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Lumber Liquidators: What Nobody Is Talking About


Weak quarter proved that company's image has been tarnished by scandal.

Even after adjusting for legal/professional fees, operating profits are negative due to loss of Chinese laminates, the highest-margin product.

These struggles are occurring during a period of supposed housing strength. We argue the market is a bubble, and that the company is more exposed than most to a correction.

Lumber Liquidators' (NYSE:LL) poor quarter confirmed what many investors expected. The controversy surrounding LL's Chinese laminate products has tarnished the firm's reputation, and hurt the company on the revenue and expense side. Same-store sales fell 13.9% on a 13.8% decline in customer traffic, pushing gross margin down almost three percentage points y/y to 32.6%. At the same time, SG&A as a percentage of revenues increased from 37.5% to 50.2% (an incremental increase of 20%), as a result of legal, professional, and settlement fees mainly related to the Chinese laminate controversy. Excluding these charges, SG&A would have been $87.7 million, which equates to 37.6% of sales, in Q1 2016 and $83.2 million (32% of sales) in 2015. Thus, even absent these expenses, the company did not generate a profit from operations. The scandal is devastating for LL because Chinese laminate products were the company's highest-margin items, and accounted for a significant portion of sales (~16% in 2015). Now that customers have shunned these products, we do not see how LL will be able to expand margins back to profitable levels. Furthermore, the company's legal and professional charges should not be dismissed as one-time items, as the company will continue to incur similar expenses in the years to come. Now that customers associate Lumber Liquidators with cancer-inducing products, it is unlikely the company will turn things around anytime soon.

But what nobody is talking about is that these results are occurring during a period of supposed strength in the housing market. Many retailers, such as Home Depot (NYSE:HD), Lowe's (NYSE:LOW) and others, continue to report strong comps growth and promising forward guidance. In its latest conference call, Home Depot reported US same-store sales growth of 8.9%, and expected total comps growth of 4.5% for 2016. Explains CEO...