Lumber Liquidators (LL) Chief Executive Rob Lynch scored high marks with Wall Street on his first report card since taking the helm Jan. 1.

The hardwood flooring retailer saw first-quarter earnings pop 45% to 29 cents a share, topping views.

Sales rose 18% to $188 million, also ahead of forecasts.

Lumber Liquidators' flagship store near its headquarters in Toano, Va.  View Enlarged Image

It was the biggest sales gain since the second quarter of 2010.

It was also the company's third straight quarter of double-digit sales and earnings growth.

Same-store sales grew 7.5% vs. the prior year, driven by an 8% increase in customer traffic.

Investors liked the news. Lumber Liquidators' stock price has ticked up around 18% since it reported the results April 25.

"We like the stock a lot," said Piper Jaffray analyst Peter Keith. "It has the one-two punch of an improving industry backdrop and improving company fundamentals."

Keith says Lumber Liquidators is benefiting from increased spending on remodeling, a trend that came back strongly in early 2012.

At the same time, he adds, there's been a secular shift in consumer preference toward hardwood floors and away from carpeting.

The improvement in company fundamentals, Keith says, can partly be attributed to Lynch and the strategic initiatives he's taken since coming on board as president and chief operating officer in 2011.

New Game Plan

Lynch made his mark on Lumber Liquidators well before taking the helm from Jeffrey Griffiths, who retired after six years as the company's chief executive.

Lynch helped Griffiths craft a game plan to help propel growth at the company.

At the time, Lumber Liquidators was suffering from sagging sales and earnings as it struggled with productivity losses and other problems while implementing a new SAP (SAP) system that came on-stream in August 2010.

Productivity was restored by the end of the first quarter of 2011.

But inconsistent servicing of consumer demand adversely affected sales through 2011's first half, says an SEC filing.

Making matters worse, home-improvement industry sales were also slowing.

"Last year was one of the toughest years in the company's history," Lynch told IBD.

Lynch oversaw a number of changes, including tweaking the retailer's marketing strategy, that helped get the company back on more solid footing.

Historically, the company focused its marketing efforts on the core do-it-yourself customer.

In the fourth quarter, Lumber Liquidators started testing a strategy to extend the company's reach and frequency of advertising to new types of customers, such as homeowners who would hire professionals to install new flooring.

Lynch attributes the growth in first-quarter customer traffic to the strength of a new marketing program.

"We used incremental ad dollars to go after a broader, more casual homeowner," said Lynch. "We saw the benefits in the first quarter. Our comps were up and our traffic was up."

Keith says the first quarter saw the company's highest increase in customer traffic growth in roughly two years.

New Chief Executive Rob Lynch. View Enlarged Image

"The first quarter represented a good turning point for the company," said Keith. "You're going to begin to see some sustainable gross margin improvement and some healthy sales gains, driven by increased traffic.

"The traffic has picked up dramatically because the company refined its ad strategy, and it has a broader reach and wider net to bring in customers."

Lynch came to Lumber Liquidators from Orchard Supply Hardware (OSH), where he was chief executive.

He also worked in various posts at home improvement kingpin Home Depot (HD), and he started his career at the world's biggest retailer, Wal-Mart (WMT). Lynch drew on his experience at these jobs to do a sweeping overhaul of Lumber Liquidators' operations.

"I saw an opportunity to go back to the basics," he said.

Lynch oversaw a number of initiatives related to sourcing, such as working with vendor-mill partners on line reviews of specific merchandise categories. The reviews involve evaluating the breadth of assortment, quality, logistics and product costs.

In another move on the sourcing front, the company last year acquired the product development and logistics operations in China of its distributor, Sequoia Floorings. The buy enabled Lumber Liquidators to source all products in China through direct-to-mill relationships.

"We saw a significant opportunity to cut out the middle man and open up business to other vendors," said Lynch.

Thanks to these and other initiatives, the company shifted to the fast track.

"We're very pleased on how we built on the momentum of the third and fourth quarters," Lynch said.

Lumber Liquidators is the largest hardwood flooring specialty retailer in the U.S., with more than 265 locations.

It's also the fastest-growing company in the hardwood flooring retail industry, says Keith.

Low Prices

The company has been able to strike a chord with consumers with its strong value proposition. It offers everyday low prices and is able to keep them low because it buys almost all its flooring directly from mills.

It's also known for quality brands, such as its flagship proprietary label, Bellawood.

And it boasts a wide selection, including solid and engineered hardwoods, laminates, resilient, bamboo and cork flooring products.

"A lot of retailers talk about their value proposition, but few really pull them all together like Lumber Liquidators does," said Stephens analyst Rick Nelson. "It's a category killer in hardwood flooring."

Watchers expect the company to stay on solid footing. Analysts polled by Thomson Reuters see 2012 earnings rising 31% to $1.23 a share. They forecast an 18% gain in 2013.

 

"As the housing market stabilizes and turns up, it will be a positive for Lumber Liquidators," said Nelson.

Keith expects the company to keep up its momentum. He says its business is tied to trends in home remodeling and less so to housing turnover and housing starts.

"They were able to grow sales in the downturn," he added. "Their industry is highly fragmented and they were able to take share."

Lynch is cautious. A lot of geopolitical and macro forces can "shock us," he said.

If things start to get shaky, he adds, consumers may opt to forgo paying $1,600 for new flooring.

Lynch attributes the growth in first-quarter customer traffic to the strength of a new marketing program.

"We used incremental ad dollars to go after a broader, more casual homeowner," said Lynch. "We saw the benefits in the first quarter. Our comps were up and our traffic was up."

Keith says the first quarter saw the company's highest increase in customer traffic growth in roughly two years.

"The first quarter represented a good turning point for the company," said Keith. "You're going to begin to see some sustainable gross margin improvement and some healthy sales gains, driven by increased traffic.

"The traffic has picked up dramatically because the company refined its ad strategy, and it has a broader reach and wider net to bring in customers."

Lynch came to Lumber Liquidators from Orchard Supply Hardware (OSH), where he was chief executive.

He also worked in various posts at home improvement kingpin Home Depot (HD), and he started his career at the world's biggest retailer, Wal-Mart (WMT). Lynch drew on his experience at these jobs to do a sweeping overhaul of Lumber Liquidators' operations.

"I saw an opportunity to go back to the basics," he said.

Lynch oversaw a number of initiatives related to sourcing, such as working with vendor-mill partners on line reviews of specific merchandise categories. The reviews involve evaluating the breadth of assortment, quality, logistics and product costs.

In another move on the sourcing front, the company last year acquired the product development and logistics operations in China of its distributor, Sequoia Floorings. The buy enabled Lumber Liquidators to source all products in China through direct-to-mill relationships.

"We saw a significant opportunity to cut out the middle man and open up business to other vendors," said Lynch.

Thanks to these and other initiatives, the company shifted to the fast track.

"We're very pleased on how we built on the momentum of the third and fourth quarters," Lynch said.

Lumber Liquidators is the largest hardwood flooring specialty retailer in the U.S., with more than 265 locations.

It's also the fastest-growing company in the hardwood flooring retail industry, says Keith.

Low Prices

The company has been able to strike a chord with consumers with its strong value proposition. It offers everyday low prices and is able to keep them low because it buys almost all its flooring directly from mills.

It's also known for quality brands, such as its flagship proprietary label, Bellawood.

And it boasts a wide selection, including solid and engineered hardwoods, laminates, resilient, bamboo and cork flooring products.

"A lot of retailers talk about their value proposition, but few really pull them all together like Lumber Liquidators does," said Stephens analyst Rick Nelson. "It's a category killer in hardwood flooring."

Watchers expect the company to stay on solid footing. Analysts polled by Thomson Reuters see 2012 earnings rising 31% to $1.23 a share. They forecast an 18% gain in 2013.

"As the housing market stabilizes and turns up, it will be a positive for Lumber Liquidators," said Nelson.

Keith expects the company to keep up its momentum. He says its business is tied to trends in home remodeling and less so to housing turnover and housing starts.

"They were able to grow sales in the downturn," he added. "Their industry is highly fragmented and they were able to take share."

Lynch is cautious. A lot of geopolitical and macro forces can "shock us," he said.

If things start to get shaky, he adds, consumers may opt to forgo paying $1,600 for new flooring.

Source: Investor.com

Posted and edited by Riona, Hanbao News Department

Contact: rionach@cltimber.com