Embattled flooring retailer Lumber Liquidators Holdings, Inc. (NYSE:LL) is set to report earnings for its first quarter on April 29, and we pretty much already know what to expect, since the company pre-released its sales results in early April. The highlights of that release:
- Sales increased 5.6% in the quarter, but fell a whopping 12.8% in March, following a negative report on 60 Minutes, alleging issues with Chinese laminates (go here for the full story).
- The average sale decreased by more than 6%.
- Same-store sales were up 9.6% in January and February; down 17.8% in March.
- Guidance for gross margin percent is between 35.5% and 36.5%, down from more than 41% last year.
However, there are a lot of specifics we didn't learn, including the final impact of the 60 Minutes report on the company's profit in the quarter, any further actions the company is taking, and what the implications are for its growth and expansion plans. Even though we have the highlights, there is certainly a lot we can learn when the company reports this week. Let's dig in.
Tile Shop earnings a story of "what could have been" for Lumber Liquidators?
When Tile Shop announced earnings on April 21, it reported a nice improvement in sales, including same-store sales growth of more than 3% -- a great result after several quarters of declining comps. Considering that both companies' sales are heavily tied to housing trends, typically what is good for one should be good for the other.
However, the national attention from the 60 Minutes piece has given Lumber Liquidators a black mark that it will take a long time to recover from.
However, Lumber Liquidators also reported some favorable trends toward the end of March. From the release:
"Net adjustments, including returns" as a percentage of gross new orders were 10% through February 2015 and 17% in March 2015. In March, the Company experienced an increase in net adjustments to approximately 27% of gross new orders in the first ten days of March, which moderated to approximately 13% of gross new orders in the last two weeks of March.
In other words, customer returns had mostly normalized by the end of the quarter, following the big spike in the week after the 60 Minutes piece was broadcast.
Coming out swinging
Lumber Liquidators has been steadfast in its position that the allegations are baseless. It claims that 60 Minutes was misguided in its reporting, and that the testing methods at the heart of the accusations are misleading, inappropriate, and invalid.
So far, there is a lot of evidence that the company is right. Essentially the entire cabinet, furniture, and wood products industry issued a statement supporting Lumber Liquidators' position that "deconstructive" testing -- as was performed for 60 Minutes -- is not a valid method for determining accurate emissions levels, calling it unreliable and prone to inaccuracy.
Even one of the labs that did the testing for 60 Minutes signed off on the joint statement, saying that the "... statement is reflective of our opinion of the [California] ARB SOP."
Furthermore, the U.S. Consumer Product Safety Commission, which has launched an investigation into the allegations against Lumber Liquidators, has indicated that it won't rely on the testing methods that have created so much confusion. On a conference call in late March, CPSC Chairman Elliot Kaye said the commission would test products "... in a method that most closely replicates the way that the products are used in the home."
While an investigation isn't necessarily good, there's a good chance that the CPSC's tests will validate Lumber Liquidators' position -- that its products are safe. As things stand today, only the short seller-funded litigants and a 60 Minutes story that was pitched by short sellers have used the deconstructive testing method. That bodes as well as anything can at this point for Lumber Liquidators.
Perception and pricing
The reality is, it's just not clear how long -- or how severe -- the overhang will be on Lumber Liquidators' reputation. Mr. Kaye was unequivocal that it would take months before the CPSC investigation reached a conclusion. That uncertainty isn't good for the company, assuming a positive ruling. Making that assumption can be risky, but there's a lot of evidence pointing to that as the most likely outcome.
Probably the biggest concern in the pre-release to me was the company's average sale price decline. On a per customer and per unit basis, the average sale price declined 6.2% and 6.8% respectively in the quarter, and surprisingly, this number didn't accelerate in March. While I guess it's positive that the company didn't use heavy discounting in March to retain sales, it's a little troubling that prices were so far down across the entire period.
This is something that bears close attention, and management really needs to explain why it was down across the entire quarter.
Looking ahead: A few key things
The most important things we can get a better grasp of when Lumber Liquidators reports this week include the bottom-line impact on profit so far, an update on sales trends in the current quarter, and any changes to its growth or capital allocation plans based on the financial results.
The reality is, despite my optimism, it remains hard to predict what the final outcome of the investigations and lawsuits will be, or -- just as importantly -- when sales will rebound. So far, the sales hit has been far and away larger than total sales of Chinese-made laminate, indicating that a lot of potential customers are just staying away period. This won't last forever, but it remains a relatively soft housing market -- though existing home sales did jump 6.1% in March despite tight inventory. The point is, the headwinds shouldn't be ignored.
Be sure to tune in on the 29th when earnings come out. It may make for uncomfortable investing lately, but it's been one heck of a story.
Jason Hall owns shares of Apple, Lumber Liquidators, and Tile Shop Holdings. The Motley Fool recommends Apple, Lumber Liquidators, and Tile Shop Holdings. The Motley Fool owns shares of Apple, Lumber Liquidators, and Tile Shop Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.