Over the past year, Tile Shop Holdings (TTSH), Trex Company, (TREX 1.23%), and Lumber Liquidators (LL 0.33%) have all taken a beating, whether from poor business results caused by bad weather, lumpiness in sales resulting from a slower-than-anticipated recovery in housing, and, in the case of both Lumber Liquidators and Tile Shop Holdings, some varying degree of short attack and accusations of illegal trade activities.
Mr. Market hasn't been kind to these three companies, and largely for good reason, if you focus on recent results and activity. But if you take the long-term view and dig a little deeper, there's still a lot to like about these three companies -- especially with the market having marked them all down so much. Let's take a closer look.
When it rains, it pours
Source: Trex.
When it comes to Trex, the problems really started more than a year ago, following a horrible spring quarter. What is typically the busiest part of the year for the company came in well below expectations, and management ended up cutting the full-year forecast from moderate growth just under 10% to potentially flat sales. Considering that Trex is supposed to be in growth mode -- after all, the company's products are now available in several dozen countries, versus just a handful only five years ago -- investors weren't well pleased.
Fast-forward to the end of 2013, and the addition of some big resellers in the Northeast led to a strong improvement in sales. At least until the results of the first quarter were announced in May, sending the stock down more than 30% since, and 27% since the beginning of the year. While weather was certainly a valid excuse this time, management is also singing a much different tune than last summer. CEO Ron Kaplan made it clear that the second quarter would be strong and guided to sales growth of 27% for the quarter, and 6% for the first six months, even after the terrible Q1.
Source: Lumber Liquidators.
Lumber Liquidators and Tile Shop Holdings both dealt with serious weather impact in the first part of the year as well. Typically showing strong same-store sales results, Lumber Liquidators actually saw a 0.6% decline in comps in Q1. But the evidence is strong that this was weather-related, with comparable sales growth of more than 8% in stores not affected by weather, versus a 14% decline in markets that experienced bad winter weather.
Tile Shop Holdings reported the same story, seeing its comps come in at a 2.5% decline. However, net sales were up more than 13%, because of $8.8 million in sales at stores that weren't open one year ago. Tile Shop is still coming out from under the effects of a short attack that, while overboard in some of its accusations of illegal activity, did expose an ugly situation with a former brother-in-law of founder Robert Rucker, a company employee, who had some involvement with a Chinese supplier that was unethical.
Brighter days already here
Source: The Tile Shop.
Tile Shop Holdings has moved past this speed bump (and parted ways with the brother-in-law), and management has updated its guidance, projecting a full year of comparable-sales growth of 4%-6%, and total revenue growth of up to 26%, even after a terrible first quarter. The company expects to open 20 stores in 2014.
Lumber Liquidators reiterated its full-year guidance for 2014, also showing a lot of confidence that the weather in Q1 simply delayed business and didn't cost it business. The company also said it will open 35-40 stores and invest up to $50 million in its supply chain to support future store openings. Comparable-store sales are expected to be in the mid- to high-single-digit range, an increase from the 3%-4% or so that was expected.
Trex is a really interesting one. Not only did management similarly reiterate guidance for the year -- and state that early results for the current quarter showed a strong rebound already under way -- but CEO Kaplan also talked about the company's new (still secret) product. He reinforced that this new product has no ties to either consumer demand or the housing market, and that it was not for a cyclical industry. The best part? It would be accretive -- adding materially -- to this year's earnings.
Final thoughts: See beyond the lumpy quarters
And keep the long-term view in mind. Lumber Liquidators and Tile Shop Holdings are both still relatively small, and their businesses are incredibly fragmented, meaning there's a lot of room to expand and grow over the next decade. Factor in that this is still the early part of the housing rebound, and this is the right side of the cycle to invest in these companies. For Trex, the same thing applies, plus the potential game-changing impact of adding a new market that's outside of housing and consumer demand.
While Mr. Market hasn't been kind to these three in 2014, the business prospects look great. Looking out five years, all three have a solid chance to outperform the market.
