Lumber Liquidators (NYSE: LL) crashed by a breathtaking 21.5%
on Thursday after management reported disappointing sales
for the second quarter of 2014 and reduced guidance for the
The company had previously delivered weak numbers in the
first quarter, which management attributed to a challenging
However, recent performance seems to be signaling that
Lumber Liquidators is going through serious difficulties, and this
is a major red flag for investors in the company.
Sales during the second quarter of 2014 were $263.1
million, a 2.3% increase versus the same quarter in 2013,
and materially below analysts' estimates of $303.2 million
for the quarter.
The company opened 13 new stores during the quarter,
bringing the total store base to 344 locations.
Comparable-store sales fell by a worrisome 7.1% during
Disappointing earnings guidance
Gross margin during the second quarter is
expected to decline due to “adverse net shifts in
sales mix and greater discounting at the point of
Management expects earnings per share during
the quarter to be in the range of $0.59-$0.61,
considerably below analysts' forecasts of $0.90 per
share on average.
Reduced guidance for 2014
The company expects sales during the year to be in the
range of $1.05 billion-$1.1 billion, down from a prior
range of $1.15 billion-$1.2 billion.
Comparable-store sales are forecast to change in the
low single digits, either positive or negative, versus a
previous guidance for a mid- to high-single-digits
Earnings-per-share guidance for the year was cut to
between $2.65 and $3 per share, versus a previous range
“Customer traffic to our stores was significantly weaker than we expected,
particularly in geographic areas severely impacted by the unusually harsh
weather in the first quarter. The improvement in customer demand we
experienced beginning in mid-March did not carry into May, and June
weakened further. Our reduced customer traffic has coincided with certain
weak macroeconomic trends related to residential remodeling, including
existing home sales, which have generally been lower in 2014 than the
corresponding periods in 2013. We now believe the prolonged purchase cycle
associated with our customers' discretionary, large-ticket home improvement
projects is likely to be delayed for some customers into the fall flooring
season, and for others, into spring of 2015.”
--Robert M. Lynch, President and CEO
Sales were also weak in stores not affected by the weather
"In certain key merchandise categories, primarily laminates, vinyl
plank and engineered hardwoods, lower than planned inventory
levels reduced our ability to convert customer interest into invoiced
sales. Certain mills experienced production delays in meeting our
open orders as we continued to enhance our quality assurance
requirements. We estimate an aggregate net sales shortfall in the
second quarter of up to $18 million in those products impacted. We
expect full product availability for our customers during the third
quarter, with no material impact to our product costs.”
Robert M Lynch, President and CEO
What to watch
It will be important to monitor performance over the coming
quarters to evaluate if Lumber Liquidators is overcoming its
Regarding industry demand, big home improvement retailers such
as Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) can provide
important information when it comes to evaluating demand
strength for retailers exposed to the housing industry.
Both Home Depot and Lowe's are bigger and more diversified than
Lumber Liquidators, and their wide geographical reach can make
them more representative of industry conditions.
Home Depot reported sales of $19.7 billion during the quarter
ended on May 4, a 2.9% increase versus the same period in the
Comparable-store sales increased 3.3% in the U.S. during the
Management is expecting accelerating sales growth during the
rest of the year: "The first quarter was impacted by a slow start
to the spring selling season. But we had solid results in non-
weather impacted markets and expect our sales for the year to
grow in line with the guidance we previously provided."
Lowe's reported sales of $13.4 billion during the quarter
ended on May 2, a 2.4% increase versus the same period in the
Comparable-store sales increased 0.9% during the quarter.
Like Home Depot, Lowe's is forecasting improving growth rates
during 2014: "Performance has improved in May, which,
together with our strengthening execution, gives us the
confidence to reaffirm our sales and operating profit outlook for
Lumber Liquidators is clearly facing considerable difficulties.
Although management is blaming its disappointing performance on
industry conditions and temporary inventory problems, investors
have valid reasons to be concerned.
It will be important to closely monitor the company in the medium
term and evaluate whether Lumber Liquidators is overcoming its
In addition, investors may want to watch big retailers linked to the
housing industry, such as Home Depot and Lowe's, in order to
measure overall industry demand.
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