LL Takes a Wallop
As I predicted in my last article, Lumber Liquidators (LL) underperformed a rosy consensus in Q2, resulting in share price falling below $10. The company blamed growing macroeconomic headwinds in the form of tariffs and softening consumer appetite, reducing full-year sales guidance to low single-digit percent growth. Consensus EPS for Q3 are likely to disappoint again, and the company probably won't break even in 2019.
However, we found much to encourage in this quarter’s results, including margin resilience amidst higher tariffs, the continued growth of its installation segment, and tacit efforts to shift production out of China.
We are comfortable initiating a long-term position in the stock at its current price of ~$8, as of Thursday night. However, due to unrealistic consensus estimates and foreboding macroeconomic trends, the stock may have a bit further to fall.
As the Market Broods, See the Silver Linings
Lumber Liquidators disappointed investors with weak earnings and lower than expected revenue. The company recorded its highest-ever revenue in Q2, but missed an optimistic revenue projection by about 1%. The company also reduced guidance to low single-digit sales growth. In line with previous quarters, LL ran a loss but was in the black by its non-GAAP measurement, which excludes costs and gains related to its legal quagmires.
I was not surprised by the revenue miss or the guidance adjustment to a more realistic figure. What impressed me about these results was the company’s ability to preserve gross margins despite rising tariff costs. As management warns, margins will take a bigger hit as more expensive Chinese inventory flows through to the income statement in Q4 and beyond. However, the company’s pride in its cost mitigation efforts is warranted, as they’ve hitherto managed to offset nearly the entire tariff impact with deft cost management.
