Source:  Lumber Liquidators

Niche home-improvement retailer Lumber Liquidators (LL -3.63%) has generated a greater than 400% gain for its shareholders over the past five years, thanks to an ability to outmaneuver the sector's "lumbering" giants, Home Depot (HD -0.36%) and Lowe's (LOW -0.82%).  Lumber Liquidators' sales more than doubled over that time frame, due to an aggressive expansion strategy that saw it branch out from its East Coast home base to create a footprint in 46 states and Canada.

However, Lumber Liquidators' most recent financial report left something to be desired. Old Man Winter put a crimp in the company's momentum, leading to lower-than-expected profitability and a mild sell-off in its share price. So, is Lumber Liquidators a good bet at current prices?

Chart forLumber Liquidators Holdings, Inc. (LL)

Source:  Yahoo! Finance

What's the value?
Lumber Liquidators is the largest domestic retailer of hardwood flooring, offering a broad assortment of products through a network of more than 300 stores across the country. The company has been a prime beneficiary of the well-publicized rebound in housing prices and transaction volumes since the financial crisis, especially in the existing home market that accounts for roughly 90% of its sales. The boost in average home-price levels has anecdotally encouraged more homeowners to complete value-enhancing projects, positively impacting Lumber Liquidators' pool of potential customers.

Notwithstanding its most recent quarterly update, Lumber Liquidators has been on a roll lately, reporting a 16.5% average annual revenue gain over the past four fiscal years. More importantly, the company has increasingly been able to up-sell customers on higher-priced flooring products, leading to a gradual upswing in its operating profitability. The net result for Lumber Liquidators has been improved operating cash flow, thereby funding greater investments in inventory and a further expansion of its store base in the U.S. and Canada.

The giants get wise
Of course, the larger that Lumber Liquidators gets, the more it becomes a threat to the franchises of the home-improvement giants. Indeed a small fry like Lumber Liquidators, as well as Tile Shop Holdings in the tile category, has undoubtedly pushed the big boys to improve their operations, especially regarding good customer service that sometimes seems to get lost in their cavernous warehouses.

Home Depot, in particular, has made top-notch customer service a key focus area, setting a long-term goal for 60% of its store labor hours to be devoted to so-called customer-facing activities, a benchmark that it reached in the fourth quarter of 2013. The company has also been upgrading its online capabilities in a bid to hold on to its market share in a digital world, highlighted by the forthcoming introduction of a Buy Online Deliver From Store initiative in 2014. While online sales are a small fraction of Home Depot's overall business, 3.5% of total sales in its latest fiscal year, it is a high-growth area that the company wants to be a leader in.

Not to be outdone, Lowe's has likewise been investing in its online tools, focusing its efforts on the MyLowes mobile application that allows customers to create home profiles, to-do lists, and reminders for key project dates. Like Home Depot, Lowe's generates a very small relative portion of its overall business from online purchases, 2% of total sales in its latest fiscal year, but the company likely hopes to drive incremental customer visits to its stores with the online tools. 

In addition, the project management features of its MyLowes website position the company to gain additional traction in the installation arena, which accounted for 7% of its total sales in FY 2013 and is a clearly articulated focus area for management going forward.

The bottom line
Lumber Liquidators' poor first quarter seems to have been an aberration, given the improving comparable-store sales trend over the course of the three-month period. That being said, exceptional rates of future growth may be harder to come by if the recent year-over-year dip in existing home sales data proves to be a longer-term phenomenon. Given Lumber Liquidators' healthy, above-market P/E multiple of roughly 30, investors might want to wait on another quarterly update prior to taking the plunge.