Lumber Liquidators (NYSE:LL)

TMF1000 (99.77) Submitted: 7/11/2011 10:15:06 AM : Start Price: $18.60 LL Score: +11.34

Caps price $18.60
Sales were up 5.6%. Not great! But I believe they are taking market share. Their flooring products sales grew faster than Mohawk, who reported a decrease in flooring sales. Lumber Liquidators is more like Home Depot, in that they cater mostly to people that want to do home improvement projects. Home Depot sales were down 0.2% in the quarter. I think this is a common thread and perhaps clues us to the demographic most affected by the present economy. The present economy is better than 2008, but perhaps not as good as several months ago as oil prices went up over $105 per barrel. Oil prices are going back down, perhaps this will help this sector some. Regardless, it is going to be volatile until oil prices stabilize.
I don’t own Lumber Liquidators, but I am interested. The drop in price grabbed my immediate interest. They face many obstacles. Big box retailers like Home Depot and Lowes offer hardwood and laminates and they have the money to take market share from Lumber Liquidators. However, I don’t think they will be offering as many products as Lumber Liquidators. And they still buy from middlemen. But they are very conveniently located.

Lumber Liquidator, like Home Depot and Lowes, offer installation. The Home Store Services Company provides installation services for Lumber Liquidator, so they are a one stop shop from mill to installation.
LL is quickly building stores. They have an advantage. Their stores are smaller, cheap to open and they can open many of them in large or small markets. Their stores ramp up quickly and are profitable very quickly. They have opened 339 stores without picking up debt. That is always good.

Everyone knows about the housing market and unemployment. This isn’t an ideal business environment for them, but they did well during the recession. I am having a bit of a problem figuring out what is hurting them now. I don’t think they are losing market share to the big box retailers. Their overall sales are down, so it’s possible they share a common demographic with the big box retailers. If so, Home Depot might provide clues to how Lumber Liquidators is doing. It is interesting to note that Lowes sales were down slightly too.

Another obstacle – rising hardwood prices and wood in general. In a world where commodities prices were soaring, it has to affect the customer base served by Lumber Liquidators. This may be the main reason; LL is having trouble even though the recession is over. They did pretty well during the recession when commodity prices were much lower. Since the quarter was reported, lumber prices along with many other commodities fell significantly. It makes me think the second half of the year, may just be a good one.

The bad unemployment report caused oil to drop a few dollars. I am sure most commodities fell that day. And they were falling before the report. This should help them. I can’t get over how well they did during the recession only to be reeling now. I think the higher price for lumber is one possible reason. It may be the high oil prices just killed their transportation costs, or a combination of both. The higher prices for lumber could also negatively affect investors’ perception of the Company even if they have locked in good prices. I mostly think the demographic that buys at Home Depot, Lowes and Lumber Liquidator has been affected by the present economy.

I wrote this recently when commodity prices were much higher. They have dropped significantly since I wrote the post.

http://caps.fool.com/Blogs/turning-point/601485

Lumber prices have gone down significantly since April. Oil prices are lower too, trying to stabilize under $100 a barrel. It is important to keep an eye on lumber prices because there could be a point when it would hurt them. A person can put off replacing carpet with hardwood if hardwood becomes too expensive or the economy is weak. We want lower commodity prices. The high commodity prices discussed in the linked blog hurt many companies. It is a risk factor.

I have no conclusion. I can just say I am very interested in them. I think they have the potential to be a category killer. They are taking steps to make their business more efficient and I think once they have 500 stores up and running we will see a more efficient company. But they have to build those stores profitably and without picking up debt.
They have done a good job of protecting cash. They have $43 million in cash and no debt. The amounts vary from year to year, quarter to quarter, but they have kept it fairly steady. The $43 million is at the high end of their historic cash amount range.
They are at the low end of their price range, not value range but price range. I think we have a huge bull/bear battle. Bears are looking at the horrible industry while bulls see the possibility of a category killer in the making.

I love investing in leaders and Lumber Liquidator is the largest hardwood and laminate retailer. But the leader in a distressed industry can be a very scary place to invest. The Company may be able to build 1,000 stores in the U.S. There are over 13,000 retailers that sell carpet, flooring including hardwood products. Many of them will not be able to compete and Lumber Liquidator could fill the gaps. It is possible they could build far more stores, but I just don’t know yet. They have no saturated markets yet, so no way to really take a good guess. They are purposely placing new stores in new markets, preferring to spread out the stores rather than try to saturate any one area. Their small store approach is one way to get the wood closer to their customers. But they are still a very small store base company.

I think bulls believe that much of Lumber Liquidators problems are simply from growing pains. They are trying to grow their store base rapidly. I am sure they feel it important in order to compete in a world filled with Big-Box giants. Even though, they are the largest hardwood retailer today, doesn’t mean they don’t see the Big-Box threat. They had to invest in an SAP software system to keep them running efficiently and that caused immediate problems. Having a small store base makes it more difficult to reach customers in a world where gas prices are high. It is harder to get supplies from the mills – it takes money to ship these products and those charges go up with higher fuel prices. A larger more conveniently located store base would help.

I like leaders, but leaders in a weak industry can face problems. But they are affected by home remodeling activity, employment levels, housing turnover, real estate prices, new housing starts, consumer confidence, credit availability and the general health of consumer discretionary spending. No one can know the direction of these many complex economic issues that affect this leader. Carpet still makes up over 50% of the market. But their growth prospects are huge. As they execute provided they can, this could be a big winner, especially if the housing market improves.