The once great specialty retailer, Lumber Liquidators Holdings Inc. (NYSE: LL), reported second-quarter 2015 results that vastly fell short of expectations. The company’s stock trading down 23% Wednesday afternoon and deservedly so. To answer the question we posed earlier in the day, Will Lumber Liquidators Find a Way Out?, the short answer is no. Here’s why.
A company’s brand represents the most valuable asset a company can possess. It is not quantified on any balance sheet. A company builds a valuable brand by selling a quality product that a customer wants or needs. Over time people come back to buy the company’s product because they trust the product and the name that goes along with it.
Lumber Liquidators represents an example of a great brand gone sour. Tom Sullivan, Lumber Liquidators founder and acting CEO, said:
I founded Lumber Liquidators more than 20 years ago with the simple mission of offering good wood flooring at a good price and putting the customer first. We did this by bringing it to the customer at a low cost and providing exceptional customer service.
Lumber Liquidators proved quite successful at doing this until it was discovered that, allegedly, products sourced from China were of questionable quality. Call it cutting corners, greed or a mistake, the fact remains that customers no longer perceive the company as honestly trying to deliver a high-quality product at a low price. If the reports are true, Lumber Liquidators violated the customer’s trust, and while it may be relatively easy to recover on an individual basis, it is more difficult to do on a business level.
Rightly or wrongly, Lumber Liquidators is now perceived as a company that tries to sell consumers cheap products laced with chemicals that can poison them. When they see the name Lumber Liquidators, they probably will want to go through the doors to a competitor, such as Home Depot Inc. (NYSE: HD) or Lowe’s Companies Inc. (NYSE: LOW).
Maybe, just maybe, Lumber Liquidators can pull out of this situation after many years of keeping its nose clean, or if the reports prove untrue. However, this is unlikely. For now, investors should take their dollars elsewhere because customers probably will.
Note that William Bias owns shares of Home Depot and Lowe’s.