So what: The hardwood flooring company found some reprieve from the long stock slide that began in March, when it suspended sales of China-sourced laminate flooring, amid allegations that the product contained toxic chemicals including formaldehyde. With the release of third-quarter 2015 earnings on Nov. 4, the "LL" symbol began a monthlong, if volatile, rally.
Earnings presented a mixed view of progress for investors anxious to find the initial indications of a turnaround. Sales declined 11.3% versus the prior-year quarter. The revenue decrease was driven by a 14.6% slump in comparable-store sales, comprised of a 13.6% drop in the number of customers the company invoiced and a dip of 1.6% in the average sale. The lighter traffic figure was perhaps the most worrisome aspect of Lumber Liquidators' report, as it implies that the negative publicity surrounding the Chinese laminate was still keeping customers away from showrooms during the quarter.
In a positive development, the retailer achieved a gross margin of 30% in the third quarter. That margin may appear woeful, considering the prior-year quarter's 39.2% gross margin. But it's an improvement of 5 percentage points from the previous sequential quarter (Q2 2015), when the company only managed a 25% margin. And it's important to remember that the roughly 40% gross margins Lumber Liquidators enjoyed before the 2015 scandal were relatively recent benchmarks, formed over the last two years by the high-margin Chinese flooring that it's since abandoned.
As I pointed out this fall, Lumber Liquidators' historical gross margin, at which it was consistently profitable, fell in a range of between 32%-35%. Before the Chinese-sourced laminate was introduced, the company held this margin range from 2007 to 2012. Thus, at 30%, the company isn't really very far from hitting gross profit levels from which it can conceivably find positive net income again.
Now what: Lumber Liquidators made one other announcement in November that shareholders appeared to welcome. The company named board member John Presley to the CEO post, replacing founder and interim CEO Thomas Sullivan. Presley's appointment may benefit Lumber Liquidators as he has extensive turnaround expertise, and, as former CEO of First Capital Bancorp, has experience working in a regulated industry (banking).
Lumber Liquidators has struggled with compliance issues, from its Chinese flooring fiasco to violations of the Lacey Act (which were resolved under a settlement with the Department of Justice in October). Presley's background of working in a compliance-heavy industry, along with his turnaround skill, gives shareholders some reason to be optimistic. But after a year-to-date decline of nearly 80% in Lumber Liquidators stock, much hard work undeniably lies ahead.