Lumber Liquidators (LL) reported Q1 2019 results that were around what was expected. However, the escalating trade war with China and the implementation of the 25% tariff rate on Chinese-made flooring have served to significantly weigh on the stock in recent days.
Q1 2019 Performance
Lumber Liquidators' Q1 2019 performance was largely as expected. The company reported -0.8% comps during the quarter and left its full-year guidance for flat to low-single digits comps growth (and mid-single digits total sales growth) intact. Lumber Liquidators' Q1 2018 sales benefited from the Hurricane Irma and Harvey rebuilding efforts, so Q1 is probably the toughest year-over-year comparison of any of the quarters this year.
I continue to expect that Lumber Liquidators will report somewhere around +0% to +1% comps growth during 2019. Getting to +1% for the full year would require it to deliver around +1.6% comps during the last three quarters of 2019.
As well, the company reported adjusted gross margins of 35.2% during the quarter, along with an adjusted operating loss of $1.1 million. This was slightly better than its guidance for 34.5-35.0% adjusted gross margins and an adjusted operating loss of $3-5 million.
Tariffs And 2019 Outlook
My outlook is for Lumber Liquidators to deliver around $42 million in Adjusted EBITDA and approximately $20 million in positive cash flow (excluding legal settlements and working capital changes) in 2019, assuming the 10% tariff rate remains unchanged.
While the trade war has escalated and there is now a 25% tariff rate on Chinese flooring, this may not affect the company's 2019 results that much. Lumber Liquidators is working down its inventory a bit, after starting the year with elevated inventory levels due to the previous threat of the 25% tariffs potentially starting on January 1st. As well, shipments that have already left China will be only subject to the 10% tariff rate, while there is still around five weeks of time for negotiations before the shipments leaving China following the increase to a 25% tariffs rate reach the US.
If the 25% tariff rate remains in place for a while, Lumber Liquidators will likely see its margins take a significant hit though. The impact to margins in Q1 2019 from the 10% tariff rate was said to be around 200 basis points. Thus, the full impact of a 25% tariff rate may be another 300 basis points.
This could reduce the company's adjusted operating margins down to around 0% with a full year of impact from 25% tariffs. Lumber Liquidators is currently projecting adjusted operating margins of 1.9-2.4% with a 10% tariff rate, so if it is able to mitigate the impact of the increased tariffs by an additional 100 basis points, it would still only get to around 0% adjusted operating margins after subtracting 300 basis points for the impact of a move from 10% to 25% tariffs. That would the company's adjusted EBITDA at around $19 million and probably fairly close to breakeven cash flow.
I think it would be reasonable to say that Lumber Liquidators is unlikely to repeat the frenetic double-digits comparable store sales growth that it displayed six or seven years ago.
By 2014, Lumber Liquidators had already hit a bit of a rough patch, with comps down -4.3%. The negative publicity surrounding Chinese laminate flooring in March 2015 dealt a significant blow to Lumber Liquidators' sales and brand, and the company has found it challenging to rebuild sales after suffering that brand damage.
A couple years ago, I had generally assumed that Lumber Liquidators could achieve low-single digit merchandise comps growth as it recovered. Growth has been a bit slower than that assumption, as whatever growth it has achieved has mostly been from services.
Lumber Liquidators' recent business performance has been around what was expected, so I would reiterate my estimate that it is worth around $11.50 per share with 10% tariffs. The 25% tariff rate could reduce the company's adjusted operating margins down to 0% if it lasts for a quite prolonged period, and that could push the stock down into the single digits.
I'd probably consider taking a position in Lumber Liquidators if it fell to around $9, based on the assumption that the tariff issue will eventually be resolved and that the company appears able to operate at least around neutral cash flow even with 25% tariffs. Then, when the tariff issue is eventually resolved, Lumber Liquidators should be a pretty lean and efficient company.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.