Shares of Lumber Liquidators
Pesky inventory levels and uninspiring guidance may have been the culprits in yesterday's 12% tumble, but the fall also presents a great buying opportunity on the resilient home-improvement retailer.
Let's break this down.
Net sales rose 18%, to $137.1 million, during the fourth quarter. This is mostly the result of expansion, as the chain tacked on 36 new stores in 2009 to close out the year with 186 namesake shops, but also a healthy 5.5% spike in comps.
Earnings growth may have appeared flattish, but the 2008 figure was padded by the reversal of a stock-based compensation expense accrual. On a cherry plank-to-cherry plank basis, earnings rose from $0.17 to $0.25 a share.
Analysts were expecting a profit of $0.25 a share on $136.5 million, so there's no knot in the wood there.
Lumber Liquidators specializes in a highly fragmented sector. While Home Depot
Home Depot and Lowe's are set to post quarterly results next week, and they won't match Lumber Liquidators' speed. Lowe's is projected to post flat year-over-year results, while Home Depot is slated to post small dips on the top and bottom lines.
The stumbling block at Lumber Liquidators is a problematic 50% spike in inventory levels. Sharp investors take this line item religiously. If inventories are growing a lot faster than net sales -- and that's certainly the case here -- shareholders begin to worry. Is Lumber Liquidators stuck with rotten wood? Will it have to discount sharply to clear out its wares? Is there a Lumber Liquidators Liquidator?
Thankfully, this isn't as troublesome as worrywarts may think. One can't compare the overstocked conditions that materialized at Crocs
Lumber Liquidators explains the buildup primarily as a store-level mandate to have more items in stock. That makes sense. If you're going to guarantee that the most popular flooring choices are immediately available, it will require a buildup of inventory. But pointing to an increase in the seasonality of its business is a flimsier excuse, since we're already pitting the fourth quarter of 2009 against the fourth quarter of 2008.
The company's guidance is solid as oak. It sees net sales climbing 14% to 18%. Projected earnings per share of $1.10 to $1.20 represent 13% to 24% in bottom-line growth. Analysts are expecting $1.16 a share and $629.9 million in revenue, so Lumber Liquidators' outlook is right in the ballpark.
Investors may be disappointed that Lumber Liquidators didn't blow analysts away the way it has done in the past, but it's a good report and a good near-term outlook. Judging by the market's decision to sell into this report, the stock sits at a good valuation, given its lean operating model and serious upside when the economy really gets back on track.