Longbow Research: Lumber Liquidators' Q1 Reveals 'Disrupted Economies'

In a report published Monday, Longbow Research analyst David MacGregor commented that Lumber Liquidators Holdings Inc (NYSE: LL)'s earnings print was "disappointing" but the company is showing "some degree" of progress in open orders and net adjustments including returns.

MacGreggor noted that Lumber Liquidators' margins were down 590 basis points in the recent quarter that suggested a number of pressures will continue in to the second quarter. However, a legal accrual of $10 million relating to the ongoing Department of Justice investigation suggests that "matters are proceeding" which the analyst views as a positive but acknowledges the development also possess a headline risk.

As such, the analyst downgraded shares to Neutral as the fallout from the formaldehyde issue will have a "long tail" and it is becoming clear that it has "disrupted" the economics and commercial momentum of the company that may take a few quarters to resolve.

MacGreggor also added that Lumber Liquidators' recent "change in its value proposition" is essentially another way of saying "we need to take down our prices." The company also stated that its "value proposition" adversely impacted its first quarter margins by 250 basis points.

"For us, the tipping point was twofold and included the view that Lumber Liquidators' flooring enterprise is being temporarily overwhelmed with matters unrelated to selling flooring, and also the gross margin pressures associated with the changes in the value proposition," MacGregor wrote. "It is hard to say to what extent these two are related, but in the absence of a strong opinion thereupon and not having any strong sense of how long this could all continue, we felt we no longer had a basis for recommending the shares."

In conjunction with the downgrade, MacGregor revised his estimates and now expects the company to earn $0.10 in the second quarter (from $0.32), $0.30 in the third quarter (from $0.54), $0.45 in the fourth quarter (from $0.67) and $0.56 for the full fiscal year (from $1.75). Full year 2016 earnings per share estimates were also revised lower to $1.75 (from $2.50) as were 2017 estimates which were lowered to $2.50 (from $3.85).