Why Lumber Liquidators Inc. Stock Popped Despite Weak Q3 Results

By Steve SymingtonFool.com

What:Shares of Lumber Liquidators Holdings rose more than 15% in Wednesday's early trading, then settled to trade up around 9.5% as of 1:30 p.m. after the hardwood flooring retailer announced weaker-than-expected third-quarter results, but also appointed a promising new CEO.

So what:Regarding the former, third-quarter revenue fell 11.3% year over year to $236.1 million. Thanks primarily to allegations in a critical 60 Minutes report that Lumber Liquidators sold laminate flooring sourced from China containing illegally high levels of formaldehyde, those results included a 14.6% comparable-store sales decline, which itself was comprised of a 13% drop in the number of customers invoiced, and a 1.6% decrease in each average sale. To a lesser extent, Lumber Liquidators believes sales were also hurt by stronger competition, its decision to suspend sales of all laminate flooring sourced from China, and the disruption of supply for certain engineered hardwood vendors. On the bottom line, that translated to a net loss of $8.5 million, or $0.31 per diluted share, compared to net income of $0.58 per share in the year-ago period.

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Analysts, on average, were expecting Lumber Liquidators to report a narrower loss of $0.18 per share on higher revenue of $259.8 million.

For perspective on the latter, keep in mind Lumber Liquidators stock plunged in May after the company announced theunexpected resignationof then-CEO Robert Lynch. Though to be fair, Lynch's departure did follow the critical 60 Minutes report two months earlier. At the time, Lumber Liquidators appointed company founder Thomas Sullivan as acting CEO as it searched for a permanent replacement.

Today, however, Lumber Liquidators has found that replacement in John Presley, who most recently served as independent chairman of the board and head of Lumber Liquidators' special committee formed toreview the underlying certification and labeling processes of its suppliers. Presley had served as CEO of First Capital Bancorp and also joined Lumber Liquidators as a director in early 2006, well before the company's IPO in late 2007.

Presley added:

Now what:With shares still down more than 70% so far in 2015, I can't blame investors for being excited by the prospect of an experienced leader in Presley managing Lumber Liqiudators' turnaround. But we should also keep in mind the company has plenty of work to do before it's out of the woods, most notably including finding resolution to potential regulatory action from the California Air Resources Board from an ongoing investigation of its products.

That's part of the reason Lumber Liquidators isn't providing specific fourth-quarter 2015 guidance. But also to its credit, it did tell investors by the end of 2015, it will have opened a total of 23 to 24 new store locations in its expanded showroom format (near the high end of previous guidance for 20 to 25 new stores), remodeled a total of 12 existing stores in that format (narrowed from 10 to 15 existing store remodels previously), and have capital expenditures between $22 million and $25 million (a $2 million increase to the bottom end of the prior range).

In the end, though, I prefer to watch Lumber Liquidators from the sidelines until it finds a complete resolution to outstanding regulatory action. While this might result in missing out on some near-term speculative gains, the risk of an extended slide in sales or a negative surprise from that regulatory action is too great for my investing taste.

The article Why Lumber Liquidators Inc. Stock Popped Despite Weak Q3 Results originally appeared on Fool.com.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lumber Liquidators. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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