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Lumber Liquidators: Operating Margin Recovery Slows Down


  • Lumber Liquidators appears to have solid comparable store sales growth, with +4.7% comps in Q2 2018 putting it on track to meet its mid-single digits guidance.
  • Gross margins took a step back in Q2 due to obsolescence costs and higher installation sales.
  • Adjusted operating margins are therefore expected to come in around the low end of guidance for 2018.
  • Lumber Liquidators is progressing in its recovery, but the slower recovery pace makes a $20 share price reasonable.
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The Q2 2018 earnings for Lumber Liquidators (NYSE:LL) shows a company that appears on track for sales growth, but is having a slower than previously anticipated recovery in operating margins. The decline in its share price in response to the operating margin issues is largely warranted as the stock was priced for 3+% operating margins in 2018 and it now looks like that operating margin percentage will be reached in 2019 instead.

Comparable Store Sales Growth Remains Solid

I had mentioned before that I expected Lumber Liquidators to do around +4% comps in 2018, which would require it to achieve +4.4% comps during Q2 2018 to Q4 2018 after Q1 2018 came in a bit lower at +2.9%.

Lumber Liquidators' Q2 2018 results point to Lumber Liquidators being on track to reach +4% comps. It did +4.7% comps in Q2 2018 and reaffirmed its 2018 guidance for mid-single digits comparable store sales growth.

Gross Margins Go Off Track

While Lumber Liquidators is in a good position with respect to its comparable store sales growth, its gross margin performance went off track a bit during Q2 2018. Lumber Liquidators reported 35.0% adjusted gross margins during the quarter, which was a decrease from 35.5% in Q2 2017. This was also a marked decline from the 36.3% adjusted gross margin in Q1 2018, although Lumber Liquidators noted that Q1 tends to be seasonally less promotional.

I had assumed that Lumber Liquidators would continue to make progress with gross margins throughout the year and average 36.5% for 2018 despite issues with higher transportation costs. However, it appears that target was too optimistic.

Lumber Liquidators mentioned that around 85 to 90 basis points of the decline in gross margin from Q1 2018 was due to seasonally higher promotional activity. The remaining decline of 40 to 45

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This article was written by

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Elephant Analytics has 15 years of analytical experience and unique skills in numerical analysis and practical mathematics. He is currently ranked in the top 2% of analysts by TipRanks.
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Comments (1)

I can understand your hesitation to take a position now but buying will occur as their turn around continues. It appears their cost of litigation is the biggest obstacle to price recovery. Institutional, mutual fund and insider ownership still remains strong. And there seems to be a reasonable amount of support in the $19/20 range. We're in the midst of an improving economy and with the cost of housing so dear home improvement is now likely to improve. 5% of new housing built in the U.S. will just be replacement homes lost in Ca. fires ( sad for their losses ). Took my starter position this week.

Thanks for the article. Will follow.
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