Lumber Liquidators Shares Tumble As Goldman Cuts To Sell

• Shares of Lumber Liquidators Holdings Inc LL plunged more than 5 percent during the premarket session on December 17.
• Goldman Sachs’ Matthew J. Fassler downgraded the rating on the company from Neutral to Sell, while maintaining the price target at $13.
• The current stock valuation reflects the potential recovery in the company’s fundamentals, Fassler believes.

Lumber Liquidators’ fundamental trends are eroding, which was evident even prior to the recent issues related to the origin and composition of imported woods and laminates. Although the fundamentals are expected to recover over time, this potential recovery is already priced into the company’s current stock valuation, analyst Mathew Fassler stated.

Lumber Liquidators has been expanding capacity despite sharp declines in its sales and margins. Fassler added, “Management pulling back on growth, refocusing solely on existing assets, and conserving capital would help de-risk the story significantly.”

The analyst expects the gradual pace of any recovery to be a long one. He expressed concern over the company’s depressed margins, brand impairment and reputation related challenges as well as stiff competition from specialty players and ongoing store growth.

“The biggest upside risk to our downgrade is explicit resolution of regulatory concerns, which would dimensionalize any financial obligations for LL associated with the laminate product that has been called into question by the media and by regulators,” the Goldman Sachs report noted.

Fassler pointed out that there is no proof that the allegations related to the company’s product quality are true. He added that a favorable end to the investigation by the Consumer Products Safety Commission would assuage investor concerns.