Shares of flooring retail specialist Lumber Liquidators Holdings Inc (NYSE:LL) were down 16.8% at 12:45 p.m. EDT on May 2, following the release of the company's first-quarter results before the market opened today. 

The good news is that the company reported sales of $248.4 million, a 6.4% year-over-year increase, including a 4.7% boost in same-store sales. Gross margin also strengthened to 34.9%, up from 32.6% one year ago, on a combination of lower expenses related to its air testing program and an improved mix of products available in its stores. 

Customers inside a Lumber Liquidators store.

Image source: Lumber Liquidators Holdings Inc.

The bad news -- and this is what's probably driving today's big sell-off -- is that the company reported a net loss of $0.93 per share, much bigger than the consensus Wall Street analyst expectation of a $0.21-per-share loss. Here's a closer look at the company's earnings release, and what the market may be missing today. 

This could be the most important part of the earnings release

Lumber Liquidators did report a much wider loss than expected, but $18 million of the $26.4 million net loss Lumber Liquidators reported was tied to potential resolution of one of the company's biggest ongoing legal challenges, as it took an $18 million charge in the quarter related to the litigation related to the company's former Chinese-made laminate flooring. 

The company's 10-Q pointed out that this is an estimate, and there remains uncertainty as to the final outcome, but this is a major step forward for the company. There is other litigation, but this is by far the biggest legal case and would be likely to set a precedent for other cases in the U.S. if a settlement is reached. 

How Lumber Liquidators' balance sheet looks

Lumber Liquidators ended the first quarter with $11 million in cash, up $700,000 since the beginning of the year, and a $72 million balance on its line of credit, a $32 million increase in total debt. But Lumber Liquidators' accounts payable -- that is, money it owes vendors, suppliers, and the like -- decreased by $33 million. Combined, the company's working capital -- a measure of its short-term assets and liabilities -- improved about $10 million over the quarter. 

When looking at both current and long-term assets and liabilities, the balance sheet weakened by $25 million, but it's important to note that $18 million of that amount, as mentioned, was related to the Chinese-made laminate litigation.

In other words, working capital improved, and the vast majority of capital burn in the quarter was related to a major step forward from the litigation albatross that has weighed on the company for nearly two years. 

Looking ahead: Not out of the woods, but moving forward

To be clear, there's a big difference between taking an $18 million liability toward a potential settlement and a court-approved "done deal." But as things stand today, it seems that the market is selling on the headline of a bigger-than-expected loss, even though the driver of that loss is probably a very good thing for the company. 

Yet even when adjusting for the impact of the $18 million charge, Lumber Liquidators still would have posted a loss, though much more narrow. At the same time, the company has seen revenue, comps, and gross margin improve every quarter for nearly a year now, and with a generally strong housing market and economy, there's good reason to expect that trend to continue. 

If that's the case, and the company is indeed coming close to settling its Chinese-made laminate class action, the future could be pretty bright for Lumber Liquidators and its shareholders.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.