Lumber Liquidators (LL) found it a lot harder to liquidate its lumber during the second quarter–and its weakness is hitting shares of Home Depot (HD) and Lowe’s (LOW) today as well.
Bloomberg News The reason: Lumber Liquidators said that second quarter earnings would come in between 59 cents and 61 cents a share, well below forecasts for 90 cents, as same-store sales fell 7.1%.
Raymond James’ Budd Bugatch and team are “waiting for the dust to settle” at Lumber Liquidators:
We felt like management spent its call trying to rationalize reasons for the weaker than expected results. After all, on its 1Q call, management exuded confidence that 1Q's results were totally weather related and that early order indications heading into the April sale gave it belief that consumers were ready to get back to work on delayed projects. As such, it left FY14 guidance intact. Now, management hypothesizes that the strong early 2Q orders and sales were, in fact, pent-up demand; but that the purchase cycle was interrupted by the bad weather. We are not convinced. While we are very respectful of the Lumber Liquidators business model (excellent operating and capital returns); it is a big-ticket business with attendant volatility. Management noted that the difference in 2Q sales between stores weather-affected (131) and those not (206) was "~1 transaction per store every other day." So, despite the attraction of the model, there are times when results can and will be different than expected, making it a challenging public equity. To us, this reinforces our value bias to buying and owning Lumber Liquidators…
For now, we are keeping our Underperform rating on Lumber Liquidators intact, waiting for the dust to settle after management's 2Q14 business update press release and late afternoon conference call.
Deutsche Bank’s Mike Baker and Adam Sindler see tougher times ahead for Home Depot and Lowe’s following the bad news from Lumber Liquidators and Tractor Supply (TSCO):
Despite major differences between Home Depot/Lowe’s and these two retailers including product categories and the timing of the quarters, both Tractor Supply and Lumber Liquidators have historically correlated positively with Home Depot and Lowe’s on comps. Lumber Liquidators and the home centers have exposure to housing markets, which have not been as strong in 2014 versus last year, and Tractor Supply and the home centers have exposure to the outdoor / weather sensitive business. Hence, we think it's prudent to lower numbers. That said, due to the differences in the business models, we think comps are probably holding up better at Home Depot and Lowe’s, and so our reductions are relatively minor. We maintain our Buy rating on Lowe’s and Hold on Home Depot.
Baker and Sindler lowered their second-quarter earnings forecast on Lowe’s to $1.02 from $1.03, and on Home Depot to $1.44 from $1.45.
Shares of Lumber Liquidators have plunged 22% to $54.78, while Tractor Supply has fallen 2.3% to $59.99, Home Depot has declined1.6% to $79.47 and Lowe’s has dropped 1.1% to $47.31.
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