Stop us if you’ve heard this one before:
looks interesting here.
The flooring retailer has had a hellish ride over the past few years with several false starts. Two years ago, the stock surged by 36% in one day after it reported a quarterly profit for the first time in years. It has had many more double-digit selloffs than rallies, with moves following earnings averaging a gut-wrenching 14% since the February 2015 “60 Minutes” exposé that nearly destroyed its business. The company was accused of selling flooring with unsafe levels of carcinogenic formaldehyde and has paid out massive legal settlements.
If all goes well this year, though, Lumber Liquidators will report its first annual profit since 2014. The 23 cents a share it is expected to eke out pales in comparison to the cumulative per-share losses of $7.82 in the previous four years, but profitability alone isn’t the reason to get excited. Instead, it is the fact that its legacy legal issues are mostly behind it, including a deferred prosecution agreement, class-action legal settlements and other regulatory fines and sanctions.
That is freeing up management to build new stores, tackle costs and, most importantly, deal with the 25% tariffs the U.S. has slapped on vinyl flooring imports from China, the main supplier of such products. Those tariffs are only now working their way into results given the slow inventory turnover typical of the flooring industry, but they could give buyers sticker shock. The company took this into account when it reported quarterly results last week, downgrading its sales growth estimate to “mid single digits” from “high single digits” for the year.
The stock plunged another 10% and is off by nearly 86% over the past five years. Such are the perils of a “show me” stock that doesn’t put on a show. That 35% of the retailer’s available shares are sold short and that 90% of analysts polled by FactSet have a “Hold” rating on the stock isn’t surprising. But investors with a stomach for volatility might want to wager on the next surprise being a positive one.
Slowing store traffic and tariffs are concerns, but they are known factors. The question, now that big payments for legal claims seem to be done, is how much of a margin of safety is built into the stock. It appears substantial, based on a multiple of enterprise value to forward sales of just 0.4 times, compared with an average of almost 1.9 times for its four closest publicly traded competitors.
While tariffs may hurt, they also will pinch competitors, particularly smaller specialty flooring stores that control about 42% of the U.S. market.
Floor & Decor Holdings
which commands a far richer multiple, has nearly doubled revenue and operating income over the past three years as Lumber Liquidators has stumbled.
While Lumber Liquidators can’t soon return to the 15% compound annual revenue growth rate it enjoyed leading up to the scandal, it does seem to have stopped the bleeding and it is now opening stores more quickly. Its competitors’ success and the intense skepticism surrounding the tarnished retailer make for a potentially lucrative bet that it can at least pick itself up off the floor.
Write to Spencer Jakab at email@example.com
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