A Strategic Look at This Flooring Retailer

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Home flooring retailer Lumber Liquidators (NYSE: LL) performed really well in 2012, growing revenue and free cash flow 19% and 25%, respectively. Its stock price rose 204% in 2012 beating the S&P 500 total return of 14% (see chart below). Let’s take a look at the company’s strengths, weaknesses, opportunities and threats to help get an overall picture.

LL Total Return Price data by YCharts

Strengths

Growth – Lumber Liquidators' small size enabled this company to grow its profitability much more than its larger home improvement rivals Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) (see table below).

 

Home Depot

Lowe's

Lumber Liquidators

Metric

% Change

% Change

% Change

Revenue

6.19%

0.62%

19.33%

Gross Profit

6.51%

-0.13%

28.30%

Operating Income

16.59%

7.95%

84.61%

Net Income

16.79%

6.53%

79.25%

Operating Cash Flow

4.87%

-13.50%

7.18%

Free Cash Flow

4.14%

4.24%

25.01%

Cash and Short term investments

25.52%

-48.77%

4.04%

Long Term Debt

-11.93%

28.36%

None

Total Debt

3.04%

10.47%

41.46%

Stockholder's Equity

-0.68%

-16.19%

9.05%

Compiled from SEC filings

People – Lowe’s and Home Depot understand the importance of people placement especially when it comes to hiring people to take care of customers on the store floor. Lumber Liquidators decided to build a university to train its people. At Lumber Liquidators University, managers learn about training strategy, product knowledge and sales techniques.

Products – Lumber Liquidators sells a myriad of flooring products and accessories. It sells a variety of hardwood products and at different price points. In addition, it also sells other types of flooring as well as accessories and tools to enable avid do-it-yourselfers to install the flooring themselves.

Specialization – Lumber Liquidators' specialization in flooring enables it to garner expertise in the area. Home Depot and Lowe’s also sell flooring but they lack the ability to focus on this specialization due to the many other products they need to manage.

Supply Chain – Lumber Liquidators has consolidated purchasing power backed by 290 stores. In addition to its relationships with mills in lower cost locations, Lumber Liquidators’ direct shipping initiatives give it strength over rivals who buy materials from the “middlemen” such as distributorships.

Weaknesses

Product diversity – While specializing in hardwood flooring will give the company an extra level of expertise, it also leaves the company vulnerable to a consumer shift in preference. Home Depot and Lowe’s sell other things such as plumbing, lighting, gardening supplies, and more.

Opportunities

New store format – Management is testing a new store format that allows for more selling space. In addition, Lumber Liquidators plans to remodel some of its stores.

Real estate strategy – Depressed economic conditions in some areas give Lumber Liquidators opportunities to enter favorable terms on leases.

Advertising initiatives – Due to its small size and increased demand due to the housing recovery, Lumber Liquidators plans to sacrifice some margin and invest heavily in advertising.

Small market share – Lumber Liquidators only owns a 10.5% market share in the specialty flooring market. CEO Robert Lynch believes the U.S. market can support 600 stores, doubling its current store count.

Threats

Many small competitors – Lumber Liquidators small market share means that others have 89.5% of the market. Competitors include many smaller, private businesses in the specialty flooring market.

Two powerful competitors – Lumber Liquidators' $66 million in cash on its balance sheet pales in comparison to Home Depot and Lowe’s with cash balances of $2.4 billion and $666 million, respectively. Home Depot could easily buy out Lumber Liquidators. Both Home Depot and Lowe’s can easily start a subsidiary company to compete with Lumber Liquidators.

Conclusion

In summary, Lumber Liquidators' small size and small market share ownership mean lots of room for expansion. Its investment in people, products, advertising, and the supply chain should pay off handsomely. Its various hardwood products with different price points should attract customers of all walks of life.

Lumber Liquidators can gain lots of expertise from its specialization in hardwood flooring. Lowe’s and Home Depot’s diverse product offerings leave out the ability to specialize. Lumber Liquidators represents an interesting growth and housing recovery play.


William Bias has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Lumber Liquidators. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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