Lumber Liquidators Holdings, Inc. LL continued with its negative earnings surprise streak for the fourth consecutive quarter as both top and bottom line results for second-quarter 2015 lagged the Zacks Consensus Estimate. The dismal performance restrained management from providing guidance for 2015.
The company posted a loss of 75 cents a share in the second quarter that fared unfavorably with the Zacks Consensus Estimate of earnings of 7 cents and the prior-year quarter earnings of 60 cents.
The dismal bottom-line performance and the absence of full year guidance were enough to raise investor concern. As a result, the company’s shares nosedived 27.7% to a multi-year low.
Quarter in Detail
Net sales plunged 5.8% to $247.9 million and also fell short of the Zacks Consensus Estimate of $256.9 million. Comparable-store net sales decreased 10% because of a 7.6% decline in the number of customers invoiced and a decrease of 2.4% in average sales. However, non-comparable store sales increased $11.1 million over the prior-year quarter.
The flooring scandal had a significant impact on Lumber Liquidators performance. The company has been fishing in troubled waters since a report aired on 60 Minutes (a newsmagazine television program) on Mar 1, accused the company of selling Chinese flooring laminates containing formaldehyde levels that do not meet California emissions standards.
The company believes that the above mentioned allegation coupled with its decision to stop selling these floor laminates in June negatively hurt its sales.
Retailers which might gain from Lumber Liquidators’ trouble are The Home Depot, Inc. HD and Tile Shop Holdings, Inc. TTS.
Gross profit fell 41.4% to $62.3 million. Gross profit margin contracted 1530 basis points (bps) to 25.1% due to certain planned reductions in retail prices, higher promotional pricing and unfavorable sales mix.
Lumber Liquidators’ operating loss for the second quarter was about $28.3 million compared to operating income of $27.2 million in the prior-year quarter.
Selling, general and administrative (SG&A) expenses rose 14.5% to $90.6 million in the quarter while SG&A expenses, as a percentage of sales, increased 640 bps to 36.5%. The increase in these expenses was owing to higher legal and professional fees coupled with store expansion costs.
Balance Sheet and Cash Flow
Lumber Liquidators ended the quarter with cash and cash equivalents of $45.3 million as compared with $48.1 million at the end of the year-ago quarter. Merchandise inventories at the end of the quarter amounted to $262.7 million compared with $272.7 million at the end of the year-ago quarter. During second-quarter 2015, Lumber Liquidators generated $19.2 million in cash from operations.
Store Update
During the quarter, the company opened 7 stores while it unveiled 13 stores in the prior-year quarter. It remodeled 1 existing outlet in the quarter. Lumber Liquidators plans to open 20–25 stores in the expanded showroom format and remodel 10–15 outlets in 2015.
Guidance
Lumber Liquidators has not provided any guidance for the rest of the year owing to the company’s long purchase cycle and volatile customer demand trends. Moreover, the company expects net sales in the second half of 2015 to be impacted by constrained inventory levels given suspension of purchase and sale of Chinese floor laminates.
The company expects capital expenditure for the full year in the band of $20–$25 million.
Currently, Lumber Liquidators carries a Zacks Rank #5 (Strong Sell). A better-ranked stock in the same industry is Builders FirstSource Inc. BLDR, carrying a Zacks Rank #2 (Buy).
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