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Lumber Liquidators Holdings (LL): Zacks Rank Buy

Zacks Equity Research

Lumber Liquidators Holdings Inc. (LL) recently posted robust second quarter results, including year-over-year earnings growth of 126.3% and a positive earnings surprise of 48.3%. Such results prompted this specialty retailer of hardwood flooring to raise its full year guidance.

The strong results and upbeat outlook helped this Zacks #1 Rank (Strong Buy) reach a new 52-week high of $43.51 on July 26, before closing at $42.55. So far this year, LL has amassed an impressive return of 144.8%.

Fabulous Quarter, Upbeat Guidance

On July 25, Lumber Liquidators announced second quarter earnings of 43 cents per share, topping the Zacks Consensus Estimate of 29 cents and increasing substantially from 19 cents in the previous year. The improvement was on the back of strategic initiatives undertaken by management, which include augmenting the top line, driving traffic and optimizing the supply chain.

Net sales jumped 19.9% over the prior-year quarter to $210.3 million, and surpassed the Zacks Consensus Estimate of $196 million. Comparable-store sales grew 12.4%, supported by a 5.8% rise in the number of customers. Gross margin expanded 330 basis points (bps) to 37.3%, benefiting from lower product and transportation costs. Operating margin grew 450 bps to 9.4%.

Buoyed by better-than-expected results, management raised its full year sales guidance to between $750 million and $775 million from the earlier outlook of $720 million to $750 million. Comparable-store sales are now expected to rise in the mid-single digits. Earnings are projected between $1.30 and $1.42 per share, up from the previous range of $1.10 to $1.25. The company expects to open 20-25 new stores over the course of the year.

Decent Earnings Estimate Revisions

In the past 7 days, the Zacks Consensus Estimate for 2012 rose 13% to $1.39 per share on the back of upward revisions in 4 out of 5 estimates. The current estimate, which lies close to the high end of management's guidance range, implies a year-over-year growth of 49.9%.

For 2013, the Zacks Consensus Estimate is $1.49 per share, exhibiting an increase of 2.1% in the last 7 days, aided by 3 upward revisions out of 11 estimates. The current estimate suggests a year-over-year growth of 7.2%.

Valuation Reflects Fundamental Strength

Lumber Liquidators currently trades at a forward P/E of 30.5x, reflecting a 33.4% premium to the peer group average of 22.9x. Also, on a price-to-book basis, shares trade at 5.5x, a substantial premium to the peer group average of 2.1x. Given the company's compelling fundamentals, the premium valuation is justified and well supported by its long-term estimated EPS growth rate of 17.5%.

With respect to return on equity (:ROE), the stock looks attractive. It has a trailing 12-month ROE of 13.8%, which is above its peer group average of 12.9%. This implies that the company reinvests its earnings more efficiently than its peer group.

Chart Echoing Strength

Shares of Lumber Liquidators had been trading in the range of approximately $17.00 to $34.00 since the beginning of this year. It broke that range on July 25, when shares soared 26.8% on stronger-than-anticipated second quarter results. The stock has been consistently trading above its 200-day moving average since January 17, 2012. It has also remained above the 50-day moving average since February 23, 2012.

Volume is fairly strong, averaging roughly 684K daily. Lumber Liquidators, which competes with Lowe's Companies Inc. (LOW) and The Home Depot Inc. (HD), has outperformed the S&P 500 since the end of February 2012. The year-to-date return for the stock is 144.8% compared with the S&P 500's return of 6.5%.

Founded in 1994 and headquartered in Toano, Virginia, Lumber Liquidators Holdings operates as a multi-channel specialty retailer of hardwood flooring and hardwood flooring enhancements and accessories. The company operated 277 stores across 46 states in the U.S. and 7 outlets in Canada, as of June 30, 2012. The company has a current market cap of $1.17 billion.

LUMBER LIQUIDAT (LL): Free Stock Analysis Report

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