Lumber Liquidators' Numbers Dive Toward the Floor

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Lumber Liquidators (LL) is walking the plank again. The leading retailer specializing in hardwood flooring put out another unflattering quarterly report on Wednesday morning, sending the shares sharply lower at the open.

Net sales may have moved nearly 5 percent higher to $266.1 million for the period ahead of the fall flooring season, but that was entirely the handiwork of stores that have opened over the past year. Things went the other way at the individual store level, with comparable-store sales slipping 4.9 percent during the period relative to last summer.

The market may sometimes look the other way if a retailer is holding back on sales growth to protect generous markups, but that wasn't the case at all here. Lumber Liquidators' gross margin of 39.2 percent -- down from 41.8 percent a year earlier -- is proof that it had to discount aggressively just to achieve its lower per-store net sales.

Shrinking sales per store and lower profit margins naturally aren't going to clean up nicely on the bottom line. Net income plunged 23 percent to $15.7 million, or 58 cents a share. Analysts were holding out for a profit of 68 cents a share on $273.7 million in net sales.

It's Not the Wood That Makes It Good

This is the third quarter in a row that the former Wall Street darling has come up short on the bottom line.

Lumber Liquidators was a hot stock last year and an even hotter stock the year before that. It nearly tripled in 2012, soaring another 95 percent in 2013. The recent housing boomlet paid off for the 350-store chain. A flurry of market activity led to home buyers springing for the stylish look of hardwood. Even those who were staying in their own digs made it out to Lumber Liquidators as rising home prices resulted in fewer people with underwater mortgages. Once you owe less on your property than it's worth in the open market, it's easier to invest in renovations.

Things began to turn at Lumber Liquidators this year. It started slowly. A 0.6 percent slide in comparable sales during the first quarter was followed by a brutal 7.1 percent drop in comps during the second quarter. Margins took a hit. Profitability started going the wrong way. However, even after the shocking second quarter, the home improvement chain's lowered guidance for the third quarter called for it to post a profit between 59 cents and 69 cents a share.

It wasn't conservative enough, judging by the eventual earnings of 58 cents a share. The market isn't sticking around. The stock that nearly doubled last year after nearly tripling the year before that has now shed more than half of its value.

Getting Floored Again

Wednesday's hit took the stock to levels last seen in late 2012, but the situation isn't entirely hopeless. Lumber Liquidators points out that the inventory constraints and promotional activity that crushed the third quarter have improved. It also pointed out that even during the third quarter it saw improving trends toward the end, and that's encouraging since we're heading into the historically potent fall flooring season.

Another silver lining is that Lumber Liquidators is still way better off than it was two years ago, even if its stock is back to where it was by the end of 2012. Yes, comparable-store sales are off 4.3 percent through the first nine months of this year, but they had soared 15.8 percent through the first nine months of 2013. Put another way, comps so far this year are 10.8 percent higher than they were two years ago.

Things clearly aren't perfect. Despite the favorable momentum heading into the holiday quarter, Lumber Liquidators' guidance for the period's profitability is still short of Wall Street expectations. However, it was unrealistic to think that the burst of buying activity in 2012 and 2013 would last forever in this very cyclical retailing niche. Lumber Liquidators will have a lot to prove this fall flooring season.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks to build your portfolio with, check out our free report.
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