Lumber Liquidators Still In 'State Of Flux,' Piper Jaffray Warns

Peter Keith of Piper Jaffray recently met several senior members of Lumber Liquidators' management team, including interim CEO Tom Sullivan, to discuss the company's "Back to Basics" operating initiatives.

'State Of Flux' For Lumber Liquidators

Keith's observations led him to conclude that Lumber Liquidators' product offering is in a "state of flux" for three reasons.

Related Link: Lumber Liquidators Purchasers File Class Action Over Hazardous Flooring

First, it is bringing in new laminate products from Europe and is still waiting for additional SKUs. Second, the company is still in the process of looking for new sources of engineered hardwood that would not fall under anti-dumping duties recently assessed to certain products from China. Third, the 30 percent reduction in flooring SKU count will "pressure" the firm's gross margins over the coming months, while the company is still holding nearly $20 million worth of Chinese laminate that will ultimately be written down.

Gross Margins

Keith expanded on Lumber Liquidators' gross margins, noting that the current dynamic remains "very fluid" and longer-term gross margin profile could be estimated. The analyst is expecting a 300 basis point change to the company's long-term margins at 36-37 percent, which is below the company's own 2015 gross margin (pre-60 Minutes) of 39-40 percent.

Bottom Line

Nevertheless, Keith stated that he likes the new business model and initiatives (such as consolidating the tools area, eliminating 120 flooring SKUs, lowering the shelf height at the front of store to offer an improved visual glance of the entire store, creating a new liquidation section, etc.) that can help support management's growth plans and open 20-25 new stores in 2015. In addition, the recent hiring of Jill Witter as chief compliance office is a "significant upgrade" from its previous head of compliance.

Bottom line, Lumber Liquidators has "no shortage" of legal and regulatory risk, and the company's business model is in a "transitional state" that is "likely to cause volatility" to near-term results.

Shares remain Neutral rated with an unchanged $13 price target.