Should You Invest in This Hardwood Flooring Retailer?

Lumber Liquidators Holdingshas enjoyed a huge run since the beginning of 2012. It has risen from around $18 per share to more than $116 per share which marks an incredible gain of 640%. Recently, it has also reported strong third quarter earnings which beat analysts' estimates. Will Lumber Liquidators have more upside? Let's take a look.

The business that keeps growing
Lumber Liquidators is considered the largest hardwood-flooring retailer in North America, operating around 307 stores. Two items that have been bringing in the largest revenue are solid and engineered hardwood and laminates, which accounted for 47% and 22%, respectively, of total sales in 2012.  In the third quarter, Lumber Liquidators experienced year-over-year earnings-per-share growth of nearly 59%, from $0.46 last year to $0.73 this year. This was driven by rising demand from the real estate market. Comparable store sales surged by as much as 17.4%, including a 9.8% rise in the number of customers invoiced and a 6.9% boost in sales. 

The company has expanded its advertising strategy to make its value proposition resonate with its growing shopper base. In addition, customers find shopping at Lumber Liquidators quite engaging, and while in-store they have exposure to a wide range of quality flooring products. In order to improve its profitability, the company has invested time and effort on supply chain optimization.

By consolidating its East Coast distribution facilities into a single, larger facility and opening its West Coast distribution center, Lumber Liquidators expects to enhance its labor productivity and lower its transportation costs, therefore increasing margins. The company commented that there would be a lot of tailwinds in the future since we are in the very early stages of the multi-year real estate recovery. For the full year, Lumber Liquidators estimates that its 2013 EPS might come in the range of $2.65-$2.74 per share. 

Home Depot and Lowe's also drive their gross margins
Its much bigger peer, Home Depot has also increased its gross margin through supply chain initiatives. The company managed to grow its gross margin by 13 basis points due to expense leveraging of its supply chain. The company set a goal of reaching a 12% operating margin by 2015, and around 20 basis points will come from supply chain. 

Home improvement retailer Lowe's  has seen its gross margin improve by 42 basis points in the second quarter because of its value improvement initiative. Lowe's expects that the value improvement will deliver its greatest financial benefits when the business reaches stabilization. That is when Lowe's will promote only new product assortments. 

What makes me worry about Lumber Liquidators is its high valuation. At $114 per share the company is worth more than $3.10 billion. This is more than 24.4 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization. Both Home Depot and Lowe's have much lower valuations. While Home Depot trades at 11.12 times its EV/EBITDA, the market values Lowe's at only 10.86 times its EBITDA. Moreover, shareholders of both Home Depot and Lowe's are enjoying continuous dividend payments with yields at 2.10% and 1.50%, respectively. Lumber Liquidators offers no dividends at all.

Is this a good time to jump in?
In the long run, Lumber Liquidators could keep growing its business at a nice rate along with the real estate recovery trend. However, with no dividend payment and a high valuation, Lumber Liquidators' share price could be vulnerable to negative business developments. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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.

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