Shares in Lumber Liquidators Holdings Inc (NYSE:LL) showed signs of life Thursday on a better-than-expected sales report, but even after losing more than half its value, LL stock isn’t set for recovery just yet.
After all, “better than expected” isn’t the same thing as good, especially when profitability is under threat from falling margins.
As was widely expected, LL stock took a huge hit to sales in March after it disclosed it was about to be the target of a TV news program. Soon after, 60 Minutes aired a segment in which it accused LL of selling laminate flooring from China that didn’t meet emission standards for formaldehyde, a chemical know to cause cancer.
Lumber Liquidators vigorously denied the charges, but that did nothing to stanch the flight from its stock. Indeed, LL stock lost as much as 60% from its pre-60 Minutes report peak, and still is down more than 50%.
Whenever a stock takes this kind of a beating, you have to figure there’s at least a chance that it has been overdone and there’s a bargain to be found. That tends to be even truer when the selloff is driven by the kind of headline risk generated by a program as well-known as 60 Minutes.
In this case, however, it’s not clear that the selloff created anything worth a commitment of fresh capital.
It’s one thing when a stock craters on a knee-jerk market overreaction. It’s another matter entirely when a stocks gets crushed and stays there for a month, as has been the case with Lumber Liquidators.
Besides, the damage done to LL sales was still severe, and now Wall Street analysts are worried about profitability too.
Lumber Liquidators Bends, Doesn’t Break
For the first three months of the year, Lumber Liquidators said revenue actually rose. The top line gained 5.6% to $260 million. True, that was short of Lumber Liquidators’ own forecast for sales of $265.6 million, but it beat analysts’ average estimate of $258.6 million, according to a survey by Thomson Reuters.
March results were another story after the 60 Minutes segment aired in the very beginning of the month. Lumber Liquidators reported a sales drop of 13% to $89.4 million for the month.
Even worse, same-store sales — a key measure of a retailer’s health — fell 1.8% for the quarter and 18% in March.
Slumping same-store sales, price cuts and increased marketing expense are going to weigh on margins in the first quarter, Lumber Liquidators said. The company expects gross margin to fall to a range of 35.5% to 36.5% from 41.1% a year ago. That’s a seriously steep contraction in profitability.
Most importantly, there was nothing in the Lumber Liquidators business update to fire up the stock in some kind of relief rally. By midday, LL was up a modest 4%.
Even if it was just a one-day trade, a stock beaten down as far as Lumber Liquidators doesn’t take much in the way of good news to get a quick — if brief — pop. After all, the kind of heavy short interest seen in LL stock usually acts as kindling for a short squeeze on any hint of positive news.
Bottom Line
As tempting as it may be to see Lumber Liquidators as rebound play, we’re not there yet. No one knows yet how the scandal is going to carry into the second quarter — or what a federal investigation may bring.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
