Traditionally, when a firm makes the list of the "Top 25 Most Overvalued Firms" in the stock market, the primary reason is that market participants have built in expectations far greater than what the firm can reasonably achieve. Lumber Liquidators (LL) has been on our "Top 25 Most Overvalued Firms" list for some time, and the recent update to its outlook December 9, which came in below consensus expectations, sent shares tumbling.
The specialty retailer of hardwood flooring in North America provided the following for its outlook for 2013 and 2014:
Company Outlook for 2013
Based on year-to-date results and current trends, the company now expects to achieve the following for the full year 2013:
- Net sales in the range of $994 million to $1.0 billion, up from a previous range of $985 million to $995 million, with the fourth quarter ranging from $252 million to $258 million.
- Comparable store net sales increasing 15% to 16%, up from a previous range of 14% to 15%, with the fourth quarter ranging from 13% to 15%.
- The opening of a total of 29 to 30 new store locations in 2013.
- Fourth quarter gross margin in the range of 40.4% to 40.7%, including incremental transportation costs of $1.2 million to $1.4 million related to the start-up of the West Coast distribution center.
- Incremental selling, general and administrative expenses in the fourth quarter of approximately $1.8 million to $2.3 million versus a prior estimate of $1.4 million to $1.8 million, primarily related to the start-up of the West Coast distribution center and certain incremental legal and professional fees.
- Earnings per diluted share in the range of approximately $2.72 to $2.75, based on a diluted share count of approximately 27.9 million shares, which is exclusive of any future impact of the stock repurchase program, up from a previous range of $2.65 to $2.74, with the fourth quarter ranging from $0.69 to $0.72.
Company Outlook for 2014
Additionally, the company has provided an initial outlook for the full year 2014:
- Net sales in the range of $1.15 billion to $1.20 billion.
- Comparable store net sales increasing in the high single to low-double digits.
- The opening of a total of 30 to 40 new store locations and remodeling of a total of 25 to 35 existing stores, all in the expanded showroom format.
- Earnings per diluted share in the range of approximately $3.25 to $3.60, based on a diluted share count of approximately 28.2 million shares, which is exclusive of any future impact of the stock repurchase program.
The firm's updated bottom-line earnings-per-share targets for 2013 and 2014 are in-line with our $2.72 per share and $3.35 per share earnings estimates, respectively, but they came in slightly lower than consensus expectations. To no surprise, shares have been tumbling toward our significantly below-market fair value estimate.
Though there have been concerns recently about Lumber Liquidators' sourcing practices and the resulting impact on the company's gross profits, the reality is that the market's expectations are just too aggressive for the firm to achieve. Strong store growth and comparable store net sales increasing in the high-single to low-double digits is impressive, but growth has always been and always will be just a component of value (e.g. higher revenue growth --> higher free cash flow growth --> higher intrinsic value estimate, all else equal). Unless Lumber Liquidators can best its own targets, we think the company's stock-price correction may continue until it reaches our fair value range. We continue to steer clear of the company's shares in the portfolio of our Best ideas Newsletter.