Lumber Liquidators Holdings, Inc. LL is set to report its first-quarter 2015 results on Apr 29. Last quarter, it posted a negative surprise of 15.8%. Let us see how things are developing prior to this announcement.
Factors This Quarter
Allegations of selling toxic flooring products have landed the company in serious trouble. As expected, sales have dwindled following a report aired on 60 Minutes on Mar 1 which accused Lumber Liquidators of selling laminates, mostly sourced from China, that do not meet formaldehyde levels permitted by the California emissions standards.
Formaldehyde is a powerful carcinogen that causes myeloid leukemia and other various cancers and is also known to cause respiratory problems.
However, Lumber Liquidators continues to vehemently deny all the charges and has blamed the whole thing on short sellers. This assurance, however, has failed to pacify investors and environmentalists alike and the company is facing significant challenges on the legal front.
The controversy could not have come at a worst time for Lumber Liquidators. The company’s performance over the last year has been nothing short of dismal with the results missing the Zacks Consensus Estimate in the trailing four quarters by an average of 12.9%.
The company, which is dominating the headlines for the wrong reasons, is also unlikely to benefit from home improvement projects that are expected to increase on account of boost in disposable income following lower gasoline prices and an improving job scenario. First quarter of 2015 is expected the bear the maximum brunt.
Though the company’s preliminary data for the first quarter reflects sales increase of 5.6% year over year but sales for March have nosedived 12.8%. Comparable-store sales for the quarter declined 1.8% with March comps down as much as 17.8%. Even contribution of laminates to total sales has drastically reduced to 16.4% compared with 21.2% through February 2015.
Going ahead, the company expects gross margin for the quarter to take a hit given the unfavorable changes in sales mix and the allegations. Gross margin is expected to be around 35.5% to 36.5% as against 41.1% recorded a year ago.
The company is trying to improve its reputation and has started a free air quality test for its customers. Nevertheless, it will be a time-consuming affair before the company’s gains back customer’s confidence.
Earnings Whispers
Our proven model does not conclusively project Lumber Liquidators as likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below.
Zacks ESP: ESP for Lumber Liquidators is -12.50%. This is because the Most Accurate Estimate stands at 14 cents whereas the Zacks Consensus Estimate stands at 16 cents.
Zacks Rank: Lumber Liquidators carries a Zacks Rank #5 (Strong Sell). We caution against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Here are some other companies you may want to consider as our model shows these to have the right combination of elements to post an earnings beat:
Groupon, Inc. GRPN has an Earnings ESP of +50.00% and a Zacks Rank #1.
Skullcandy, Inc. SKUL has an Earnings ESP of +7.69% and a Zacks Rank #1.
Tyson Foods, Inc. TSN has an Earnings ESP of +1.35% and a Zacks Rank #2.
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