Lumber Liquidators received a huge boost today after Cantor Fitzgerald analysts upgraded it from Hold to Buy and raised their price target from $15 to $18 per share. This week’s upgrade follows their downgrade in May ¯\_(?)_/¯ .
The stock remains an embattled one although the company has clearly made some progress toward fixing the damage caused by a report on 60 Minutes earlier this year. Shares of Lumber Liquidators climbed as much as 6.96% to $15.20 per share in early trading this morning after the upgrade.
Lumber Liquidators appoints new compliance officer
Analysts Laura Champine and Jason Smith said they became more positive on Lumber Liquidators’ progress after touring the company’s stores. They also noted that this week, the flooring retailer appointed a new chief compliance and legal officer who has 30 years of experience in compliance, naming Jill Witter to the post.
In the past, she has worked in similar roles at the forest resources division of International Paper and Rayonier, a timberland real estate investment trust. Her experience at both of these companies will lend itself quite well to her work at Lumber Liquidators as the company has gotten into trouble after reports that its Chinese-made laminate flooring contained formaldehyde levels that were higher than those set forth in national and California state guidelines.
Shoppers returning to Lumber Liquidators?
Following those allegations, the company claimed that 60 Minutes did not use the proper testing methods, but the damaging had been done. Shoppers started to steer clear of its stores, sending sales into a downward spiral.
However, that could be changing, according to the Cantor Fitzgerald team. They visited some of Lumber Liquidators’ stores and said there appears to be some momentum growing on the top line. 60 Minutes reran the report that caused all the problems for the flooring retailer on Tuesday, and Champine and Smith think that rerun had a very limited impact on sales. The first time that report aired was on March 1.
Still some barriers to overcome
Lumber Liquidators still has to deal with regulatory and legal problems related to the report and an investigation that was launched after that report. However, the Champine and Smith think the downside risk “has been more than priced in” and that the stock looks “washed out” to them in the wake of its performance so far this year. Shares have tumbled by almost 80% since the beginning of the year.
One thing they believe the flooring retailer will benefit from is a “rationalization of SKUs.” The company also appointed a new head merchant, Marco Pescara, to the role in June, and one of his first decisions was to reduce the number of SKUs offered in stores.
The Cantor Fitzgerald team thinks this is the right move because it should make it easier for Lumber Liquidators to focus more on its core products of value-priced flooring. Among the SKUs expected to be eliminated are multiple SKUs of the same product in similar colors and SKUs in related but non-core categories like tools. They also believe updates and improvements to the company’s stores will improve the shopping experience and boost sales.
The analysts think their previous projections for gross margins were too conservative because they had lower expectations for the 2017 to 2019 time frame due to the volatility in the near term. However, they think the current efforts will turn things back around and are now expecting gross margins to expand 240 basis points between next year and 2019. Their previous estimate was for 150 basis points of expansion.