Unfortunately, the transition period has been difficult for Lumber Liquidators, increasing inefficiency and creating problems with inventory management and order fulfillment. These problems have persisted for three quarters now and are weighing on the business.
Revenues for the quarter were up 5.6%, but this was from opening 16 new stores. Sales at stores open for at least a year were actually down 4.3%, which doesn't bode well. However, management attributes the slowdown in comps to the continued problems with its SAP installation. Prior to the SAP installation, same-store sales were strong, 6.7% for the first half of 2010. After the installation, comps immediately began to suffer.
If the company can sort its software problems out, the business should start to return to normal. Management expects this to happen in the second half of this year, but it may be difficult. If these problems continue, customers may grow frustrated and take their business elsewhere.
This isn't the only problem Lumber Liquidators will have to deal with. The wood flooring industry is still waiting for the final rulings in a pair of trade disputes with China, both aimed at increasing the tariffs on hardwood flooring imports. One of the preliminary rulings proposed duties much less than expected, but the final rulings are expected in November, and until then the uncertainty will be difficult for retailers.
The Chinese imports are mostly at the bottom end of the price spectrum, however, and Lumber Liquidators has been preparing by shifting its product mix toward more high-margin products. In the conference call, management noted that big-box competitors -- such as Home Depot
Overall, this will be a difficult year for Lumber Liquidators. How it performs against these problems will say a lot about its ability to face future challenges.
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Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Home Depot and Lowe's are Motley Fool Inside Value recommendations. Lumber Liquidators is a Motley Fool Rule Breakers selection. Motley Fool Options has recommended writing covered calls on Lowe's. The Fool owns shares of Lumber Liquidators. 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.