How are Lumber Liquidators, Tile Shop, and Restoration Hardware Faring During the Housing Recovery?

Who is truly generating cash from the housing recovery?

Apr 25, 2014 at 6:30PM

The housing recovery continues with the Case-Shiller Home Price index up 1%  so far this year. Investors may want to consider hardwood flooring retailer  Lumber Liquidators (NYSE:LL), luxury furniture seller  Restoration Hardware (NYSE:RH), and tile retailer  Tile Shop Holdings (NASDAQ:TTS)

However, from an owner's standpoint you want a company that generates cash and possesses enough sense to hold a little back for a rainy day. You should also prefer companies that don't take on a great deal of debt because interest on debt chokes earnings and cash flow, which both drive capital gains and future dividends. With that said, let's take a look under the proverbial hood at these three companies below.

Hardwood flooring with a smile
Lumber Liquidators maintains that its competitive strengths lie in the fact that it sources its merchandise straight from the mills. The company maintains a customer centric focus by staffing its 318 US and Canadian stores with knowledgeable associates who help the customer decide what they want and/or need.  Company efforts paired with the housing recovery resulted in robust sales which increased 23% in 2013. Lumber Liquidators' net income also increased 64% during 2013. However, free cash flow declined 28% during that time frame due to increased capital expenditures stemming from store expansion. Lumber Liquidators possesses an excellent balance sheet with cash amounting to 26% of stockholder's equity and no long-term debt. The company pays no dividend as it uses cash to reinvest in the business. 

Luxury furniture
Restoration Hardware sells luxury furniture through a variety of channels including catalogs, websites, and stores. Restoration Hardware wants to switch strategies to focus on "Full Line Galleries" which offer the greatest market potential and encompass a greater assortment of merchandise according to its 10k.  Looking at the fundamentals, Restoration Hardware grew its revenue 30% last year. Its net income swung from a net loss of $12.8 million to a net income of $18.2 million in fiscal year 2013.  Negative free cash flow shrunk from $53.2 million to $6.3 million in 2013. A 90% increase in capital expenditures  stemming from expansion and investments in supply chain and distribution infrastructure  accounts for the reason that Restoration Hardware's free cash flow remains negative. All of this spending doesn't leave much cash on Restoration Hardware's balance sheet with its $13.4 million cash balance only representing 2% of stockholder's equity. The company currently carries no long-term debt. 

Tile specialists
Tile Shop sells every kind of stone tile you can think of from granite to quartz to ceramic and more. Like Lumber Liquidators, Tile Shop purchases directly from producers.  Last year, Tile Shop grew its revenue 26%. Net loss shrunk from $46.9 million to $35.7 million. Tile Shop's free cash flow swung from a positive $18.2 million to a negative $31.7 million during 2013.  Changes in the fair value of stock warrants represents the reason the company turned a loss in 2013. Like Restoration Hardware, The Tile Shop increased capital expenditures in an effort to expand its store base.  This led to a low cash balance amounting to only 2% of stockholder's equity. The company also took on some long-term debt last year with long-term debt to equity coming in at 115% in 2013. The company pays no dividend. 

What should investors do?
Lumber Liquidators has the greatest investment potential with a balance sheet full of cash and no debt. No long-term debt means no interest expense to choke out profitability and cash flow. The company plans to open 30 to 40 new stores and remodel 25 to 35 current locations this year.  Any company that can do that without taking on debt belongs in your portfolio.

By contrast, Tile Shop took on debt last year and both Tile Shop and Restoration Hardware lean heavily on capital spending, leaving little on their balance sheets to carry out expansion plans. This significantly boosts their fundamental risk which you don't want to see in your portfolio during another housing downturn. Successful investors hold for the long-term and that's easier if the companies in your portfolio possess enough cash to weather any storm.

Here's some companies that may possess some cash for hard times
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

 

William Bias has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators and Tile Shop Holdings. The Motley Fool owns shares of Lumber Liquidators and Tile Shop Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers