Robert Chapman Explains What Made Him Go Long On Lumber Liquidators

Shares of Lumber Liquidators Holdings Inc

opened strong and spiked up significantly post the opening on news that activist investor and CEO of Chapman Capital, Robert Chapman, has taken a long position in the stock. Chapman was on CNBC Wednesday to discuss why he is bullish on Lumber Liquidators going forward. Getting Economies Of Scale "Cutting to the chase, the critics of Lumber Liquidators from a consumer standpoint often referred to them as the Wal-Mart of flooring and that's precisely the [bulls] story here," Chapman said. "These guys only have 350 locations now and just in United States. You [brought] Wal-Mart there with over 4,000 locations, now the penetration, not that Wal-Mart and Lumber Liqidators compete in the same niche, but the penetration of Lumber Liquidators is just getting started maybe around 5 percent here in the U.S." He continued, "Their margins are expanding for the same reason that Wal-mart's and Home Depot's and Best Buy's and 99 Cent stores' and Dollar Tree's expanded is that they are getting economies of scale as they spread their overhead over a larger distribution base and they build distribution centres." Operating Margin Issue On the operating margins being inflated, Chapman said, "So, let's just cut to the operating margin issue. A key part of the short story here is that somehow Lumber Liquidators cheated their operating margins from 6 to 10 percent over the last few years and it really does not make any sense if you look at comps." He continued, "Home Depot in 5 years saw their operating margin double from 6 to 12 percent, Wal-Mart in 8 years went from 4 to 6 percent, 99 Cent Stores' margins quadrupled from 2 to 8 percent in 2 years and Best Buy's operating margins tripled from 1.5 to 4.5 percent over a four year period, peaking at 5.5 percent a few years ago. So, this whole idea that 10 percent of their sales are Chinese laminate led to this margin expansion is preposterous."