What happened

Shares of hardware flooring retailer Lumber Liquidators Holdings (NYSE:LL) tanked in July, declining 20.6%, according to data provided by S&P Global Market Intelligence. Almost all the losses came after the company released its second-quarter numbers on the last day of the month.

Lumber Liquidators suffered a similar fate at Mr. Market's hands after its first-quarter numbers, and it seems that investors just can't get their heads around the company's future.

So what

Here are some key numbers from Lumber Liquidators' Q2 report:

  • 6% growth in same-store sales. 
  • 6% growth in revenue.
  • Gross margin of 35.7% versus 37% in Q2 2017.
  • A $1.5 million net loss versus a profit of $4.5 million in the year-ago quarter.
  • Eight stores were opened, taking its total store count to 406 as of June 30.

So despite strong growth on its top line, Lumber Liquidators suffered a big loss last quarter. There are several factors to blame, including higher transportation costs and inventory obsolescence expenses that the company incurred on disposal of old inventory.

Display of red electronic board of stock quotes with down trend graph.

Image source: Getty Images.

What caught my attention, though, is this: Lumber Liquidators cited "increased installation sales" as another factor that resulted in a lower gross margin. The company is increasingly focused on installation sales to grow its top line, but it's a lower-margin business than flooring products. 

In fact, tallying up some of the numbers that the company gave out reveal that its merchandise isn't really attracting customers, and much of the growth in recent quarters has come from installation services. In Q2, for instance, the number of customers invoiced was up a meager 0.1%, which means foot traffic remained pretty much the same across Lumber Liquidators' stores year over year. And of the 4.6% growth in same-store sales last quarter, merchandise sales grew only 0.9%.

Now what

To be fair, Lumber Liquidators is striving to expand its do-it-yourself customer base (also its core business) through initiatives like digital marketing and boosting online presence in coming months. Management also reiterated its full-year outlook, which includes revenue growth in the mid to upper single digits, and mid-single-digit growth in comps. That's not bad, but an adjusted operating margin projection of 2% to 3% is discouraging.

Simply put, don't expect Lumber Liquidators' profits to grow much as long as installation drives sales, and until demand for higher-margin products like vinyl picks up. Meanwhile, the company is still bearing substantial costs from drawn-out lawsuits.