. 1. LUMBER LIQUIDATORS AS A “SELL” AT THE CFA SOCIETY OF VIRGINIA LOCAL FINALS University of Virginia1
    2. 2. OVERVIEW OF LL’S BUSINESS University of Virginia2
    3. 3. A NEGATIVE FUNDAMENTAL OUTLOOK OFFERS ADVERSE RISK/REWARD University of Virginia3
    4. 4. STORE COUNT GROWTH WILL CONTINUE… University of Virginia4
    5. 5. … AND SALES PER STORE WILL INCREASE… University of Virginia5
    6. 6. … YIELDING IMPRESSIVE TOP-LINE GROWTH University of Virginia6
    7. 7. HISTORICALLY, LL HAS SUCCESSFULLY EXPANDED GROSS MARGINS… University of Virginia7
    8. 8. … BUT FAVORABLE SHIFTS IN LL’S PRODUCT MIX ARE UNSUSTAINABLE, … University of Virginia8
    9. 9. … AND LL’S SUPPLY SIDE COST ADVANTAGE IS EPHEMERAL… University of Virginia9
    10. 10. … AS SUPPLIERS SEEK TO DIVERSIFY THEIR CUSTOMER BASE… University of Virginia10
    11. 11. … AND COMPETITORS REPLICATE LL’S SOURCING STRATEGY, … University of Virginia11
    12. 12. University of Virginia12 … HENCE LL’S GROSS MARGINS WILL COMPRESS
    13. 13. FURTHERMORE, LL’S LEASING EXPENSES WILL INCREASE University of Virginia13
    14. 14. CUSTOMERS ARE UNIMPRESSED BY LL’S PRICES… University of Virginia14
    15. 15. … SINCE LL ONLY PARTIALLY DIFFERENTIATES ON PRICE University of Virginia15
    16. 16. LL PRODUCTS ARE OF QUESTIONABLE QUALITY… University of Virginia16
    17. 17. … AND COMPLAINT LEVELS INDICATE CUSTOMER DISCONTENTMENT University of Virginia17
    18. 18. VALUATION MODELS INDICATE 18.4% DOWNSIDE University of Virginia18
    19. 19. FINANCIAL PROJECTIONS FORM BASIS FOR DCF ANALYSIS University of Virginia19
    20. 20. DCF ANALYSIS IMPLIES 10.4% DOWNSIDE University of Virginia20
    21. 21. DCF EXIT MULTIPLES CONVEY 8.5% DOWNSIDE University of Virginia21
    22. 22. LL IS OVERVALUED RELATIVE TO ITS PEERS University of Virginia22
    23. 23. LL IS OVERVALUED RELATIVE TO ITS HISTORICAL MULTIPLES University of Virginia23
    24. 24. CUMULATIVE VALUATION INDICATES 18.4% DOWNSIDE University of Virginia24
    25. 25. PRICE PROJECTION PRESENTS DOWNSIDE FOR LL SHARES University of Virginia25
    26. 26. SIGNPOSTS WHEN CONSIDERING A CHANGE IN RECOMMENDATION University of Virginia26
    27. 27. RECOMMEND “SELL” RATING University of Virginia27
    28. 28. APPENDIX University of Virginia28
    29. 29. APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012) University of Virginia29
    30. 30. APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013) University of Virginia30
    31. 31. APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012) University of Virginia31
    32. 32. APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013) University of Virginia32
    33. 33. APPENDIX: LL HISTORICAL GROSS MARGIN DRIVERS University of Virginia33
    34. 34. APPENDIX: LL PRODUCT MIX AND GROSS MARGINS University of Virginia34
    35. 35. APPENDIX: LL HISTORICAL ADVERTISING EXPENSE University of Virginia35
    36. 36. APPENDIX: LL STORE COUNT GROWTH BY REGION University of Virginia36
    37. 37. APPENDIX: LL INSIDER HOLDINGS AND TRANSACTIONS University of Virginia37
    38. 38. APPENDIX: LL’S EXTANT LEGAL TROUBLES University of Virginia38
    39. 39. University of Virginia39 APPENDIX: LL COMPLAINT LEVELS EXCEED RETAILERS OF ALL SIZES
    40. 40. APPENDIX: MACROECONOMIC CONSIDERATIONS University of Virginia40
    41. 41. APPENDIX: CORRELATION OF VARIABLES WITH LL’S REVENUE University of Virginia41
    42. 42. APPENDIX: LUMBER PRICE CHART University of Virginia42
    43. 43. APPENDIX: HISTORICAL AND PEER ANALYSIS SUGGEST LL’S WACC IS 10.5% University of Virginia43
    44. 44. APPENDIX: PRICE COMPARISON IN OTHER PRODUCT CATEGORIES University of Virginia44
    45. 45. APPENDIX: COMPETITIVE PEER GROUP FINANCIAL ANALYSIS University of Virginia45
    46. 46. APPENDIX: PEER GROUP COMPARABLES CALCULATION University of Virginia46
    47. 47. University of Virginia47 APPENDIX: PEER GROUP COMPARABLES NOTES
    48. 48. APPENDIX: DCF LINE ITEMS (Q4FY2010 – Q3FY2012) University of Virginia48
    49. 49. APPENDIX: DCF LINE ITEMS (Q4FY2012 – Q3FY2014) University of Virginia49
    50. 50. APPENDIX: DCF LINE ITEMS (Q4FY2014 – Q3FY2016) University of Virginia50
    51. 51. APPENDIX: DCF LINE ITEMS (Q4FY2016 – Q4FY2018) University of Virginia51
    52. 52. APPENDIX: DCF ASSUMPTIONS University of Virginia52

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