Lumber Liquidators Posts Dismal Q3 Earnings, Guides Low - Analyst Blog

Battered by soft consumer traffic owing to lower demand for big ticket projects, Lumber Liquidators Holdings, Inc.'s (LL) third-quarter 2014 earnings per share of 58 cents not only plunged 20.5% year over year, but also came way below the Zacks Consensus Estimate of 67 cents.

 

However, net sales climbed 4.6% year over year to $266.1 million, backed by recovery of inventories, launch of the Bellawood assortments and fall season sales. Nevertheless, sales fell short of the Zacks Consensus Estimate of $273 million.

Comparable-store net sales (comps) decreased 4.9%, along with a 2.6% reduction in number of customers invoiced and 2.3% fall in average sales. This decline was a result of a dip in demand for wood flooring, which in turn led to soft traffic.

Gross profit slipped 2.1% to $104.2 million and the gross profit margin contracted 260 basis points (bps) to 39.2%, due to unfavorable sales mix, heavy promotions higher inventory costs, partly offset by improved net transportation expense.

Selling, general and administrative (SG&A) expenses rose 7.2% to $78.4 million in the quarter while SG&A expenses as a percentage of sales increased 70 bps to 29.5%, attributable to higher legal, professional, occupancy and advertising expenses.

Following a fall in gross margin and a rise in SG&A, Lumber Liquidators' operating income plunged 22.5% to $25.8 million, while operating margin contracted 340 bps to 9.7%.

Balance Sheet and Cash Flow

Lumber Liquidators, which competes with Lowe's Companies Inc. (LOW), The Home Depot Inc. (HD) and Builders FirstSource, Inc. (BLDR), ended the quarter with cash and cash equivalents of $10.8 million and its total shareholders' equity standing at $313.2 million. During the first nine months of the year, Lumber Liquidators generated $32.4 million in cash from operations.

Also, during the same period, capital expenditures were roughly $44 million, allocated to expenditure related to property and equipment for new distribution centers as well as expansion and remodeling of stores.

Further, Lumber Liquidators bought back 257,000 shares for $14.7 million in the quarter.

Guidance

Following its results so far this year, Lumber Liquidators lowered its outlook for the year. For 2014, sales are expected to be in the range of $1.05–$1.065 billion, compared to the previous range of $1.05 billion to $1.10 billion. For the fourth quarter, sales are expected in the band of $275–$290 million.

Comparable store sales for the year are expected to decrease in low single digits, and for the quarter are expected to be in low single digits (positive or negative).

Consequently, the company envisions earnings per share for the year in the range of $2.38 to $2.52, against $2.65 to $3.00 projected earlier. The current Zacks Consensus Estimate for the same is pegged at $2.45 per share, lying within the guidance range of the company. However, it is expected to trend lower as analysts incorporate lowered guidance into their estimates.

For the fourth quarter, earnings per share are expected to range from 71–85 cents, with the Zacks Consensus Estimate at 88 cents, prone to a downward revision.

Moreover, Lumber Liquidators plans to introduce three new stores in the coming quarter and remodel two existing stores. Further, capital expenditures for the year are expected to be around $85 million.

Currently, Lumber Liquidators holds a Zacks Rank #5 (Strong Sell), indicating the disappointing bottom-line performance and lowered outlook.

However, management remains focused on making investments to expand its operations in order to improve its gross and operating margins.

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