Lumber Liquidators' Q2 Earnings Plunge on Weak Traffic

Zacks

Lumber Liquidators Holdings, Inc.’s (LL) second-quarter 2014 earnings per share of 60 cents came in line with the Zacks Consensus Estimate, but fell 17.8% year over year. Though net sales increased 2.3% year over year to $263.1 million, it fell short of the Zacks Consensus Estimate of $275 million.

Per the company, weaker-than-anticipated traffic coinciding with macroeconomic headwinds pertaining to residential remodeling wreaked havoc on its quarterly performance. A dip in demand for wood flooring and low inventory levels in many of the company’s key merchandise categories, were the main reasons behind the decreased traffic.

Comparable-store net sales decreased 7.1%, along with a 5.3% reduction in number of customers invoiced and 1.8% fall in average sales. Moreover, sales continued to reel under the after effects of bad weather. The impact was felt severely across 131 outlets resulting in a 12.9% decline in comps.

Gross profit remained almost flat at $106.2 million whereas the gross profit margin shrunk 90 basis points (bps) to 40.4%. Constrained inventory levels led to an unfavorable sales mix causing the contraction in margins.

Lumber Liquidators’ operating income decreased 17.9% to $27.2 million while operating margin as a percentage of net sales contracted 260 bps to 10.3%.

Selling, general and administrative (SG&A) expenses rose 8.3% to $79.1 million in the quarter while SG&A expenses as a percentage of sales increased 170 bps to 30.1% attributable to higher legal, professional, occupancy and advertising expenses.

Balance Sheet and Cash Flow

Lumber Liquidators, which competes with Lowe's Companies Inc. (LOW), The Home Depot Inc. (HD) and Builders FirstSource Inc. (BLDR), ended the quarter with cash and cash equivalents of $48.1 million as compared with $80.6 million as of Dec 31, 2013. During first half, Lumber Liquidators generated $28.1 million in cash from operations.

For the first half, capital expenditures were $28.3 million, up significantly from $6.8 million recorded in the year ago period. The rise in expenditure was related to property and equipment for new distribution centers as well as expansion and remodeling of stores.

Further, Lumber Liquidators’ bought back 246,000 shares for $20.7 million in the quarter.

Guidance

Lumber Liquidators has reiterated its earnings and sales guidance for 2014, having already lowered its outlook earlier this month. For 2014, sales are expected to be in the range of $1.05 billion to $1.10 billion, from the earlier expectation of $1.15 billion to $1.20 billion.

Comps will be in low single digits (positive or negative) as against earlier projection of increases in mid to high single digits. Consequently, earnings per share are now expected to be in the range of $2.65 to $3.00, down from the earlier projection of $3.25 to $3.60.

Moreover, Lumber Liquidators has curtailed its expansion plans such that it now intends to open 33–37 stores as against the previous expectation of 35-40 stores. Further, remodeling plans have also been scaled down to include 15—20 stores versus 25–30 outlets projected earlier.

Operating Margin is anticipated in the range of 12.9%–14.5% for the remaining year. Management expects SG&A expenses to rise within 8%—12% year over year in the second half.

Currently, Lumber Liquidators holds Zacks Rank #5 (Strong Sell), indicating the disappointing bottom-line performance, lower-than-expected top-line and cautious outlook.

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