Lumber Liquidators (LL) is in need of a catalyst to push (and keep) its stock into the double digits again. Two potential catalysts include improved sales results and the removal of tariffs. The company can influence the former, but the latter depends on external forces. Lumber Liquidators has been unable to move the needle much with regard to sales in the last couple years though, with 2018’s positive comps driven by lower-margin installation revenue and 2019’s comps slightly negative (up to Q3 2019) as installation growth slowed.

Stagnant Sales

Lumber Liquidators has been dealing with stagnant sales for a while. It did have modestly positive comparable store sales growth in 2018, but that was fueled by a large increase in installation revenue, which has lower margins than merchandise. Margins on services have typically been around 25-26%, compared to 37-38% for merchandise. Merchandise comps and customers invoiced in comparable stores were both slightly negative in 2018, and this has gotten a bit worse in 2019.

In 2018, the company reported +2.6% comparable store sales growth, with merchandise comps down -0.6% but installation comps up +41%. It also saw a -0.8% decrease in customers invoiced in comparable stores during the year.

For the first three quarters of 2019, Lumber Liquidators’ comparable store sales growth would have been approximately -0.6% after adjusting to take out the estimated negative sales impact of the network security incident. Its adjusted merchandise comps would have been -1.5% and its installation comps would have up approximately +8%, while customers invoiced in comparable stores would have probably decreased by around -3% with the adjustment.

This paints a picture of a company that is having some challenges with growing its customer base. Lumber Liquidators’ average sale (in dollars) has been growing by low single digits per year, so that keeps its comparable store sales relatively flat even when customers invoiced in comparable stores decline by low single digits. However, the company’s growth in average sale value has also been helped by the increasing attachment rates for installation services.

With the rate of increase in services revenue slowing, Lumber Liquidators will probably need to keep its decline in customers invoiced in comparable stores under -2% in order to reach flat overall comparable store sales.

It would be a significant catalyst if the company can turn around its sales performance, but I haven’t seen any signs that it is able to do that yet. As a result, I am still modelling Lumber Liquidators with around flat comps.

The Tariff Issue

The other potential catalyst for Lumber Liquidators is a removal of the tariffs on Chinese flooring. The USTR ruling on tariff exemptions was a definite positive and should help mitigate the impact of 25% tariffs on the company. However, with 25% tariffs remaining on some Chinese imports, Lumber Liquidators probably is looking at around 3% operating margins with successful mitigation efforts.

This wouldn’t be a bad position for the company, as those margins would allow it to open 10-15 stores per year and still generate $10-15 million in positive cash flow after accounting for the extra inventory for those stores.

Full removal of the tariffs would be a major catalyst for Lumber Liquidators, but that remains unpredictable and uncertain.

Conclusion

At $9 per share, Lumber Liquidators is trading for close to 7x EBITDA based on flat comps and 3% operating margins. This is a relatively low multiple for the company based on its historical multiples, and suggests some upside if it can maintain flat comps and achieve those margins with partial 25% tariffs. There is some risk though that Lumber Liquidators sees slightly declining comps, with installation growth continuing to slow and customers invoiced continuing to decline in the low single digits.

The removal of the rest of the tariffs or sustained low- to mid-single digit positive comps could push Lumber Liquidators back up to $15, while both of those catalysts could result in the stock being worth $20+ again.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2020-01-14