Lumber Liquidators Tanks: Is It Just a Retail Funk?

Lumber Liquidators and The Container Store both posted a surprisingly bad quarter. What's going on here?

Jul 11, 2014 at 11:32AM

Shares of Lumber Liquidators (NYSE:LL) got sliced yesterday, falling 22% on a dismal preliminary earnings report -- but it's not the only home-focused retailer to underwhelm investors. Just Wednesday, shares of The Container Store (NYSE:TCS) lost 8% after it posted its first same-store sales decline in more than three years. CEO Kip Tindell seemed at a loss for words to describe the poor performance, saying, "Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'."

Because the Container Store was one of the first companies to report earnings this season, the assessment seemed a bit surprising. After all, economic data in the second quarter has been stellar, as average job growth for the three months was 272,000, the best streak since the recession. In addition, unemployment rate fell 6.1%, within a hair of the Federal Reserve's goal of 6%. This was supposed to be the quarter where consumer spending bounced back after bad winter weather marred the first quarter.


It's not just home-improvement specialists that are having problems. Even Wal-Mart, the biggest retailer in the world, is seeing flatlining sales at home. Its head of U.S. stores said most consumers are still "challenged," noting the larger numbers of Americans who dropped out of the workforce during the past few years.

Other retailers to report disappointing results thus far include Tractor Supply and Family Dollar. At Family Dollar, same-store sales fell 1.8%, and CEO Howard Levine said the poor results "reflect the economic challenges facing our core customer and an intense competitive environment." Indeed, many retailers have blamed deep discounting among competitors for taking a bite out of profits starting last holiday season, which was one of the worst for the industry in years.

Tindell, who has been Container Store's chief for 36 years, called the current retail environment the "most promotional I've ever seen." Shifting buying patterns also seem to be affecting retailers, as consumers look to mobile apps like Groupon for steep discounts, or simply shop online instead of visiting stores.  

Despite deep discounts and changing shopping habits, there is evidence that consumers spent more in the second quarter. The Census Bureau's retail sales report showed the overall figure increased 4.3% in May, and 5.5% in April from the year before, indicating that consumer spending is growing at a respectable clip.

For Lumber Liquidators and, to a lesser extent, The Container Store, homebuying will also be a key indicator of future performance, in addition to the general retail environment. Lumber Liquidators CEO Robert Lynch noted a correlation in the company's traffic with a decline in existing home sales and other trends in residential remodeling. Like other retailers, Lumber Liquidators also seems to be suffering from increased competition from Home Depot and others, and the company also cited "greater discounting" for a compressed gross margin.  

Foolish takeaway
For Lumber Liquidators and The Container Store, the recent quarters were the second time in a row the companies had significantly underperformed expectations, pointing to a pattern that may be hard to reverse. Macroeconomic forces in the retail and housing sectors may be responsible for the slides of these stocks, but these were two highly valued stocks, priced that way because they were supposed to outperform their industries. Perhaps they will bounce back if home sales pick up, but it looks like more tough times could be ahead, as the retail "funk" looks likely to continue.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lumber Liquidators, and The Container Store Group. The Motley Fool owns shares of Lumber Liquidators and The Container Store Group. 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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