LL - LL Flooring: Now Getting To Bargain-Basement Levels

Summary

• LL Flooring Holdings, Inc. missed earnings estimates in Q3.
• Management, though, is sticking to its long-term strategy.
• Growing sales to Pro customers is the best trend LL Flooring Holdings, Inc. has going for it.

Intro

If we pull up a long-term chart of LL Flooring Holdings, Inc. ( LL ), we see that, unfortunately, it makes for dismal reading. Shares are down well over 70% since they topped out back in December 2020, with no clear end in sight at present. The one ray of hope is that we have had a marginal up-move in the monthly histogram, but the long-term stochastics remain depressed and currently come in around the 8 level. Given that long-term investors would be going against the grain here, we would need to see LL's long-term stochastics take out the 20 level before entertaining any thought of putting long deltas to work in LL Flooring Holdings.

The reason being (and value investors will know this all too well) pertains to the premise of opportunity cost. In an inflationary environment where the purchasing power of one's dollars will be considerably less in time to come, waiting for a stock to bounce out of oversold conditions could end up being a very risky endeavor, to say the least. Remember, it is all about real returns (and not nominal returns), which is why stocks that trade in a rangebound manner or even worse (may be heading south at an accelerated rate of knots) open the door to much poorer returns in the long run.

Q3 Misses Estimates

LL Flooring Holdings recently announced its third-quarter earnings numbers where we witnessed an earnings miss (-$0.14 per share) on lower-than-expected sales ($268.8 million). Management cited lower customer spending buoyed by higher inflation as the principal reason for the lower sales print. Furthermore, costs rose in the quarter due to higher inflation and a ramping up of investment spending. This resulted in operating income actually coming in negative (-$4.3 million), which was the first quarterly operating loss for quite some time in LL Flooring.

Whether this is the start of a sustained trend remains in the dark at this stage, as management refrained from providing any forward-looking guidance on the Q3 earnings call . What we did learn is that more favorable terms in associated transportation costs which management obtained will help the income statement in time, but we most likely will not see evidence of this for some time to come.

Sound Fundamentals

The trends alluded to here mean the company will not be opening the number of stores originally envisioned, and this is probably a smart play as "Pro-Growth" is where the priority currently lies. The reason being is that growth in revenues to pro customers continues to gain traction, with another high single-digit growth recorded in the third quarter. Higher inventory at stores, user-friendly e-commerce technology, and competitive pricing are resulting in a very high retention rate among Pros. Management believes that recurring income on growing volumes will end up being a winning combo despite giving up some margin to pros on the front end initially.

Cheap Sales & Assets

Obviously, market conditions will have to cooperate somewhat for the above trend regarding Pro-Growth to keep on accelerating. However, for shares to move north on a sustained basis over the near term, participants will have to believe that LL Flooring's value is too cheap to pass up. From a sales and assets perspective (The two areas which ultimately create profits for the company), there is definitely value in this play. LL Flooring now trades with an ultra-low sales multiple of 0.20 and a book multiple of 0.81. Furthermore, despite the negative earnings number in Q3, LL Flooring is still profitable over the past four quarters. The company´s trailing GAAP earnings multiple (although still on the high side) comes in at 16.86.

Cash-Flow Headwinds

The company´s cash-flow position however is a bit more worrying. We state this because, over the past four quarters, the company used up over $135 million of operating cash flow. Although management cited the quality of the company´s inventory on the recent earnings call, this crucial line item now surpasses $364 million, with cash & ST investments now only coming in at a mere $6 million. Suffice it to say, if present trends persist, long-term debt ($69 million) may have to increase to ensure customers continue to get serviced. This "tieing up" of capital may also mean that fewer resources will be funneled towards building the brand which is something that the market definitely does not want to see.

Conclusion

Therefore, to sum up, it will be interesting to see if LL Flooring can rally out of these ultra-oversold conditions in the near term. The stock is definitely cheap and the fundamentals regarding "PRO Growth" are encouraging. Consumer spending habits, no forward-looking guidance as well as inflation, though, bring uncertainty to this play at least for now. We look forward to continued coverage of LL Flooring Holdings, Inc.

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