This Company Is on a Solid Path to Recovery

Warren Buffett has famously boasted that he invests mostly in boring industries like paint and carpet. Hardwood flooring, on the other hand, is apparently a roller-coaster thrill ride. Investors who bought Lumber Liquidators (NYS: LL) last fall are sitting on a double right now, while those who bought just a couple of months prior are only just now breaking even. After a botched software installation and an industrywide International Trade Commission investigation, is business finally getting back to normal at the company?

What went wrong
I can't say Lumber Liquidators has the best operations out there. Same-store sales growth over the last five years has only averaged about 2.4%. Off the top of my head, I can think of at least a few retailers that beat that easily. But in the context of its industry, it's really quite impressive. Average growth rates at competitors such as Lowe's (NYS: LOW) and Home Depot (NYS: HD) have been -3.5% and -3.1%, respectively.

Unfortunately, business at Lumber Liquidators got knocked off track a few quarters ago when the company installed software from SAP intended to streamline operations and order fulfillment. Instead, complications arose, and orders began piling up as stores struggled to adapt to the new system. While things have mostly been sorted out, the latest 10-K notes that the implementation is not completely finished, and there are still several minor phases that may cause similar complications.

Meanwhile, the U.S. Department of Commerce and the International Trade Commission launched an investigation into whether Chinese hardwood flooring manufacturers were receiving unfair state subsidies, allowing them to charge much lower rates than manufacturers in the U.S. In a preliminary ruling, the Department of Commerce announced it may impose duties on Chinese imports of up to 242.2%, prompting many in the industry to worry about retailers who rely on bargain prices.

However, in October of last year, the Department of Commerce issued its final ruling, imposing countervailing duties of up to 26.73% and antidumping duties of up to 58.84%. Lumber Liquidators subsequently announced that only about 10% of its products would be affected, and the duties on those products would only be about 1.5% and 3.3%, respectively. The company had dodged the bullet.

Flash-forward to today
Lumber Liquidators still hasn't fully recovered from the SAP debacle. Days inventory outstanding, a measure of how quickly a company is able to sell its inventory, jumped from 114 days to 144 days in the quarter following the SAP install -- a huge slowdown in business. Lumber Liquidators was forced to offer more favorable payment terms to customers annoyed at the long processing times. It took a few quarters to get everything sorted out and running smoothly again, so DIO has only fallen to a low of 132, but it appears to be trending down.

Similarly, operating margin was cut in half after the SAP install, but it has been steadily climbing back up and is almost back to pre-crisis levels. Assuming the kinks have really been worked out and the new software will start working in Lumber Liquidators' favor, operations efficiency should continue to increase, but given the problems the company has had so far, that's not a completely safe assumption.

Interestingly, sales never really took a hit. As mentioned, competing retailers such as Lowe's and Home Depot have struggled to keep sales afloat, and hardwood flooring manufacturer Armstrong World Industries (NYS: AWI) has actually seen sales decline by nearly 20% over the last four years, while Lumber Liquidators has grown sales by 65%.

The Foolish bottom line
Lumber Liquidators has recovered nicely from its fall. It isn't a particularly cheap stock now, but I believe it will continue to recover and become more attractive. Despite the company's missteps, I stand by the assertion I made a year ago that Lumber Liquidators is one of the best ways to play the trend of home renovation as homeowners try to spruce up their abodes for either potential buyers or a simple change in scenery.

Add Lumber Liquidators to My Watchlist to stay updated with the company's recovery. Lumber Liquidators isn't the only retailer managing to grow sales, either. Check out The Motley Fool's free report on two companies changing the face of retail. Enjoy and fool on!

At the time thisarticle was published Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of Lumber Liquidators Holdings and The Home Depot. Motley Fool newsletter services have recommended writing covered calls on Lowe's Companies. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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