Source: Lumber Liquidators Holdings.
Lumber Liquidators Holdings (LL +0.00%) has seen its stock price cut in half in less than a year, on what has felt like a constant stream of bad news and poor earnings results. The onetime highflier hit shareholders the hardest in July, when it announced that second-quarter sales came in far below expectations and that it was cutting its guidance for the remainder of the year.
With third-quarter earnings a couple days away, what should investors expect from the specialty wood flooring retailer? Here are three things investors should look for.
1. Stabilization of comparable sales results
The company has seen same-store-sales fluctuate wildly over the past year-plus after consistently growing comps by the midteens for more than a year. While this isn't fully under the company's control, management's projections have been way off lately.
At the end of the first quarter, the company said its big comp miss was weather-related, and that stores that weren't affected by the nasty winter showed strong sales growth. However, that story fell flat when the company had to revise its sales and earnings forecast for the rest of 2014 after the second quarter's dismal results: comparable sales for all locations were actually down 7% in the quarter, versus a 14.9% increase in the year-ago period, while net income fell almost 19%. Total sales increased 2.3%, driven entirely by 13 new store openings. The poor results led to a full-year sales forecast cut to $1.05 billion to $1.1 billion, with comparable sales between 2.3% positive and 2.3% negative. That's a nearly 5% spread in the comps projections -- a relatively wide and conservative number, indicating that management (like the rest of us) is not sure what to make of the current market.
The remodeling market has slowed in 2014, and management is rightly taking a conservative approach to its forecast. On the second-quarter earnings call, CFO Daniel Terrell addressed this issue, but said the company expected improvement in the third quarter. However, he added that the improvement would likely not show up in Lumber Liquidators' results until the fourth quarter. Either way you slice it, Lumber Liquidators is built for growth over the long term, and we need to see comps stabilize at some point.
2. Moving ahead with expansion plans without a major cutback
While the macro trends are out of the company's control, management can continue to position Lumber Liquidators for the inevitable rebound in remodeling activity. The company slightly altered its store opening and remodeling/relocation plans for the year last quarter, reducing its planned new store count by three units. However, by the end of 2014, Lumber Liquidators will have opened at least 33 new stores and remodeled or relocated another 15 to 20.
Growth is important, but it shouldn't come at too high a price, so the roughly 8% reduction in store growth is reasonable and keeps the cost of growth at a manageable percentage of income. Furthermore, the company continues to test its three "LL Tile" stores, and not rush headlong into a new business, especially while weakness persists in the remodeling market.
However, any major alterations to its long-term growth plans could be a concern.
3. Better controls on its inventory
Lumber Liquidators management has said on more than one occasion that part of its struggles are tied to inventory -- more specifically, not having the right inventory on hand. While it could be viewed that having more demand than you can meet is a good thing, that's not the case this time.
Since last year, Lumber Liquidators has been dogged by accusations that some of its products were made from illegally harvested wood. In an effort to assuage these concerns, Lumber Liquidators has begun requiring more documentation from its suppliers; a number of these companies have struggled to meet the tougher standards, causing delays and inventory shortfalls.
This has led to a double-whammy of sorts, with both lost sales if a specific product wasn't available and an impact on margins when a higher-cost item was often substituted. While management said this issue has been largely addressed, it also said that it would still have an impact on the third quarter, through mid-August. It's critical that the company has finally moved beyond this issue by the time earnings are announced this week.
Still built for growth, but stabilization is most important right now
Frankly, it's been a pretty tough year for Lumber Liquidators, the business and the stock. Sure, the wider macro issue of housing and home remodeling is out of management's hands, but it can do better in dealing with inventory problems and forecasting.
Lastly, don't look for major changes or a return to big growth numbers. Right now, it's more about adjusting to the market dynamics and management doing a better job not getting caught off guard by the macro trends.
