Laying a Floor for Growth

 | Mar 26, 2013 | 9:30 AM EDT  | Comments
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The last time I looked at Lumber Liquidators (LL) was in the summer of 2011 and the company was crippled by an all-consuming installation of SAP (SAP) software.

Lumber Liquidators was trying to streamline its financial, manufacturing and logistics software. The flooring company missed quarter after quarter because orders were mixed up and the inventory was a mess. By the end of 2012, the enterprise software system was up and running -- just in time for a housing recovery. The stock bottomed out just over $14 and hasn't looked back. The stock closed yesterday at $68.97.

Tom Sullivan started the company in 1994 in Somerville, Mass., selling surplus building materials out of the back of his truck. Within two years, Sullivan was selling hardwood flooring at discounted prices. He worked directly with sawmills to increase the quality and the selection of flooring available to consumers.

Sullivan became the largest specialty retailer of hardwood and laminate flooring in the United States. Lumber Liquidators is aggressively taking market share from the big box retailers as the company continues to expand its retail square footage.  Since 2008, the company has gone from 150 stores to an estimated 318 stores, producing same store sales in the mid-single digits.  Management believes it can fit 600 stores in the United States.

Even through the biggest housing bubble in the history of the U.S., Lumber Liquidators has managed to grow net sales at an annualized growth rate of 13.4%. Lumber Liquidators' operating margin bottomed out at 6.2% in the dark days of 2011, but has rebounded dramatically and is estimated to hit 10% for 2013. The improvement has come from a reduction in manufacturing expense and in lower transportation costs. Because of the operational improvements and strong sales, net income has exploded. In fact, net income for 2013 is expected to exceed $56 million, double the 2011 results.

The company has guided investors to expect sales growth of 11% in 2013 to $902.5 million. But that forecast may be conservative. Consider that Lumber Liquidators just blew the doors off the fourth quarter. LL beat the Street estimate by $.07. Revenues rose 20.8% to $210.6 million. Same store sales grew 13.2%, driven by a 9% increase in store traffic. (They'll have to replace the floors at the stores if the foot traffic continues to grow.) Management plans to open between 25 and 35 new stores and plans to relocate or remodel another 20 to 25. The company recently introduced a larger store format that sells an expanded selection of flooring, moldings and tools.

The shorts have dogged this company, but last quarter's results should put that issue aside as the company buys back $50 million shares and the housing recovery takes hold. The shorts are concerned about the higher costs of materials and transportation as the economy recovers.

Although the stock is flying high -- up some 25% year-to-date -- I think it can keep going. I believe there is a pent-up demand for housing. Millions of homeowners are waiting for the market to improve before they put their house on the market. Those re-sellers will  likely be interested in renovating their home before they put it on the market. If they don't do any touch ups, buyers are likely to spruce up. While I would wait for a correction to buy the stock, I think Lumber Liquidators could run for another year as the housing market returns to normal.

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