Lumber Liquidators Seen Showing Strong Q1


After years in the basement, the flooring industry has started to move upstairs.

Flooring industry manufacturers' sales growth accelerated to 4.5% in 2012 from a 2.5% rate in 2011, says Piper Jaffray analyst Peter Keith, citing data from Catalina Research.

In this year's first quarter, flooring sales were up 4%. Hard-surface flooring, led by ceramic tile, resilient flooring and wood flooring, saw the biggest gain with an 8.3% increase.

Hardwood flooring, says Keith, is in the "sweet spot" of the flooring cycle.

Lumber Liquidators ( LL ), North America's largest specialty retailer of hardwood flooring, is not only reaping the benefits of the flooring industry rebound. It's also seeing a growth spurt of its own, thanks to ongoing initiatives in areas such as sourcing, advertising and merchandising overseen by CEO Rob Lynch, who took the helm in January 2012.

Earnings have climbed by at least 43% the last six quarters and sales have grown by at least 14%. If followers are on target, the company will show it stayed on the fast track when it reports first-quarter results Wednesday. Analysts polled by Thomson Reuters expect earnings to rise 45% to 42 cents a share. They see sales rising 15% to $215.40 million.

'Strong' Quarter

Keith says the company likely had a "very strong" first quarter.

"There was healthy momentum in the flooring industry coming out of 2012," he said. "Our research suggests that momentum likely continued through the first quarter. We think there's ongoing strengthening in the remodeling cycle and that flooring is in the sweet spot of that cycle."

SunTrust Robinson Humphrey analyst David Magee expects the company to deliver a "good quarter."

"They had a lot of momentum coming into the quarter," he said. "The company continues to benefit from the slow housing recovery as well as the company's own initiatives, which happen to have been so impactful to the firm the past year."

The solid showing analysts forecast for the first quarter would follow a strong fourth quarter. Earnings climbed 67% to 50 cents a share. Sales rose 21% to $210.7 million.

Same-store sales increased 13.2%, driven by a 9.1% increase in the number of customers invoiced.

The initiatives Magee refers to include efforts to improve sourcing, such as going to direct sourcing from the mills, an approach that reduced costs.

Lower product costs due to sourcing initiatives and lower transportation costs helped lift its gross margin to 38% in 2012 compared with 35.3% the prior year. Operating margin increased to 9.6% in 2012 from 6.2% in 2011.

On the advertising front, Lynch's strategy has been to expand the company reach and target audience from its core customer, the experienced do-it-yourselfer, to include the more casual homeowner who may need more help and handholding. The more casual do-it-yourselfers have a contractor help them or have Lumber Liquidators assist with setting up the installation.

It's also expanded its merchandise assortment to include more of everything needed to complete a flooring project, including the tools to remove, repair and maintain the flooring and enhance it with complementary moldings and accessories.

Magee says accessories carry a somewhat higher margin and are a nice addition to the average ticket size.

There are more initiatives on tap for 2013. Among them is an effort to step up ad spending, says Keith.

"They feel it's an improving industry backdrop," he said. "So why not increase advertising to accelerate market share gains?"

Keith says one growth driver, though in its early stages, is a new store format the company calls the "store of the future." The format expands the selling space of its traditional stores by 50% to roughly 1,500 square feet, Keith says.

The extra space allows the company to offer more products, including a broader assortment of tools, moldings and some new items such as area rugs on hanging racks.

Keith says the company only has a few stores remodeled in this format now. All 25 to 35 new stores slated to open in 2013 will be in this format, he says, and it will also remodel 20 to 25 existing stores in this style. That means by the end of 2013, the company should have roughly 45 to 60 stores in the new format or roughly 15% of its store base.

Keith says while the company hasn't disclosed anything on paper, it seems the stores should be "quite successful."

Lumber Liquidators has more than 290 locations. The company features more than 340 first-quality flooring varieties, including solid and engineered hardwood, bamboo, cork, laminate and resilient vinyl.

Remodeling Pickup

The climate for its business is heating up. Keith says we started to see a "modest" pickup in home remodeling around the middle of last year with activity strengthening as the year progressed and into 2013. He expects it to continue to strengthen for at least the next six months and should continue to remain healthy into 2014.

There was very little remodeling activity completed from 2008 through 2011, he adds. So there's a lot of pent-up demand that now is coming back to the market. An improvement in the job market and in consumer confidence have helped spur larger-ticker remodeling activity, he says. Home-price stability and appreciation have also helped drive the activity.

Keith says his research indicates a strengthening in the home remodeling cycle with more and more homeowners looking to increase their spending on remodeling over the next 12 months. Flooring is tied with painting as the highest-priority home improvement project.

Analysts polled by Thomson Reuters see full-year earnings rising 28% to $2.15 a share. They expect a 21% gain in 2014.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: LL

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