The Company and Business:
Lumber Liquidators (LL) was started in 1993 with a decision by founder Tom Sullivan to sell lumber at reduced prices out of a warehouse. From those humble beginnings, Tom was able to build an inventory of very high-quality wood which could be used in hardwood and other flooring, and the first store was opened three years later. The company's roots started in Massachusetts but the company decided to move its headquarters to Virginia in order to have a much larger warehouse for the hardwood flooring.
Lumber Liquidators has rapidly grown, and as of the end of the last quarter, the company operated over 130 stores with plans to open 30-40 new stores over the course of the next year. The company is considered the cost leader in hardwood flooring and has benefited from increased cost awareness by consumers, whereby Lumber Liquidators will typically offer a 5-20%+ discount on flooring (with the larger discount on premium items where the company has higher margins) as compared to a Home Depot or Lowes. Lumber Liquidators has recently begun a campaign to sell hardwood flooring to UK customers; this could become a significant source of revenue growth going forward, especially if they can expand it into other international markets.
In my opinion, LL is still in its early days of growth and has thus only had a minor effect from the weakness in housing. I suspect as the housing environment stabilizes, the company's revenue growth rate will accelerate from the current annual growth rate of 24% (7% in same store sale growth). However , it's likely to remain around these levels as long as the weak housing environment still exists.
Despite the housing difficulties, LL has been able to experience growth due to their unique business plan which has allowed them to take market share from the market leaders and since the company still operates in relatively few locations. The stock is currently trading at about 19 times this year's expected earnings and 17 times enterprise value/earnings with a PEG below 0.5. The company has a strong balance sheet with over $30 million in cash (over $1 per share) and no long-term debt.
The company has fairly healthy financial strength ratios with a current ratio above 2, ROE of 14% and ROIC of 13%. Recently, the company has benefited from liquidation purchases where they are able to buy wood at reduced prices. In the company's last conference call, they also mentioned a potential China deal later in the year which could propel growth and cost reduction going forward.
Expansion: Lumber Liquidators is still not active in all of the major U.S. retail markets thus allowing them to have significant opportunity for growth as they expand their business lines.
Economies of scale: Despite the relatively small size of the company at this time, Lumber Liquidators is the largest supplier of hardwood flooring and therefore can benefit from reducing costs due to their large order size.
Improvements in the housing market: Any improvements or stabilization in the overall housing market can result in increased spending by consumers on hardwood flooring.
International expansion: The company is in the early process of establishing a relationship with UK customers where they have an even larger advantage on pricing than in the U.S. LL could have other potentially large opportunities in many other countries as they expand operations.
Any changes in industry dynamics: It is highly unlikely but it is possible that Home Depot or Lowes could attempt to match the pricing from Lumber Liquidators. It?s also possible that an emerging company may be able to steal market share in the future from LL.
Economic environment: The company has successfully navigated the economic environment thus far, however, there is no guarantee that they can continue to do so if the consumer environment significantly deteriorates from its present environment.
Potential Mismanagement of growth: Once the company reaches a certain level, it may start to cannibalize its own sales. My own estimates show that the company still has significant ability to grow stores before this happens but it is possible it could occur earlier.
Overall, I am very impressed with the operating efficiency and business plan of Lumber Liquidators. This is a growth company which trades at a relatively inexpensive valuation as compared to some of its growth peers. The company has a strong management team and the future looks bright for this leading hardwood floor provider.
Disclosure: The author currently does not hold stock in Lumber Liquidators.