Bad press is weighing on sales at Lumber Liquidators.
On Thursday morning, the embattled flooring retailer gave a business update disclosing that in March, sales declined 12.8% compared to March 2014.
The company attributed this decline to “unfavorable allegations surrounding the product quality of the Company’s laminates sourced from China.”
Back in early March, “60 Minutes” aired a report showing Lumber Liquidators factories in China allegedly misidentifying certain laminate flooring products as compliant with regulatory standards when they were in fact not compliant.
Since this program, Lumber Liquidators has fought back against these allegations, saying that “60 Minutes” used improper testing methods to draw its conclusions.
In the first quarter, Lumber Liquidators sales totaled $US260 million, up 5.6% from a year ago; analysts at Goldman Sachs had been expecting sales of $US257 million.
Same-store sales in the quarter fell 1.8% against Goldman’s expectations for a 2% decline. The company expects profit margins to be in the range of 35%-36.5%, down from 41.1% in the same quarter last year.
From Lumber’s update, Goldman had these three takeaways:
- The ticket decline is consistent with trends prior to the 60 Minutes piece that questioned LL’s safety procedures, but short of guidance, as the firm expected some recovery in trend.
- The fading in the rate of cancellations suggests fading headwinds from the poor publicity associated with 60 Minutes.
- At the same time, the meaningful margin shortfall vs. prior guidance suggests some combination of much lower margin on transactions since March 10, and adverse selection in the book of business cancelled since then (i.e., consumers walking away from higher-margin transactions).
Goldman added that while sales look better than the firm had feared, margins were and will continue to be pressured and the firm is concerned with profitability as Lumber Liquidators recovers.
Goldman’s estimates and price target are under review pending further analysis.