Value Line has recently initiated coverage on Lumber Liquidators Holdings (LL) in The Value Line Investment Survey. The company is the largest specialty retailer of hardwood flooring in the United States. However, like most corporations, it came from humble beginnings.

The Founding

Lumber Liquidators got its start in 1993 when Thomas D. Sullivan, a building contractor, began buying excess lumber from companies and reselling it to consumers. He primarily operated out of the back a trucking firm located in Stoughton, Massachusetts, which is a small town located about 20 miles south of Boston. Over the next few years, Mr. Sullivan’s business expanded rapidly, and the company’s first hardwood flooring retail store opened in January, 1996 in West Roxbury, MA. Soon after, a second ribbon cutting occurred in Hartford, CT.  During the late 1990s and up to the present, Lumber Liquidators has materially expanded its store count and market reach.

Operations Today

The corporation, now headquartered in Toano, VA, currently owns and operates more than 250 stores in 46 states. In addition, in 2011, it expanded into Canada with several outlets located in and around the Toronto metropolitan area. New stores are usually 6,000 to 7,000 square feet, with about 1,000 to 1,200 square feet dedicated to showroom space. Lumber Liquidator stores can be found in shopping centers, strip malls, and as stand-alone locations.

As mentioned, it is the largest specialty retailer of hardwood flooring, and has an expansive inventory of pre-finished and unfinished products. Its main distribution center is located in Hampton, VA, and the company possesses fulfillment facilities in Toano, VA and Toronto. Management will also arrange for products to be shipped directly from the production mills to its retail stores. The company, in order to reduce fluctuations in raw materials costs, will commonly contract to purchase a mill’s entire annual production. It also buys from more than 120 domestic and international vendors, which usually helps keep costs in check. That said, wood, like most other commodities, can experience wide price swings, and it is vital that Lumber Liquidators secure its flooring products at reasonable prices.

Lumber operates in a fiercely competitive space. In 2011, According to data provided by Catalina Research, Lumber, Home Depot (HDFree Home Depot Stock Report) and Lowe’s (LOW) accounted for about 37% of domestic hardwood flooring retail sales, with the remainder coming from small regional or local businesses. Competition also exists with alternative floor coverings, including carpet and tile. All told, in order for Lumber Liquidators to remain successful, and be able to compete with behemoths like Home Depot and Lowe’s, as well as local “mom & pop” stores, it must continue to offer quality products at competitive prices.

The market for hardwood flooring is also heavily dependent on the remodeling of existing homes and the construction of new homes, which often correspond to the overall health of the U.S. economy. During times of economic weakness, individuals are typically more concerned about sustained employment, and as a result, tighten their purse strings, and put off discretionary projects like home remodeling. In addition, the demand for new homes often takes a hit during times of economic uncertainty. The financial health of the United States is obviously out of Lumber’s control, so investors should monitor the strength of the country’s economy, and pay particular attention to the market for new and existing homes.     

The Stock

Lumber Liquidators completed its initial public offering in November, 2007. At that time, 10 million shares were sold to the public at an average price of $11.00 per share. The underwriting syndicate was led by Goldman Sachs (GS). The stock trades on the New York Stock Exchange under the ticker LL. Thomas Sullivan, the founder, is the chairman of the board and currently owns about 7% of the outstanding stock. 

For a more detailed evaluation of Lumber’s current business prospects and the stock’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.