What Investors Need to Know About the Lumber Liquidators Collapse

Earnings season hasn't gotten off to a particularly good start for the retail sector. Several companies have already released some worrying earnings reports for the quarter, and it is quite likely that there is more pain on the horizon. Following a period of strength related to the recovery in the housing market, Lumber Liquidators (NYSE: LL  ) provided a disastrous second-quarter business update as well as full-year guidance that missed by a mile. The results do not bode well at all for the industry, and it is likely that competitors Lowe's (NYSE: LOW  ) and Home Depot (NYSE: HD  ) will also be affected.

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Timber!
Amid a broad market sell-off on Thursday, Lumber Liquidators was absolutely savaged, down around 22% at the time of writing. We don't see this kind of market action following a slight miss, so let's take a look at the company's second-quarter business update.

For the quarter ended June 30, net sales increased by 2.3% to $263.1 million, well below the $303.2 million consensus estimate. Furthermore, comp-store sales plunged around 7% versus an increase of nearly 15% last year. The company now expects Q2 earnings per share of between $0.59 and $0.61, down from $0.73 per share last year and missing the $0.91 consensus estimate by roughly a third. Moreover, gross margin is expected to contract for the period due to higher expenses.

According to CEO Robert Lynch, customer traffic was significantly lower than expected, especially in areas affected by the harsh winter weather in the first quarter. While there was strong demand earlier in the year, this trend did not continue, which is related to housing trends such as lower existing home sales compared to last year. Remodeling projects are now expected to be delayed to spring 2015 in some cases, making a near-term improvement unlikely.

Guidance slashed
Even more worrying than the poor numbers for the second quarter is the company's lowered guidance for the rest of the year, as the factors that affected these results are expected to continue into the rest of the year. Versus a previous full-year EPS estimate of $3.25-$3.60, Lumber Liquidators now expects to earn between $2.65 and $3.00 a share. Revenue, previously estimated at between $1.15 billion and $1.2 billion, now is projected in the range of $1.05 billion to $1.1 billion. Management was 'clearly disappointed' with the figures.

This isn't good news for the industry at large, leading some analysts to adjust their estimates for competitors Home Depot and Lowe's as well. Deutsche Bank's Mike Baker lowered his comp sales forecast for Lowe's from 4.5% to 4% and Home Depot's from 5% to 4.5% and projects EPS of both companies to be around a penny lower than the consensus.

Historically, both companies' results have a positive correlation with other stocks exposed to the housing market, but due to their differing business model and considerably wider range of products, their results are expected to hold up better than those at Lumber Liquidators. Still, both were down more than 1% following the results and are slated to report earnings on the Aug. 19 and Aug. 20.

The bottom line
As earnings from major retailers start to trickle in, it is becoming clear that the sector still has considerable problems to deal with aside from a period of harsh winter weather. Lumber Liquidators came out with some fairly disastrous guidance, as weak demand and higher expenses are expected to continue pressuring the company's results going into the rest of the year. Home Depot and Lowe's are expected to suffer from similarly weak demand but should be able to hold their own due to a wider selection of goods and a more competitive business model.

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