Things were looking dire for Lumber Liquidators Holdings stock (NYSE: LL) earlier this year. After a CEO Change in February and the coronavirus crash, the flooring products retailer traded at a 52-week low of $3.77 in March. However, the company’s narrative has shifted from pessimistic to bullish which has driven the stock up over 500% from the lows. With so many people stuck at home this year, there are several companies that have seen a nice uptick in demand for their products and services. It’s clear that the market views Lumber Liquidators Holdings as one of them.
Whenever a stock makes a move like Lumber Liquidators has, it’s easy to be skeptical. However, this is a company that has some good things going for it at this time and the stock undeniably has positive price momentum. With positive new home sales data and several analyst upgrades, Lumber Liquidators continues to outperform many of its peers in the specialty retail sector. Below, we are going to look at some of the reasons why this stock has been rallying and determine whether or not now is the time to be adding shares.
Pandemic Could be a Positive
For most companies in the retail sector, the pandemic is probably the worst thing that could have happened to their businesses. With consumer spending down, people staying at home for health reasons, and a shift to online shopping, we’ve already seen quite a few retail business file for bankruptcy. Lumber Liquidators has over 420 physical stores that certainly saw foot traffic decline at the onset of the pandemic which resulted in Q1 comparable-store sales falling to negative 0.9%. However, you could argue that the pandemic is positive for the company going forward.
With more people at home than ever before as the result of lockdowns, working remotely, and health precautions, many of them are taking advantage of the situation and tackling home improvement projects. Lumber Liquidators is one of the largest retailers of hardwood flooring materials which means that its sales could go up based on this stay-at-home remodeling trend alone. You also have a lot of pent-up demand for new home purchases in the real estate market, which also works in the company’s favor. As of now, it looks like the market is betting that the pandemic will ultimately be a good thing for this company.
We all know about the tariffs on imported goods from China and how expensive they can be for certain companies. However, Lumber Liquidators has actually been benefitting thanks to a favorable decision back in 2019 that retroactively excluded certain vinyl and engineered floor products from the tariff. This has been very positive for the company’s net operating margins which were up $11 million year-over-year in Q1 to $9.6 million. The company actually had a net operating loss of $1.6 million in 2019, which speaks volumes to just how much of an impact the tariff exclusion has made.
With that said, these favorable tariff exclusions are set to expire on August 7th. If they don’t get extended, Lumber Liquidators’ shares could absolutely see a sharp downturn. Although many companies and trade associations are in favor of extending the tariff exclusions, this is still a risk that investors who are interested in Lumber Liquidators stock should not ignore.
What to Watch for in the Q2 Lumber Liquidators Earnings Report
This stock has been on a tear lately and is up over 60% in July, but it might be best to wait until Lumber Liquidators reports Q2 earnings on August 5th before buying shares. Keep in mind that this stock is trading at its highest price in over 2 years and that there are several risks such as the tariff exclusions to consider. The market has priced in a lot of optimism at this time and there’s a chance that the economic impact of the pandemic has been understated.
Although the consensus EPS estimate is ($0.09), if sales have rebounded sharply it is possible that the company exceeds expectations. Many eyes will be on the Q2 comparable store sales which will show investors just how much the demand for flooring products has increased. Comparable store sales for the company declined roughly 45% in the final week of March which was concerning. However, through May 23rdQ2 comparable-store sales improved slightly to be down roughly 30%. If that number has improved dramatically throughout the quarter, Lumber Liquidators could be ready for its next leg up.
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