A horrific quarterly earnings report, a CFO leaving, and the announcement of a Justice Department investigation have shares of flooring retailer Lumber Liquidators Holdings Inc (NYSE:LL) falling through the floor.
Lumber Liquidators reported a net loss of $7.8 million and 29 cents per share for the first quarter, compared to a profit of $13.7 million and 49 cents per share in the same quarter a year ago. Analysts were expecting earnings of 15 cents per share.
Revenue rose 5.6% from last year, coming in at $260 million.
Same-store sales dropped 1.8%, but cratered 17.8% just in March following a March 1 report by television’s 60 Minutes that claimed LL sold laminate flooring containing formaldehyde at levels well above California health limits.
LL management disputed the 60 Minutes report, but it certainly played a factor in March’s same-store sales. During the month LL experienced a 6.5% decrease in the average ticket and an 11.7% drop in the number of invoices.
Wall Street was expecting a massive drop, as earnings estimates were cut to 15 cents and revenue expectations were sliced to $259 million, but the Street certainly wasn’t expecting LL to post a loss.
The next blow to the stock came as LL announced that Daniel Terrell, the CFO since 2006, would be leaving in June. While each case needs to be looked at separately, it usually is seen as a red flag by shareholders when any top executive leaves in the middle of a scandal.
Lastly, buried in the LL SEC filing, the company announced that it was facing criminal charges from a federal probe regarding its wood flooring products. The Justice Department investigation centers around alleged violations of the Lacey Act, which prohibits trade of plants, wildlife and fish that have been illegally taken, transported or sold.
LL revealed in the SEC filing that it was served with search warrants in September 2013 and expects to spend $10 million defending itself from the possible charges, not including the cost of any penalties or fines.
So even if LL escapes criminal charges, this DOJ case alone could cost LL a full quarter of net earnings just in legal fees — if LL is vindicated from the allegations levied in the 60 Minutes report, and if management can turn around public perception.
The road ahead for Lumber Liquidators stock is certainly going to be rocky. Remember the earnings reported today were terrible after just one month of bad sales due to the 60 Minutes story. The results for the second quarter will likely be worse.
Investors should expect earnings to remain in the red for the foreseeable future, if not eternity.
The stock is down 20% today and 70% over the last 12 months. If you have owned the stock during either of those periods, you have felt enough pain. Sell now before things get any worse.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
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