Morgan Stanley On Lumber Liquidators: It's Unclear If Worst Is Over, Stock Is Worth $12

In a report published Thursday, Morgan Stanley analyst Simeon Gutman maintained an Equal-weight rating on

, while lowering the price target from $30 to $12. The analyst expects stock volatility to continue into 2016. Following the decline in top-line, driven by allegations related to product quality, the analyst believes that the company would need to undertake much more promotional activities for a long period of time in order to win back business. According to the Morgan Stanley report, "Not only will this put pressure on margins but also, LL's underlying profitability could get worse before getting better." The analyst had initially believed that the impact of the allegations would be mostly felt in 2015, with recovery starting in 2016. However, it now appears that the issues could persist into 2016. "There is a wide range of earnings outcomes for LL, in our view, in light of the recent business disruption," Gutman said, while adding, "[O]ur bias is to the downside given the deep level of discounting happening to drive sales and the potential for further financial and/or reputational fallout from legal issues." With regard to the Q2 results, Lumber Liquidators reported weaker than expected EPS for the quarter, with all the key metric missing the expectations. The adjusted gross margin also came in below expectations. The analyst believes that even the gross margin of 31.2 percent was due to lower pricing from vendors. "Fundamentally, there is potential to recover, but it could take years, not months or quarters, in our view. Walking a sales/gross margin tight rope is difficult for any retailer, let alone one with external scrutiny," the Morgan Stanley report added. The EPS estimates for 2015, 2016 and 2017 have been lowered from $0.60, $1.50 and $2.00 to $(0.92), $0.20 and $0.70, respectively.