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Why Lumber Liquidators Holdings Stock Crashed 11% in January, and Continues to Tank

Neha Chamaria, The Motley Fool

What happened

After a staggering run-up of 99% in 2017, shares of hardware flooring retailer Lumber Liquidators (NYSE: LL) are finding it hard to keep the momentum going. Lumber Liquidators tumbled 11% in January, according to data from S&P Global Market Intelligence, leaving investors wondering if the stock has lost steam.

Lumber Liquidators has already dropped another 9.8% so far this month, as of the time of this writing. What's going on?

So what

2017 was a transformational year for Lumber Liquidators, as it left behind the ghosts of a scandal that involved its Chinese-made laminate flooring for potential health hazards. The company confirmed that its efforts to salvage any damage to its reputation and sales were paying off when it reported strong profit numbers for its second quarter in August last year, sending the shares soaring 51.9% during the month.

By October, Lumber Liquidators reached a settlement of $36 million, partly in cash and partly in the form of store-credit voucher, to settle the class action lawsuits. The stock, however, continued to be volatile as the company reported a surprise loss for its third quarter on Oct. 31, to some extent because of the legal expenses tied to the lawsuits.

Various parquet wood flooring swatches in different colors fanned out on the floor.

Image source: Getty Images.

Nonetheless, Lumber Liquidators ended 2017 with a hefty 99% gain. Unfortunately, investors don't appear to be confident just yet about management's growth plans, which is why the stock gave up 11% in January despite lack of any company news. Or put another way, investors simply took some profits off the table after the stock's huge rally last year.

The drop in Lumber Liquidators stock in February, though, was triggered by another reason: a massive analyst downgrade.

Now what

Investment firm Wedbush just downgraded its rating on Lumber Liquidators stock from outperform to neutral and slashed its price target on the stock to $28. As of this writing, the stock has already tumbled below $25 after the news.

Wedbush isn't confident about Lumber Liquidators' prospects, thanks to decelerating sales growth, rising interest rates, and higher promotional costs amid stiff competition, especially from heavyweights like Home Depot that are experiencing strong sales momentum in flooring as they push for chemical-free, greener products.

Whether Lumber Liquidators shares can rebound now depends a great deal on what the company has to offer in terms of its outlook for 2018 and beyond later this month when it reports its fourth-quarter and fiscal 2017 numbers.

It's imperative that management chalks out firm plans to not only grow margins to beat the competition but also regain lost customer confidence after the scandal and increase its store footfalls. Unless investors have better visibility into the flooring specialist's future, the stock could continue to feel the heat.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lumber Liquidators. The Motley Fool has a disclosure policy.