Should Investors Buy Lumber Liquidators Now?

Source: Wikimedia Commons

One of the worst performing stocks on July 10 turned out to be Lumber Liquidators (LL). After the specialty retailer reported preliminary revenue and earnings metrics for the fourth quarter of its 2014 fiscal year the day before, shares fell 22%. While this falloff in share price might signal a time to sell for its investors and might incite some to go to Home Depot (HD -1.77%) or Lowe's (LOW -1.40%) instead, might now actually be the best time to jump into the company's stock?

Talk about coming up short!
For the quarter, Lumber Liquidators reported revenue of $263.1 million. Although this represents a 2% rise in sales compared to the $257.1 million management reported last year, the company's top line came in far short of the $299.3 million analysts anticipated. According to management, this fall in revenue came in spite of a 15% rise in store count from 300 locations to 344; it was primarily attributable to a 7.1% drop in comparable-store sales driven by harsh weather conditions and a slowing housing market.

Source: Yahoo! Finance and Lumber Liquidators

From a profit standpoint, Lumber Liquidators management expects results to be even worse. For the quarter, the company anticipates earnings per share to come in between $0.59 and $0.61. In addition to being below the $0.73 the company reported for the same quarter a year earlier, its expected earnings per share will be far lower than the $0.90 analysts were hoping to see.

On top of being hit by lackluster sales, the company attributed its falling profits to a 9% rise in its selling, general, and administrative expenses because of increased costs stemming from advertising, legal, occupancy, and professional expenses.

Source: Lumber Liquidators

Unfortunately, management expects the company's results this quarter to negatively impact its full-year 2014 performance. If current forecasts turn out to be correct, Lumber Liquidators will see sales come in between $1.05 billion and $1.1 billion. While this represents a 5% to 10% improvement over the $1 billion seen in 2013, the company's top line will still miss the $1.15 billion to $1.2 billion management previously anticipated. As a result of this shortfall, Lumber Liquidators will likely see earnings per share come in between $2.65 and $3, down from the $3.25-$3.60 management previously expected.

Is Lumber Liquidators still better than Home Depot and Lowe's?
For investors looking to buy a stake in home-improvement businesses, the two most significant prospects out there are Home Depot and Lowe's. Over the past five years, these companies have seen sales and profits rise. But are they more appealing than Lumber Liquidators?

Between 2009 and 2013, Lowe's saw its revenue climb 13% from $47.2 billion to $53.4 billion. According to its most recent annual report, this rise in sales came in spite of aggregate comparable-store sales staying flat during this period and was chiefly due to the company's 7% rise in store count from 1,710 locations in 2009 to 1,832 by the end of its 2013 fiscal year.

Lumber Liquidators Revenue (Annual) data by YCharts

Over the same five-year period, rival Home Depot did even better. Between 2009 and 2013, the world's largest home-improvement retailer saw sales climb 19% from $66.2 billion to $78.8 billion. The main driver behind this increase was the business' aggregate comparable-store sales jump of 11% accompanied by an almost 1% improvement in store count from 2,244 locations in 2009 to 2,263 by the end of its 2013 fiscal year.

Although both Lowe's and Home Depot (the latter more than the former) posted respectable sales gains in years past, neither one had the growth rate Lumber Liquidators managed to post. Over its most recent five-year period, the company's revenue soared 84% from $544.6 million to $1 billion as an aggregate comparable-store sales increase of 29% propelled revenue higher. Another major contributor, however, was the company's ability to grow its number of locations in operation by 71% from 186 five years ago to 318 by year-end 2013.

Lumber Liquidators Net Income (Annual) data by YCharts

From a profitability perspective, Lumber Liquidators continued to trounce its larger rivals. Between 2009 and 2013, the specialty retailer saw its bottom line grow 188% from $26.9 million to $77.4 million. As a percent of sales, this implies that for every dollar of revenue brought in, the company generated nearly $0.08 in profits in 2013, up from about $0.05 five years earlier. This is significantly better than Lowe's, which saw its profits stay roughly level at $0.04 on the dollar while Home Depot's grew from $0.04 to nearly $0.07.

Foolish takeaway
Based on the data provided, Mr. Market is extremely disappointed with Lumber Liquidators. When a company announces that revenue and earnings will fall short, not just for a quarter but for a year, it makes sense as to why investors would feel pessimistic. It is important, however, to consider that even with this expected shortfall, revenue will grow by 5% to 10% compared to last year, and profits could increase by as much as 8% year over year in an industry that Home Depot previously admitted is saturated.

While this isn't necessarily great news, the fact that Lumber Liquidators continues to grow in the face of competition and manages to outperform its peers in terms of profitability suggests that the company warrants a closer look. Admittedly, with the company's smaller size, investors are assuming greater risks by buying into Lumber Liquidators; but if growth kick-starts again (even at a slightly higher rate than expected), then Lumber Liquidators could see significant upside.