cfa institute research challenge - lumber liquidators (ll) presentation - university of virginia...

LUMBER LIQUIDATORS AS A “SELL”AT THE CFA SOCIETY OF VIRGINIA LOCAL FINALS

University of Virginia1

OVERVIEW OF LL’S BUSINESS

University of Virginia2

A NEGATIVE FUNDAMENTAL OUTLOOK OFFERS ADVERSE RISK/REWARD

University of Virginia3

STORE COUNT GROWTH WILL CONTINUE…

University of Virginia4

… AND SALES PER STORE WILL INCREASE…

University of Virginia5

… YIELDING IMPRESSIVE TOP-LINE GROWTH

University of Virginia6

HISTORICALLY, LL HAS SUCCESSFULLY EXPANDED GROSS MARGINS…

University of Virginia7

… BUT FAVORABLE SHIFTS IN LL’S PRODUCT MIX ARE UNSUSTAINABLE, …

University of Virginia8

… AND LL’S SUPPLY SIDE COST ADVANTAGE IS EPHEMERAL…

University of Virginia9

… AS SUPPLIERS SEEK TO DIVERSIFY THEIR CUSTOMER BASE…

University of Virginia10

… AND COMPETITORS REPLICATE LL’S SOURCING STRATEGY, …

University of Virginia11

University of Virginia12

… HENCE LL’S GROSS MARGINS WILL COMPRESS

FURTHERMORE, LL’S LEASING EXPENSES WILL INCREASE

University of Virginia13

CUSTOMERS ARE UNIMPRESSED BY LL’S PRICES…

University of Virginia14

… SINCE LL ONLY PARTIALLY DIFFERENTIATES ON PRICE

University of Virginia15

LL PRODUCTS ARE OF QUESTIONABLE QUALITY…

University of Virginia16

… AND COMPLAINT LEVELS INDICATE CUSTOMER DISCONTENTMENT

University of Virginia17

VALUATION MODELS INDICATE 18.4% DOWNSIDE

University of Virginia18

FINANCIAL PROJECTIONS FORM BASIS FOR DCF ANALYSIS

University of Virginia19

DCF ANALYSIS IMPLIES 10.4% DOWNSIDE

University of Virginia20

DCF EXIT MULTIPLES CONVEY 8.5% DOWNSIDE

University of Virginia21

LL IS OVERVALUED RELATIVE TO ITS PEERS

University of Virginia22

LL IS OVERVALUED RELATIVE TO ITS HISTORICAL MULTIPLES

University of Virginia23

CUMULATIVE VALUATION INDICATES 18.4% DOWNSIDE

University of Virginia24

PRICE PROJECTION PRESENTS DOWNSIDE FOR LL SHARES

University of Virginia25

SIGNPOSTS WHEN CONSIDERING A CHANGE IN RECOMMENDATION

University of Virginia26

RECOMMEND “SELL” RATING

University of Virginia27

APPENDIX

University of Virginia28

APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012)

University of Virginia29

APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013)

University of Virginia30

APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q4FY2010 – Q2FY2012)

University of Virginia31

APPENDIX: LL HISTORICAL FINANCIAL METRICS (Q3FY2012 – Q4FY2013)

University of Virginia32

APPENDIX: LL HISTORICAL GROSS MARGIN DRIVERS

University of Virginia33

APPENDIX: LL PRODUCT MIX AND GROSS MARGINS

University of Virginia34

APPENDIX: LL HISTORICAL ADVERTISING EXPENSE

University of Virginia35

APPENDIX: LL STORE COUNT GROWTH BY REGION

University of Virginia36

APPENDIX: LL INSIDER HOLDINGS AND TRANSACTIONS

University of Virginia37

APPENDIX: LL’S EXTANT LEGAL TROUBLES

University of Virginia38

University of Virginia39

APPENDIX: LL COMPLAINT LEVELS EXCEED RETAILERS OF ALL SIZES

APPENDIX: MACROECONOMIC CONSIDERATIONS

University of Virginia40

APPENDIX: CORRELATION OF VARIABLES WITH LL’S REVENUE

University of Virginia41

APPENDIX: LUMBER PRICE CHART

University of Virginia42

APPENDIX: HISTORICAL AND PEER ANALYSIS SUGGEST LL’S WACC IS 10.5%

University of Virginia43

APPENDIX: PRICE COMPARISON IN OTHER PRODUCT CATEGORIES

University of Virginia44

APPENDIX: COMPETITIVE PEER GROUP FINANCIAL ANALYSIS

University of Virginia45

APPENDIX: PEER GROUP COMPARABLES CALCULATION

University of Virginia46

University of Virginia47

APPENDIX: PEER GROUP COMPARABLES NOTES

APPENDIX: DCF LINE ITEMS (Q4FY2010 – Q3FY2012)

University of Virginia48

APPENDIX: DCF LINE ITEMS (Q4FY2012 – Q3FY2014)

University of Virginia49

APPENDIX: DCF LINE ITEMS (Q4FY2014 – Q3FY2016)

University of Virginia50

APPENDIX: DCF LINE ITEMS (Q4FY2016 – Q4FY2018)

University of Virginia51

APPENDIX: DCF ASSUMPTIONS

University of Virginia52