Why Lumber Liquidators Holdings Inc. Stock Has Plunged 45% in 2014

Source: Lumber Liquidators

In 2012 and 2013, Lumber Liquidators (LL 0.67%) was one of the darlings of the stock market, with the specialist in hardwood and other flooring materials rode the wave of positive sentiment about the recovering housing market to record-high levels. Yet even as broader-based home-improvement retailers Home Depot (HD 0.86%) and Lowe's (LOW 1.49%) have largely managed to sustain their share-price advantages even as fears increase about a possible end to the recent rise in housing prices, Lumber Liquidators has seen questions come up about its ability to keep growing at the pace investors expect. So far, Lumber Liquidators hasn't given investors the answers they want to hear, and the stock has plunged as a result. Let's take a closer look at Lumber Liquidators to see whether the drop in its share price is a buying opportunity or just a sign of further weakness to come.

Stats on Lumber Liquidators

Source: Yahoo! Finance

What sent Lumber Liquidators stumbling?
2014 definitely hasn't been the best of years for Lumber Liquidators, but it has taken a while for investors to get a clear sense of exactly what's behind the stock's sluggish performance. Early in the year, it was easy for investors to blame a harsh winter season for poor results. When Lumber Liquidators reported first-quarter results in May, it reported sales that were more than 6% less than investors had expected, and earnings per share fell short by about 20%. Indeed, Lumber Liquidators was able to quantify the impact of winter weather on the retailer, pointing to same-store sales gains of 8.5% in areas unaffected by harsh weather compared to a plunge of 13% in same-store sales in harder-hit areas. At the time, CEO Robert Lynch seemed to assure investors that the shortfall was a temporarily glitch.

Yet by the time the second quarter rolled around, Lumber Liquidators failed to see the recovery that nervous investors were counting on. Instead, Lumber Liquidators issued a warning in July about its second-quarter results, with the company expecting plunging same-store sales yet again along with declines in margins that hurt earnings. The company cited greater promotional discounting from competitors as well as a jump in general overhead expenses, especially because of higher advertising, legal, and professional expenses.

Source: Wikimedia Commons

Put together, Lumber Liquidators now expects the entire year to be poor, cutting its sales guidance by between 9% and 10% and projecting that its same-store sales growth would fall to the low single-digit percentage range. Overall, a $0.60 per share earnings cut represented about 17% to 18% of its previous guidance, signaling that Lumber Liquidators doesn't expect improving conditions in the near term.

Can Lumber Liquidators bounce back?
The key question for Lumber Liquidators is what happens to the housing market. One of the most troubling things about the company's problems is that they've come despite relative strength in housing thus far. Indeed, the positive results and optimistic expectations for Home Depot and Lowe's have come in part from investors being impressed that the housing market has managed to avoid losing steam thus far.

Of course, calls for a slowdown in housing have proven premature before. Last year's jump in interest rates led many to conclude that mortgage rates would move sharply higher. Yet after adjusting to new conditions, rates have flattened out and even declined in the interim, helping to sustain ongoing gains in home prices. If Lumber Liquidators can tap into that positive momentum in housing before the recovery runs its course, then its recent share-price swoon will make the stock look like a bargain in hindsight.

Building up Lumber Liquidators' future
Lumber Liquidators has to convince investors that it can rebound from its recent troubles and demonstrate the same drive that made the flooring specialist's stock soar during 2012 and 2013. Otherwise, this year's 45% drop in the shares might merely reflect the first stage of a tough long-term future for Lumber Liquidators.