Lumber Liquidators: Large Movements On Any Positive News

| About: Lumber Liquidators (LL)

Summary

Any positive news for Lumber Liquidators appears to send its stock surging, even if the news is old or inconsequential.

The Lacey Act settlement has now sent its stock surging upwards twice, both temporarily. This latest surge was smaller and much shorter than the first.

Duties on imports of Chinese engineered hardwood remain similar to past levels.

Expectations for Q4 2015 and 2016 have come down to reasonable levels.

This increases the chance of a positive surprise. I still believe Lumber Liquidators has serious business challenges, but it may be worth an option on a positive surprise surge.

Lumber Liquidators (NYSE:LL) has an impressive history of moving sharply upward on relatively inconsequential news recently. The latest spike was quite temporary in nature, but still appeared quite surprisingly strong given that all that happened was that a judge approved a previously announced settlement reached between the Department of Justice and Lumber Liquidators regarding Lacey Act violations. The chance that the settlement would not be approved was very small given that the two parties agreed to it and there were no apparent objections.

Other than that, it appears that expectations for Lumber Liquidators in Q4 2015 and 2016 have come down to a manageable level now. I am uncertain whether it can make those revenues and earnings numbers, but it should at least be able to come close.

Lacey Act Settlement

The news about the Lacey Act settlement with the Department of Justice is essentially the fourth time it has been mentioned. The first time was in Lumber Liquidators' Q1 2015 10-Q filing, which estimated a probable loss of $10.0 million related to Lacey Act violations. An additional $3.2 million was added separately in Lumber Liquidators' Q2 2015 filing, bringing the total to $13.2 million. There wasn't a noticeable market reaction to these disclosures since it was buried in the 10-Q filings and there was a heavier focus on Lumber Liquidators' gross margins and comparable store sales.

In October, Lumber Liquidators announced that it had reached a settlement with the Department of Justice for the $13.2 million that it had previously estimated. Although I believed that this was a minor event given that the results were in-line with previous disclosures, Lumber Liquidators' stock rose nearly 50% over two days before drifting back downward over the next few weeks.

The most recent news on February 1st had Lumber Liquidators rising nearly 17% at one point before settling down to only a modest gain on the day. However, there really should not have been any movement at all, as it was essentially a given that the settlement would be approved by the court.

Duties On Chinese Imports

Another item that will affect Lumber Liquidators results going forward are duty rates for Chinese wood imports. It appears that the preliminary results of the countervailing duty [CVD] review for 2013 and the antidumping duty [AD] review for December 2013 to November 2014 were completed in January for multilayered wood flooring imports from China. The CVD rate for that period appears to be 1.43% and the AD rate appears to be 13.34%, and would affect Lumber Liquidators' engineered hardwood imported from China. The combined rate of 14.77% is similar to the previous period combined rate of 14.73%.

This will likely result in a charge of $3 million to $4 million for Lumber Liquidators that would affect cost of goods sold and long-term liabilities. However, Lumber Liquidators may decide not to take the charge yet since these are preliminary rates only. As Lumber Liquidators has been paying 14.73% duties since July 2015, these results should have a minimal effect going forward beyond the remaining $1 million to $2 million in potential charges for the CVD in 2014 to mid-2015 and the AD for December 2014 to mid-2015.

Future Revenue And Earnings Expectations

The Q4 2015 expectations for Lumber Liquidators appear to have come down, with consensus for revenues of $252 million and a loss of $0.20 per share. I believe that the revenue number may be achievable (it appears to represent around -11% to -12% comparable store sales), while I have a current estimate of a $0.25 loss per share, assuming that Lumber Liquidators does not take a charge for the preliminary duties during Q4 2015.

2016 expectations for $1.05 billion in revenue and a net loss of $0.24 per share also appear generally reasonable as that would represent a modest recovery versus current sales levels along with approximately 33% gross margin before charges. I am not particularly confident that Lumber Liquidators can reach these numbers given its business challenges, but the targets do appear reasonable at least.

Conclusion

Given Lumber Liquidators' resilience to quite poor news such as its Q3 2015 earnings report and its strong reaction to relatively inconsequential positive news, it may be worth taking a small speculative position in Lumber Liquidators if its price settles down again after the latest spike. The preliminary duty review results were essentially status quo, while expectations for Q4 2015 and 2016 have come down considerably from before.

Lumber Liquidators appears to have some support that will help prevent its stock from crashing too much unless there is some truly terrible news such as -20% comparable store sales or fines that will cripple the company. If Lumber Liquidators actually does resolve its formaldehyde issues or shows signs of a business rebound, the upward surge in its stock could be very large. There are risks given the challenges with its business recovery, but expectations are not factoring in much of a recovery now.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.