What Happened to Lumber Liquidators?

After posting strong earnings, Lumber Liquidators fell as much as 7% Thursday. What gives?

Steve Symington
Steve Symington
Feb 25, 2013 at 2:26PM
Consumer Goods

Hardwood flooring specialist Lumber Liquidators (NYSE:LL) reported fourth-quarter and full-year earnings last Wednesday, and by all accounts the numbers were solid.

For the quarter, revenue rose 21% to $210.7 million from the year-ago period. Even more impressive, fourth quarter net income skyrocketed 63% year over year to $13.8 million as margins continued to improve. For the year, the company boasted net income growth of 79% to $47.1 million, with 2012 revenue growing 19.3% to $813.3 million, largely thanks to strong comparable-store sales growth of 11.4% for the year.

That's some serious growth, so few were surprised when shares of Lumber Liquidators traded modestly higher immediately following the results. But why, then, did the stock plunge by as much as 7% Thursday?

What have you done for me lately?
Keeping in mind sluggish industry giants like Home Depot and Lowe's, Lumber Liquidators has stood out for the past several years as a small, fast-growing alternative to play the rebound in the housing sector. After all, both Home Depot and Lowe's did manage to destroy the broader markets for more than two decades by using their cash to rapidly grow their businesses. Still, after all those years of capital appreciation, many long-term investors hope Lumber Liquidators can use its laser focus on flooring to even partially replicate the big boys' growth.  

When that growth inevitably slows, however, it's fair to say our fickle stock market isn't exactly the forgiving type. Unfortunately, much of Lumber Liquidators' outperformance was already baked into its stock, with shares trading hands over 200% higher than their year-ago levels. Furthermore, the company issued 2013 revenue guidance of between $885 million and $920 million, which means it expects meager year-over-year growth of between 8.8% and 13.1%.

As I noted last month, while the company's balance sheet remains strong and margins will likely continue to improve, its valuations can only stretch so thin before it can no longer meet Mr. Market's impossible expectations.

Check out the company's historical price-to-earnings ratio going all the way back to its November 2007 IPO:

LL PE Ratio TTM Chart

LL P/E Ratio TTM data by YCharts.

Where do we go from here?
Does this mean current investors should take their money elsewhere? Not necessarily. There's much to be said for letting your winners run, and a big part of being a Foolish investor is maintaining the ability to approach prospective investments with a long-term outlook. With this in mind, if you continue to hold shares of Lumber Liquidators, remember that the business has plenty of room for sustainable growth and there's a good chance you'll be pleased with the results another five years from now.

However, if I were looking to open a new position, I'd be lying if I said its share price doesn't look a little steep for my taste at current levels. Unfortunately, assuming the company isn't just being conservative in its guidance, I feel the need to reiterate my stance. Lumber Liquidators is another great stock that just seems to have gotten a little ahead of itself.

In the end, while I'd like to eventually buy shares in this solid long-term business, I'm reminded that good things always come to those who wait.