NEW YORK (TheStreet) -- Lumber Liquidators(LL) - Get Report shares hit a new 52-week-low of $38.19 after a delayed opening on Monday. The stock tumbled followed a damaging "60 Minutes" report that its wood products had dangerous amounts of formaldehyde.
The stock started trading shortly after 11 a.m. EST. Lumber Liquidators issued an 8-K filing with the Securities and Exchange Commission in which the company issued further response to the "60 Minutes" segment.
"We believe that '60 Minutes' used an improper test method in its reporting that is not included in CARB's regulations and does not measure a product according to how it is actually used by consumers," the company said in the filing. "Our laminate floors are completely safe to use as intended. In our attempt to be fair and transparent, we provided significant testing results to '60 Minutes,' including the results of the random testing performed on products from each of our laminate suppliers. We also went to great lengths to document issues between the validated test method and that used by '60 Minutes.' Our Chairman addressed the differences and our position on the test methodology but '60 Minutes' chose not to include it."
Following Sunday night's television segment, a flurry of Wall Street analysts issued reports following the segment. Morgan Stanley downgraded the stock from the equivalent of a buy to the equivalent of a hold.
Lumber Liquidators had warned investors last week that the television segment was coming. Earlier Monday, the Toano, Va.-based company issued a statement to TheStreet saying, "We stand by every single plank of wood and laminate we sell all around the country and will continue to deliver the best product at the best price to our growing base of valued customers."
The stock was down 21.8% to $40.54 after a delayed open. Here's what analysts said.
Simeon Gutman, Morgan Stanley (downgraded to Equal Weight from Overweight; no price target stated)
If there were any prevailing quality issues in LL's supply chain, we hadassumed they were largely behind the company. The quality allegations are 2-3 years old and the company has seemingly taken many actions to resolve them.
But, after watching the "60 Minutes" episode, we are concerned that quality issues may still exist. We recognize we are reacting to one interpretation of the situation, one that is clearly being influenced by investors who have a stake in the outcome. But, nevertheless, the piece suggests that the legacy issues may not have been fully resolved. It is this uncertainty that is pushing us to the sidelines....
The episode did suggest that short sellers have a stake in how thissituation unfolds. "60 Minutes" raised concerns that those involved in pushing the legal allegations and in putting this situation in front of the media have connections to investors that are short the stock. To the extent consumers appreciate this, and see through the situation, it could influence how they perceive the allegations. In other words, it could minimize any fallout.
Ultimately, it is important not to lose sight of the underlying issue here. Regardless of what is driving the effort, the issues are now in front of consumers and the question is what degree of fallout may occur. If there is none, the market seemed to suggest the stock is worth at least ~$70 (this is where the stock had traded up to intraday prior to management mentioning the "60 Minutes" episode). At $51, the current level, the stock is thus pricing in a 25%+ impact to the business.
Our instinct is that the stock fallout has already likely outpaced any sales fallout. However, we just don't have precedent to look back to and predict what the fallout may be. Furthermore, if product quality issues still exist, it would be hard to get comfortable with the business' fundamentals.
Peter J. Keith, Piper Jaffray (Neutral; $55 price target)
The "60 Minutes" segment on LL was worse than we thought based on 1) how specific the story was on LL, 2) the evidence provided by "60 Minutes," and 3) a poor on-camera interview by founder Tom Sullivan who conceded that the video evidence called into question the company's oversight of its suppliers. While the validity of "60 Minutes" evidence and claims will likely be vigorously disputed by the company -- and we are still in no position to determine if there has been any wrongdoing -- the piece portrayed LL in a negative light and will likely leave the company guilty in the court of public opinion for the foreseeable future.
We remain Neutral-rated and we are not changing our estimates at this time until we conduct further research.
While certainly biased, the response on social media following the segment was overwhelmingly negative. Individuals noted they will be returning recently purchased product, asking how their floors could be tested, and commenting on the poor performance by LL's founder.
Bradley B. Thomas, KeyBanc Capital Markets (Sector Weight; no price target stated)
On Sunday night, "60 Minutes" aired a segment about Lumber Liquidators Holdings, Inc. (LL-NYSE). The episode's timing was expected, but the exact details had not been part of the show's previews. The piece accuses Lumber Liquidators of selling laminate flooring from China that does not meet CARB 2 compliance standards, despite being labeled as such. The segment focused solely on LL, indicating tests of similar product at Home Depot(HD) - Get Reportand Lowe's(LOW) - Get Report passed their independent tests.
We expect the PR implications will be negative for traffic and we would not be surprised if LL ultimately changes some of its sourcing practices for the laminate products at issue. As such, we are lowering our estimates. While we believe this issue will blow over in the long run, we expect LL shares to remain under pressure in the near term.
For 1Q15 EPS, we go to $0.47 from $0.52. Our 2Q15 EPS estimate stays at $0.62. Our 3Q EPS estimate goes to $0.75 from $0.80. For 4Q15, our EPS estimate goes to $0.86 from $0.92. As such, our full-year 2015 EPS estimate goes to $2.70 from $2.85. For 2016, we are lowering our EPS estimate to $3.20 from $3.45.
Shares of LL trade at 19.2x and 16.2x our 2015 and 2016 EPS estimates of $2.70 and $3.20, respectively. This compares to the stock's historical forward P/E trading range of 12-36x, with a mean of 23x over the past five years. Shares also trade at an EV/Sales of 1.2x our 2015 estimate vs. a five-year average of 1.6x. We rate the shares Sector Weight at this time.
Seth Basham, Wedbush Securities (Neutral; $55 price target)
Last night's expose on LL by "60 Minutes" produced one major development, in our view. Undercover "60 Minutes" investigators visited three Chinese mills that produced laminate flooring and the mills' employees remarked (two on camera)that products for LL were not compliant with CARB (California Air Resources Board) Phase 2 requirements (concerningformaldehyde emissions levels), despite labeling it as such. The mills explained they are capable of manufacturing CARB compliantflooring but it would cost 10-15% more, suggesting LL did not want to pay the higher price in order to earn higherprofits.
We believe that laminate is LL's highest-margin major flooring product line, with gross margins well over 50% on someproducts vs. the company average 40%. LL founder Tom Sullivan noted on the show that the company trusts these mills andhas inspectors double check them to make sure the product is made to LL's specifications based on CARB standards. Mr.Sullivan was surprised by this information presented to him (during the interview recorded on Wednesday, February 25, webelieve) and stated that the company would investigate immediately. We await further explanation from LL.
Facts onformaldehyde emissions testing methodologies also raise questions.... The significant level of uncertaintykeeps us NEUTRAL on LL shares.
TheStreet Ratings team rates LUMBER LIQUIDATORS HLDGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate LUMBER LIQUIDATORS HLDGS INC (LL) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 13.5%. Since the same quarter one year prior, revenues slightly increased by 4.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- LL has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.09 is very weak and demonstrates a lack of ability to pay short-term obligations.
- 39.15% is the gross profit margin for LUMBER LIQUIDATORS HLDGS INC which we consider to be strong. Regardless of LL's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 5.91% trails the industry average.
- LUMBER LIQUIDATORS HLDGS INC's earnings per share declined by 20.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, LUMBER LIQUIDATORS HLDGS INC increased its bottom line by earning $2.77 versus $1.68 in the prior year. For the next year, the market is expecting a contraction of 3.2% in earnings ($2.68 versus $2.77).
- You can view the full analysis from the report here: LL Ratings Report