Lumber Liquidators' House Of Cards Came Crashing Down

| About: Lumber Liquidators (LL)
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Summary

Lumber Liquidators' earnings expectations were clearly far too high.

Last night's earnings update sent shares plummeting.

Are shares a buy after the carnage?

Yesterday, following the close, Lumber Liquidators (NYSE:LL) updated its Q2 earnings forecast, and the results weren't pretty, to say the least. I'm not going to read the press release to you, as it's linked above, but some highlights (or lowlights) are: much lower sales, lower margins, higher SG&A and horrendous comparable sales compared to expectations. These are all absolutely awful numbers, as LL didn't just miss, it's not even in the same neighborhood as expectations were. Now, investors are left to pick up the pieces, after shares plummeted from a previous close of $76 to an after-hours price of $55.

I love the idea of Lumber Liquidators. The company offers a wide array of product in a niche category where homeowners can walk into a store, get real advice and then make an informed decision. However, there are some problems with its business model. Repeat customers are hard to come by, simply by the very nature of the product being sold. How often do you buy flooring? The answer for most people is "once", and that is no different for LL. Great businesses thrive over the long term on repeat customers, and LL's business model necessarily precludes that from occurring. I think this will keep long-term revenue in check, as it just isn't possible for LL to grow sales like a food business, for instance, that can sell product to the same customer over and over again.

I have written previously on Lumber Liquidators, and my conclusion was always that LL was insanely priced for a growth scenario that couldn't possibly materialize. My most recent article, linked above, was from last spring, when I said that LL's earnings multiple of nearly 40 was unsustainable, and that multiples that high rarely work out for shareholders, because the multiple either contracts when the growth story ends or the company simply grows into its already-high valuation.

Shares were trading around $80 when I wrote that article, and subsequently went to $118, before crashing down to the $55 print we saw last night. It was obvious that LL would crash at some point, given its downright crazy valuation, but when it was still up in the air. At this point, it is no longer up in the air; Mr. Market has lost faith in LL's ability to grow. Better late than never, I suppose, as anyone examining LL's growth prospects in relation to its then-current valuation would easily see that LL was priced for perfection and more.

So what do you do now? In my most recent LL article, I posited that a price in the $50 range would be a good buying opportunity for LL shares, and I still believe that. The story isn't dead; it was simply priced in an out-of-this-world manner. You just need to understand what you're getting with LL, and what you're not getting, as we saw last night, is a company that will grow sales into infinity. LL says it is expecting EPS of $2.65 to $3.00 this year, down from a consensus of $3.34. That is a bad miss, but if we look at LL's after-hours price of $55, LL is now trading for just over 20 times earnings at the low end and around 18 times at the high end of the guidance. That is actually a reasonable price for LL's growth story, and I think we are actually seeing a buying opportunity in LL for the first time in about two years.

I would wait for the dust to settle from last night's fireworks before pulling the trigger, because you never know just how ugly one of these violent sell-offs will get before it stops. However, if you are interested in a long position in LL, $50 was my buy point a year ago, and now that we are there, I'm interested. If we see LL print below $50, I would pull the trigger, as I think we'll see LL trade up into the $80 range again, perhaps in a couple of years. LL management has burned the bridge with the speculators that bid up its stock price over the past two years, and now that no one believes management's guidance anymore, it's time to consider a long position. Buy when the business is on fire to get the best value, and after last night, LL is burning.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.