Lumber Liquidators: What recession?

During these recession days of anemic sales for construction goods, Lumber Liquidators might be what economists call a “countervailing indicator.”

In suburban Richmond, foundering new subdivision lots might draw no bidders when banks try to unload them. Nevertheless, Toano-based Lumber Liquidators, the largest specialty retailer of hardwood flooring in the United States, is doing just fine, thank you.

The firm, transplanted to Greater Richmond from New England a decade ago, saw a sales boost of $15.1 million, or 11.8 percent, in the second quarter. Gross margins increased to 35.3 percent compared with 34.6 percent for the same period last year.

“Top and bottom lines were better than expected, and we saw an increase in sales despite the economic environment,” chief executive Jeff Griffiths recently told industry analysts on a conference call.

Explaining the surprising performance, Griffiths says that while cash-strapped contractors and homebuyers are moving to cheaper lines of wood flooring, “there are signs of strengthening in customer demand.”

Sales for construction goods suppliers nationally are down overall. Harvard University’s Joint Center for Housing Studies reported last month that remodeling activity, a leading indicator of goods sales, has dropped 12.3 percent this year. But center director Nicholas P. Retsinas has said he sees some stirrings of life due to low financing costs and improved home sales.

If that’s the case, Lumber Liquidators is way ahead of the curve. Despite such bleak economic conditions, the firm, with 160 stores in 40 states, is stretching into seven new markets and plans to open from 32 to 39 new stores this year, Griffiths says.

Among other countervailing statistics: Market capitalization has actually expanded by $18.87 million to $573 million in the past year, and one-year earnings per share growth has been 10.23 percent in the past year. Although stock prices dipped to about $7 a share in March, they have climbed past $20 a share. The firm went public in November 2007.

How does Lumber Liquidators do it? One reason is its business model, which eliminates the sales middlemen that hamper larger competitors such as Lowe’s and Home Depot. The firm relies on call centers at its Toano headquarters, web sales, and a number of strategically placed warehouses to expedite 25 different domestic and foreign types of wood to buyers, 90 percent of whom are homeowners.

According to a company spokeswoman, “We have a relatively small store base and low market share in a highly fragmented market. So, we see a lot of opportunity to open new stores and growth the business despite a challenging environment.”

Griffiths, the CEO, told analysts that the firm intends to use its strong financial position to beef up information technology, product procurement and allocation to improve the firm’s future prospects despite the recession.

One product is the firm’s marquee name brand “Bellawood” wood flooring, which is treated with an aluminum-oxide-based finish. Homeowners renovating their properties can simply nail it in without sanding or extra finishing. Other premium brands include Dream Home, Schon, Virginia Mills Works and Morning Star.

Cost is important along with convenience. Lumber Liquidators has sold flooring at prices as much as 50 percent below Lowe’s for comparable products and with the recession, the firm is “expanding our product mix in the lower priced market,” says Griffith.

Consequently, the firm is pushing cheaper laminate wood flooring goods out the door rather than relying on its hardwood products such as Bellawood, which has a 50-year guarantee and is hawked by television’s home improvement guru Bob Vila. The firm is also introducing a stained version of its Morningstar strand bamboo, which a spokeswoman says is popular.

That strategy seems to be working. Along with improved gross margins, the company told the Securities & Exchange Commission that it saw a 13.6 percent increase in same-store customer traffic during the three months ended in June 30.

Another wining strategy is knowing its customer base. The firm has thoroughly researched its buyers who tend to be affluent people in their mid-30s or older who make at least $70,0000 a year, according to recent 10-K filings with the SEC. The largest concentration of existing stores is in states such as California, Florida and Texas, along with six in Virginia. Curiously, those Sunbelt states have seen the worst of the housing downturn, making Lumber Liquidators increased sales and margins all the more striking.

Call-in sales are important to the firm so the 50 call center workers at Toano have been given special training to handle requests and sales since most customers are homeowners who have studied what they need, but don’t frequently buy flooring. Special instruction to phone workers is given at “LLU” or Lumber Liquidators University at the headquarters.

The firm came to Greater Richmond in a round-about way. It was founded by Boston native Tom Sullivan in 1994 after his first business attempt in contracting faltered and then an attempt at syndicating a TV travel show failed.

The third try was the charm. Sullivan tried contracting but didn’t have enough space to store building supplies where he did business in Boston. Sullivan, now the firm’s largest stockholder, started buying scrap lumber from construction sites and selling it from the back of his yellow pickup truck in Stoughton, Mass., near Boston.

Eventually, he started handling wood flooring products made in Canada, but soon ran out of storage space. Starting in a dilapidated warehouse with no running water in West Roxbury, Mass., he stockpiled wood flooring.

But demand outstripped his sourcing capacity and Sullivan realized that he needed to build his own wood flooring manufacturing facility. He chose Virginia because of its central location and built an 80,000 square foot factory on a vacant John Deere plant in Colonial Heights in 1999. “We never thought we could fill that building,” Sullivan has said, but proximity to Virginia’s ports helped. He soon decided to move the rest of the firm to Greater Richmond.

The move to the Old Dominion seems to have worked. Sales jumped from $22 million in 1999 to $35 million in 2001. Last year, they were $482 million, up from $405 million in 2007.  In 2003, the firm was the retail-wholesale winner in the “Fantastic 50″ contest of the fastest-growing small businesses in the state sponsored by the Virginia Chamber of Commerce.

The investment community has noticed the company’s performance. The Motley Fool recently referred to Lumber Liquidators as “Be fruitful and multiply, like by a two by four” and noted that “the fast-growing chain is holding up better than larger home improvement superstores.”

If there’s any downside in the near future it may come from sourcing exotic woods that the company uses in its flooring. Last year, the Lacey Act dating back to 1900 and the McKinley Administration was beefed up to prevent the import of certain exotic hardwoods into the U.S. if they came from endangered trees or involved illegal deforestation practices in foreign lands. The law originally banned importation into the U.S. of endangered exotic animals or plants. New provisions of the law take effect this year.

Still, stock watchers are bullish on Lumber Liquidators. Noting its peppy net store sales, the Motley Fool vamps, “Can your orange apron do that?”

Peter Galuszka is a Richmond-based business journalist. He has also served as Moscow bureau chief and international news editor in New York for BusinessWeek and as executive editor of Virginia Business magazine. Click here to read his previous BizSense report on MeadWestvaco.