Will Trex and Tile Shop Follow Lumber Liquidators Lower?

Home-improvement specialists stumble after Lumber Liquidators disappoints.

Jul 10, 2014 at 4:30PM

Shares of Lumber Liquidators (NYSE:LL) are getting nailed today, but that's not the only flooring stock taking a hit. Trex (NYSE:TREX) and Tile Shop Holdings (NASDAQ:TTS) also moved sharply lower -- off 5% and 12%, respectively, as of this writing -- on fears that the same thing that ails Lumber Liquidators will weigh down their financial results in a couple of weeks.

Yes, the news out of Lumber Liquidators was bad. The leading retailer specializing in hardwood flooring is warning that sales only climbed 2% to $263.1 million in its second quarter, well short of the 16% advance that analysts were targeting. A shocking 7.1% decline in comps is the top-line culprit. This comes on the heels of a 14.9% increase during the prior year's second quarter, so we're eyeing a reasonable 6.7% advance in comps for the two-year period. However, Wall Street clearly didn't expect to see hardwood planks walk the proverbial plank this early in the housing market's recovery.

This would be an ugly development on its own, but the news gets worse when we factor in the quality of the sales that the 344-store chain is generating. Margins are taking a hit as Lumber Liquidators is forced into heavier discounting than usual to close sales and customers are going for lower-margin products. Lumber Liquidators now sees a profit of $0.59 to $0.69 a share. It earned $0.73 a share a year earlier, and analysts were holding out for net income of $0.90 a share. 

As you can probably imagine, Lumber Liquidators is also hosing down its guidance. It sees soft customer traffic continuing through the summer and possibly into early next year if the fall flooring season doesn't deliver its historical uptick. 

Given the gloomy outlook for the entire residential remodeling trend, it isn't a surprise to see wood-alternative decking leader Trex and floor tile retailer Tile Shop slumping today. It probably isn't a surprise to see the niche in a funk. All three chains disappointed investors three months ago. 

Trex shares took a 15% hit the week that it posted disappointing quarterly results with revenue and profitability going the wrong way. Tile Shop's sales and earnings also fell short of expectations, with negative comps to boot. Lumber Liquidators also clocked in weak

However, before we go assuming that all three flooring pros are connected at the hip, it's worth pointing out that Lumber Liquidators was the only one of the three that stuck to its original full-year outlook at the time. In retrospect, it was naively optimistic. Trex and Tile Shop could have had a clearer assessment of their near-term challenges and modeled accordingly. 

Analysts see 24% to 26% growth for the June quarter at Trex and Tile Shop. Given the nature of Trex's business -- outdoor weather-resistant decking -- it could still live up to the call for healthy top-line growth. The cruel winter held back patio makeover projects, and the harsh conditions probably helped sway more than a few homeowners to go with sturdier Trex over traditional wood decking materials. Tile Shop could also stand to benefit from folks using tile for more than just flooring solutions, given the fashion-friendly nature of tiled walls on kitchens, bathrooms, and beyond.

We won't know for sure until a few weeks form now. Trex reports on Aug. 4, and Tile Shop should announce results just before Trex. Investors hate uncertainty, but given today's sale, opportunistic investors may be getting a bargain on Trex and Tile Shop.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Lumber Liquidators, Tile Shop Holdings, and Trex. 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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