Lumber Liquidators management read a prepared statement during their business update on Thursday, leaving analysts and investors disappointed that they didn’t take any questions. They promise that answers to emailed questions are coming, but in the meantime, analysts have plenty of things to say about what they said.
Did Lumber Liquidators respond well?
Thursday’s conference call and webcast were aimed at doing damage control in response to the 60 Minutes report that suggested the company’s flooring products were not in compliance with California Air Resources Board (CARB) regulations. While early responses were fairly negative, analysts today are saying that management scored some good points.
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Stifel analysts John Baugh and Dillard Watt reinstated their Hold rating on Lumber Liquidators after the business update. They think things aren’t as bad as initially thought. Comparable store sales did fall 13% after the 60 Minutes report, but they had been concerned that all of the company’s flooring products would see a decline. However, they believe sales of Lumber Liquidators’ non-Chinese-made flooring weren’t affected.
Morgan Stanley analysts Simeon Gutman and Joshua Siber said that overall, they believe Lumber Liquidators management did fairly well. The company did not admit fault, but they think the move to provide free tests to customers could be interpreted as admitting some problems with the quality of the products, at least indirectly. However, they also think the move is important because it could help Lumber Liquidators repair its relationships with customers.
Limited financial risks to Lumber Liquidators
The Stifel team thinks the flooring company has a good legal defense regarding the testing method that was used. Only tests of the core board matter, and 60 Minutes used the deconstructed method. They say if Lumber Liquidators is able to document that its core boards are within the regulations for formaldehyde content, then the financial risk is small.
However, they don’t believe that the manufacturing process has such a major impact on the core boards. They note though that this may not matter much when it comes to Lumber Liquidators stock.
Not much visibility
In their report, Evercore ISI analysts Greg Melich and Oliver Wintermantel said their bear case scenario for the company’s stock falls from $30 to $24 per share. The reason for this is because we don’t know what kind of long-term impact the formaldehyde issue may have on the flooring retailer. Their bear case assumes comparable store sales fall into the low teens and earnings are less than $2 per share in 2016.
However, in the long term they believe shares will move higher, and their base case is $40 per share. They have a Hold rating on Lumber Liquidators.
Raymond James analyst Budd Bugatch and associates David Vargas and Bobby Griffin were disappointed that management didn’t provide any “quantification of the number of shipments it may have refused and/ or the number of unannounced inspections it made to its Chinese sources.”
Lumber Liquidators to be hit by some effects
One thing can be sure about Lumber Liquidators in the near term, and that is the company is going to have to spend some money dealing with the fallout from the formaldehyde issue. Between legal fees, testing of past customers’ floors and replacing some floors, the costs are going to add up.
The company estimates that replacing laminate flooring in affected homes will cost between $3,000 and $4,000 per home. Chinese-made laminate flooring makes up only 10% of the company’s overall sales, down from 16% in 2011, according to Evercore.
2015 may not matter to investors
The Morgan Stanley analysts said they don’t think investors will care much about Lumber Liquidators’ 2015 results. They expect earnings per share to pick up again next year even though the company’s gross margins will be “structurally” lower. They’re estimating a hit of 50 basis points if Lumber Liquidators moves its sourcing away from China and to Europe and the U.S.
They continue to rate the flooring retailer at Equal-weight.
Lumber Liquidators estimates cut
The Morgan Stanley team cut their estimate for earnings per share to $1.70 for this year. The Stifel team slashed their estimate from $2.77 per share to $1.84 per share. The Raymond James team also cut their estimates for Lumber Liquidators, reducing their earnings per share estimate for 2015 from $2.85 to $1.50 per share.
Shares of Lumber Liquidators pulled back in premarket trading this morning, falling as much as 5.88% to $33.96 per share, undoubtedly pleasing short-sellers in the process.