Lumber Liquidators Slashes Outlook: Is Tile Shop Next?

How weak flooring sales could spell trouble for tile demand.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jul 11, 2014 at 9:13AM
Consumer Goods

The Tile Shop's (NASDAQ:TTS) shares fell 11% yesterday despite no news coming from the company. Instead, investors were spooked by a big profit warning from a seemingly unrelated retailer: Lumber Liquidators (NYSE:LL)

The hardwood flooring specialist announced last night that its business suffered a major negative shift in the second quarter that ended June 30. Customer traffic tanked, shoppers put off purchases, and the people who did buy flooring ended up doing so only at heavily discounted prices. As a result, Lumber Liquidators slashed its profit outlook for the next few quarters and said that revenue growth will come in below expectations.

That pullback could point to trouble ahead for The Tile Shop. Like Lumber Liquidators, The Tile Shop saw its comparable sales slip into negative territory in the first quarter of the year. But an uptick in March suggested that growth would return as soon as warmer weather came. Despite the exact same hope, though, things didn't work out that way at all for Lumber Liquidators: A cold winter gave way to an even colder spring. Management said that more fundamental trends than the weather seem to be at work, including a potential housing market slowdown and "weak macroeconomic trends related to residential remodeling." 

Of course, that's the same type of pinch that would hurt Tile Shop's sales, as the company is sensitive to bigger trends in housing. No surprise, then, that an analyst at Credit Suisse cut his price target on the stock yesterday from $18 to $16 in light of Lumber Liquidators' struggles. It's worth noting, though, that Credit Suisse kept their "outperform" rating on Tile Shop's stock.

Assuming Tile Shop doesn't issue a mid-quarter warning, investors will have to wait until it posts second-quarter results to see if Lumber Liquidators' issues hit tile demand, too, or were confined to just flooring products. Wall Street expects a 24% quarterly sales gain from Tile Shop when it reports later this month, along with flat earnings of $0.13 a share. But given how strong of a demand turn Lumber Liquidators saw starting in May, it's likely that other specialty retailers in the home remodeling space, including Tile Shop, had a weaker second quarter than expected.