Lumber Liquidators: Another Quarter Of Strong Growth
Summary
- Lumber Liquidators posted a second consecutive quarter of double-digit growth.
- Operating margins ended up at 6.2% for Q4 2020 and may come under additional pressure in 2021.
- It should be able to keep sales around 2H 2020 levels, but its growth rate is less certain once the industry slows down.
- Floor & Decor posted comps that were around 11% higher than Lumber Liquidators.
- Comps should remain strongly positive in the first half of 2021.
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Lumber Liquidators (NYSE:LL) posted another quarter of double-digit comparable store sales growth with the help of the boom in home renovations. It should continue to post strong year-over-year growth in the next couple quarters, but then runs into tougher comps in the back half of 2021. There may also be some gross margin pressure due to factors including tariffs, transportation costs and raw material costs.
Lumber Liquidators appears to be fairly priced in the mid-$20s for a slowdown in sales growth (with sales stabilizing around 2H 2020 levels or slightly higher) along with lower (4% to 5%) operating margins though.
Q4 2020 Results
Lumber Liquidators had a strong second half after COVID-19 affected its sales in late March through into Q2 2020. It reported +10.5% comparable store sales in Q4 2020, after reporting +10.9% comps in Q3 2020. This helped boost its full year comps up to -0.5%, as it recaptured most of the sales lost due to the earlier disruption. Lumber Liquidators had originally projected low-single-digit comparable store sales growth for 2020.
Lumber Liquidators also reported solid 38.1% adjusted gross margins and 6.2% adjusted operating margins. The reinstatement of Section 301 tariffs are starting to affect its margins somewhat though and will likely affect its margins more in 2021.
Comparable Store Sales Trends
Lumber Liquidators has seen double-digit comparable store sales growth during the past couple of quarters as it continues to benefit from strength in the overall flooring industry.
However, the gap between Floor & Decor (FND) and Lumber Liquidators expanded. In Q3 2020, Floor & Decor's comps were 7.5% higher than Lumber Liquidators. In Q4 2020, Floor & Decor's comps ended up 11.1% higher than Lumber Liquidators.
| Comps | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 |
| Floor & Decor | 2.4% | -20.8% | 18.4% | 21.6% | 5.5% |
| Lumber Liquidators | -0.9% | -21.3% | 10.9% | 10.5% | -0.5% |
The increased gap may be partly due to the tougher comps in Q4 2020, as Lumber Liquidators saw a roughly 3% impact to Q3 2019 sales due to a network security incident. As well, Lumber Liquidators had some supply chain challenges caused by the combination of strong demand and constraints with freight and raw material availability. It believes that Q4 2020 sales could have been stronger with higher inventories.
Thus the gap in relative performance for Floor & Decor and Lumber Liquidators is probably unchanged between Q3 2020 and Q4 2020 after adjusting for the network security incident's effect on prior-year sales.
Floor & Decor indicated that YTD sales as of late February were up +24%. I'd thus expect Lumber Liquidators to be up near +15% for Q1 2021.
Margins And Valuation
Lumber Liquidators expects some headwinds to its gross margins in 2021. It mentioned tariffs, transportation and raw material costs to all be headwinds to its gross margins. While it is attempting to mitigate these cost increases, I'd assume that its adjusted operating margins will decline a bit from the 6.2% it reported in Q4 2020. I am continuing to model its operating margins in the 4% to 5% range in the longer run. This would support a valuation in the mid-to-high $20s per share. A 1% change in long-term operating margins from that level would affect Lumber Liquidators' estimated value by approximately $4 per share at a similar sales level to the second half of 2020.
Conclusion
Lumber Liquidators delivered a second quarter in a row of strong comparable store sales growth, and I'd expect that to continue some more in the first half of 2021. Floor & Decor indicated that its Q1 2021 comps (by late February) were trending a couple points better than Q4 2020 comps, and with the end of Q1 2020 (and Q2 2020) taking a hit from the pandemic, the year-over-year comparison gets easier. Thus based on Lumber Liquidators' relative performance, I could see it doing +15% comps in Q1 2021 and +35% to +40% comps in Q2 2021.
However, beyond Q2 2021, the year-over-year comparison gets tough, and Lumber Liquidators will probably do well to hold comps flat year over year in the second half of 2021. It also faces some margin pressures due to a variety of factors such as tariffs, transportation costs and raw material costs. Lumber Liquidators will see a boost once tariffs are removed, but so far there isn't any hurry to lift the Chinese import tariffs. I'd consider Lumber Liquidators fairly priced currently, but would look for an entry point in the low-$20s.
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