Lumber Liquidators Proved 1 Thing in Its Earnings

Lumber Liquidators (NYSE: LL  ) was the quintessential momentum stock in 2012 and 2013, posting combined stock gains of 475% as investors took big bets on the growth of the housing market. However, following its first-quarter earnings report, the company plainly told investors one thing as to how it measures against peers Restoration Hardware (NYSE: RH  ) and giants such as Home Depot (NYSE: HD  ) .

An evident problem forming
Lumber Liquidators is a floor specialist, selling mostly hardwood floors, and has been one of Wall Street's favorite small-cap momentum stocks. However, one alarming data point can be found in its recent quarter, which can be seen below.

Quarter/Year

Revenue Growth YOY

Q2/2013

22.2%

Q3/2013

24.5%

Q4/2013

22.7%

Q1/2014

6.9%

Lumber Liquidators is a company that enjoyed 20%-plus growth in each quarter of last year, and in 2012 it saw double-digit growth in each quarter. However, in the first quarter of 2014, that growth decelerated to just 6.9%; and for the first time in many years, Lumber Liquidators' comparable-store sales fell into negative territory of 0.6%.

Of course, the company blamed the weather for this shortfall, but during the same period, many of the company's peers thrived. Specifically, the company saw a 3.2% decline in total customers invoiced on a comparable basis, insinuating that growth came from store expansion. 

Therefore, Wall Street's bet on the company's growth is showing some real problematic signs. Hence, investors might be best suited by looking elsewhere in the home-improvement space.

Where are these better opportunities?
Investors in Lumber Liquidators likely bought the stock in search of growth. However, Restoration Hardware is growing faster and is cheaper. For one thing, Restoration Hardware grew more than 30% last year, significantly faster than Lumber Liquidators, and impressively did so without the addition of even one new store.

Furthermore, in a fiscal fourth quarter that is comparable to Lumber Liquidators' first quarter, Restoration saw its total revenue grow 18.5% and its comparable sales increase 24%, which is far better than Lumber Liquidators' comparable-sales loss.

With that said, Restoration Hardware is for the first time in two years expanding its store count this year and is guiding for yet another year of 20% growth. Therefore, it should come as a major surprise that Lumber Liquidators and Restoration Hardware trade with the same market cap, yet the latter is 50% larger in annual revenue and is growing significantly faster. Hence, if you believe that Lumber Liquidators is a value opportunity, then what is Restoration?

Next, large companies like Home Depot present a better opportunity than Lumber Liquidators. For one thing, Home Depot is growing nearly as fast, expecting sales growth of 5% this year. Moreover, its U.S. comparable sales are growing by nearly 4.9%, which is also significantly better than Lumber Liquidators'. Lastly, when you combine Home Depot's 4% decline in costs and its rising sales, this is a company whose margins should continue to increase. Therefore, at 15 times next year's earnings, Home Depot is a better opportunity than Lumber Liquidators, which has a forward P/E ratio of 20, given its newfound problems.

Final thoughts
Restoration Hardware is a luxury home-improvement retailer that is for the first time in years finally expanding. Home Depot is the industry's biggest name and has seen vast operating improvements over the last several years, including a near double of return on equity since the current CEO's tenure began.

On the other hand, Lumber Liquidators is a company that's already giving reason for growth concerns, as its first quarter drop-off was significant in comparison to prior quarters. For this reason, investors might want to avoid the stock, meanwhile finding great value and growth in industry peers Restoration Hardware or Home Depot.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2943894, ~/Articles/ArticleHandler.aspx, 10/25/2014 3:15:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement