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Bear of the Day: Lumber Liquidators

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Founded in 1994 to sell surplus building supplies, Lumber Liquidators (LL - Free Report) transformed itself two years later into what would become the nation’s largest seller of hardwood and laminate flooring. Recognizing that traditional home improvement stores lacked in inventory, selection and prices, Lumber Liquidators forged relationships directly with mills and was able to provide consumers a wide range of flooring choices at low prices.

Riding a booming housing market and the general popularity of home improvement projects – including house “flipping” – Lumber Liquidators became a household name in flooring. Profits soared and shares prices topped $119 in 2013, but have suffered mightily since then, recently closing below $14/share. The share price has declined more than 50% in 2018 alone.

A widely publicized news story in 2015 culminating in a 60 minutes expose contributed to the decline as most of Lumber Liquidators Chinese-sourced products were found to contain high levels of formaldehyde, a cancer-causing chemical. Many customers ripped up installed flooring to avoid the health risks.

Though the company insisted its products were safe, the public relations damage was done just as big-box home improvement stores like Home Depot (HD - Free Report) and Lowe’s (LOW - Free Report) were increasing their offerings.

A class-action lawsuit backed by notable short sellers argued that it was only through the sourcing of inferior and potentially dangerous products that Lumber Liquidators was able to increase profit margins so dramatically.

The past two quarterly earnings reports have been big disappointments, with the company most recently missing the Zacks Consensus Earnings estimate by $0.11, or 47% in Q2.

Future estimates are falling as well with 2018 earnings expected to be only $0.48, down from $0.78 just 90 days ago. Thanks to those diminished expectations, LL is currently a Zacks rank #5 (Strong Sell).

Although revenues have stabilized, legal costs associated with the formaldehyde lawsuits continue to weigh on the bottom line, and in the most recent report, management predicted that those costs would be relatively constant through 2019.

Efforts to restructure the company are ongoing, with the abandonment of Chinese-sourced laminates, the elimination of underperforming product lines, management changes and a relocation of corporate headquarters, but the results remain to be seen.

Investors in the home improvement retail space would be better off considering Tecnoglass (TGLS), a manufacturer of glass and aluminum windows and a Zacks rank #1 (Strong Buy), or Home Depot, the country’s largest chain of home products stores and a Zacks Rank #2 (Buy).

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Lowe's Companies, Inc. (LOW) - free report >>

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The Home Depot, Inc. (HD) - free report >>

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