Lumber Liquidators (LL 11.32, -1.01, -8.19%) is under pressure this morning after reporting
Q3 results earlier today.
With over 400 locations, Lumber Liquidators is one of North America's largest retailers of hard-surface flooring. The company features more than 400 flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate, resilient vinyl, and porcelain tile. Additionally, Lumber Liquidators provides a wide selection of flooring enhancements and accessories to complement, install and maintain your new floor.
The stock has had a wild ride in recent years. It fell from $120 in late 2013 to the $15 area by mid-2015 when it came to light that the company was selling Chinese-made laminate that had high levels of formaldehyde, a known carcinogen. Then LL management bungled the damage control by continuing to sell laminate for 67 days before finally suspending sales of all laminate flooring sourced from China. Investors became concerned about LL's brand and its class action litigation exposure etc. The stock recovered to the high $30's in late 2017, but it has been steadily declining over the past year or so.
Turning to the Q3 results, non-GAAP EPS more than doubled yr/yr to $0.27 from $0.12 last year. This was quite a bit better than market expectations. However, revenue came up light. Revenue rose just 6.4% yr/yr to $270.5 mln, which was below market expectations. Same stores sales were up +2.1%, driven by the expansion of installation services, whose sale in comparable stores was up 39%, which more than offset a 1.3% decline in merchandise sales. Full year guidance was taken a bit lower. LL now expects total revenue growth in the mid-single digits vs prior guidance of mid-to-upper single digits. Comp guidance was reduced to +2.5-3.5% vs prior guidance of mid-single digits.
So what was the main problem for LL? It seems the tariffs on China are hurting LL quite a bit. The company explains that it sources approximately 45% of its products from China. Virtually all of these products were imposed with a 10% tariff effective September 24, 2018 and many of these products are at risk to have tariffs increased to 25% as of January 1, 2019.
The company has several options to address this situation including adjusting its pricing, partnering with current vendors to lower costs, and altering its supply chain to source the same or similar products from other countries at lower costs. LL continues to monitor market pricing and promotional strategies to inform and guide its decisions. LL will seek to mitigate the impacts of these tariffs.
In sum, investors have been sniffing around LL over the past few years hoping for a turnaround play. You have to remember this stock was a huge mover a few years ago. However, the tariffs have made it hard for an effective and this is having a pretty big negative impact on LL's near term results. Plus there is the impact of rising rates on home sales and home renovations which are the main drivers for LL's business. Hopefully the stock can get back on track in 2019, but the tariffs and rising rates are causes for concern.
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