Lumber Liquidators Is Tanking: What You Need to Know

What's behind today's huge drop, and what investors should do about it.

Jul 10, 2014 at 5:45PM

Investors sent shares of Lumber Liquidators (NYSE:LL) behind the woodshed today, with the stock down 22% as of early afternoon trading. Shareholders were spooked by the flooring retailer's profit and sales warning for the next few quarters. Let's dig right in to the bad news.

A shockingly rough quarter
The company last night issued a business update for the second quarter ended June 30 that showed a scant 2% sales improvement. That's a far cry from the 16% revenue gain that Wall Street analysts expected. Comparable-store sales dove 7% as customer traffic levels sank. By comparison, Lumber Liquidators managed 15% comp growth in the prior-year period and just a minor dip in the first quarter of 2014. 

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On top of that surprising revenue slowdown, the company now expects profit to fall by 18% to just $0.60 a share. Wall Street, meanwhile, targeted a 23% increase in earnings, to $0.90 a share. It's not a good sign for Lumber Liquidators' pricing power that big flooring discounts failed to keep sales growth humming along. 

It's more than weather
Management blamed residual effects from last quarter's harsh weather for part of the shortfall, but it's clear that something more fundamental is hurting the business. CEO Robert Lynch said in a press release that the housing market isn't providing the same lift that it did last year, citing "weak macroeconomic trends related to residential remodeling, including existing home sales." Still, even Lynch was caught flat-footed by the severity of the pullback: In April, he said that warmer weather was leading to a rebound in customer demand, but yesterday he explained that the March recovery "did not carry into May, and June weakened further." 

Given those trends, it isn't surprising that the company had to slash its outlook for the rest of 2014. Sales are now expected to reach about $1.1 billion, with comps potentially negative for the entire year. The new profit target is $2.82, or almost 20% below the forecast provided back in April. 

The (somewhat) good news for investors is that management at least seems aware that it has lots of work to do. Lynch said that his team has "a strong sense of urgency" around recovering business momentum over the next few quarters, with a multiyear housing recovery helping drive gains beyond that. 

Foolish bottom line
In light of those positive long-term trends, I wouldn't panic and sell the stock just based on this quarter's weakness. Still, I wouldn't look at today's dive as a buying opportunity, either. The company has some serious issues to tackle, and investors on the fence about purchasing Lumber Liquidators after this 20% discount should wait for a clearer outlook before jumping in.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Lumber Liquidators. 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.

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