Shareholders of Lumber Liquidators
The chain of more than 250 stores now expects net sales to grow by just 4% to $175.5 million during the current quarter. If growth -- any kind of growth -- sounds impressive in the out-of-favor home improvement niche, take a closer look.
Lumber Liquidators has tried to maximize its niche leadership and cash in on its attractive unit-level economics by expanding quickly. It has opened 27 new stores so far this year. Check in at the store level, and comparable sales are expected to take a roughly 8% hit. This is pitted against a 5.5% spike in same-store sales during last year's second quarter, but it's still problematic.
Factor in margin contraction as a result of promotional markdowns and higher transportation costs, and you see a modest top-line gain work its way down the income statement until it's a sharp bottom-line slide. Lumber Liquidators is now targeting a quarterly profit of $0.18 a share to $0.20 a share, well short of both the $0.32 a share it earned last year and the $0.31 a share that analysts were expecting.
The swoon took the retailer by surprise, given its improving trends toward the end of the first quarter. Lumber Liquidators is also hoping that the downswing won't last, since CEO Jeffrey Griffiths points out that catalog and sample requests -- strong internal demand indicators -- are holding up.
This isn't merely a blip, though. Lumber Liquidators is shaving $30 million off its full-year net sales guidance, far more than the second quarter's shortcoming.
In retrospect, it's easy to see why consumers aren't clamoring to upgrade their flooring with classy hardwood planks. Think of all the water damage from homes that are fiscally underwater!
Real estate tracker CoreLogic reports that 38% of the homeowners who took out second mortgages or opened up home equity credit lines -- just the kind of people who often leverage their home to bankroll a home improvement project -- currently owe more on their borrowings than their properties are worth. Why invest in digs that may be headed to foreclosure? The housing market is showing no signs of bouncing back anytime soon.
The only real surprise here is how Lumber Liquidators' peers are dismissing the news. Home improvement superstores Lowe's
They're leaving Lumber Liquidators to rot on its own today, but the malaise should be contagious.
I recommended Lumber Liquidators to Motley Fool Rule Breakers newsletter service subscribers two summers ago, and it clearly hasn't been one of my better calls. I still like the model, and I admire the chain's market leadership in a niche that should bounce back either when housing prices stabilize, or when the economy improves. (It's easier to bet on the latter than the former). Lumber Liquidators is doing its best to manage in a very difficult climate, but coming up short will earn you a good smack at the hands of Mr. Market every time.
Would you rather own Lowe's, Home Depot, or Lumber Liquidators? Share your thoughts in the comment box below.
The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Lowe's, Home Depot, and Lumber Liquidators. Motley Fool newsletter services have recommended writing covered calls in Lowe's. 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.
Longtime Fool contributor Rick Munarriz had hardwood flooring put into each of his past two homes, but long before Lumber Liquidators popped up in town. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.