Lumber Liquidators imports approximately 45% of their products from China. Throughout 2018 there were rumblings about possible tariffs on these goods. Despite the huge impact that tariffs would have on the company and the clear risk that tariffs would be imposed, CEO Dennis Knowles did not mention the word tariffs a single time in Q1 or Q2 2018. This seems peculiar.
Martin Agard, the former CFO, had this to say about tariffs in Q2 2018.
Martin D. Agard – Lumber Liquidators Holdings, Inc. (Source)
“In my earlier comments about second half margins, assume no meaningful tariff adoption”
Here is an interaction with an analyst:
Gregory Scott Melich – MoffettNathanson LLC
Marty, I guess on the guidance, I heard that tariffs are not included and what’s your thinking for the back half? Could you remind us what percentage of your COGS are imported, anything that you have on what’s directly imported versus indirectly or China as a proportion of those?
Martin D. Agard – Lumber Liquidators Holdings, Inc.
Yeah. It’s in the 40% range that comes from China. But we have various appeals to those. And then a range of ways we would try to manage it. So, rather than speculate on what we’d include, what we wouldn’t, what would impact margin and so forth, we’re kind of sticking to the guide is kind of clean of that. And then we’ll sort of cross those bridges as we go.
The tag team of Knowles and Agard clearly didn’t think tariffs would be much of an issue.
But in Q3 2018, after tariffs were implemented (Sept 2018) Knowles faced a barrage of questions about tariffs. Mind you, this is also the time when the LL stock nose dived 50% in 3 months (July 15 to October 15 2018). Perhaps Knowles’ lack of planning and mismanagement of the tariffs issue had something to do with it?
What did Knowles have to say about tariffs then?
Dennis R. Knowles – Lumber Liquidators Holdings, Inc. (source)
We acknowledge that we’re faced with heightened macroeconomic conditions, namely increasing tariffs, which are impacting the cost side of our business. Roughly 45% of our merchandise comes from China and we’re subject to the 10% tariffs as of September 24. We’re aggressively and proactively exhausting all options to mitigate the cost increases.
While the effects of our strategy will not be seen overnight and tariffs remain a challenge, we’re considering any and all options to offset tariffs and improve our sourcing strategy.
Additionally, we’re laser-focused on our bottom-line and believe we can drive margin expansion through careful cost management and strategic mitigation of tariffs.
I think at this point, you kind of have to act like 25% tariffs going into place. And that impacts the aggressiveness of your sourcing changes as well as anything you might do to pre-buy.
So, all of a sudden, tariffs are being discussed, and they seem to be a major issue for the company. But Dennis Knowles assures everybody that he is being aggressive, proactive, strategic, exhaustive, and “laser-focused” (Dennis loves lasers) at mitigating these costs, by any means possible. He even says he is acting like 25% tariffs are going to happen.
Five months later, in the Q4 2018 Conference Call, Martin Agard had this forecast to make on tariffs. (source)
We anticipate 10% tariffs continuing, no removal and no escalation.
Martin Agard then resigned from the company.
Dennis Knowles, didn’t resign, but took the opportunity to reassert his resolve to mitigate tariffs:
While the 25% of tariff has been indefinitely postponed, we know that our work to further mitigate the impact is still in front of us. To that end, we are not only improving our cost structure and supply chain, but also enhancing our capabilities under new leadership. We are actively renegotiating costs and moving product out of China where it makes sense.
Dennis also took a optimistic, yet cautious tone:
We are currently assuming the trade environment with 10% tariff, though the potential of a 25% mark will have a substantial impact.
Notice that this is a softer stance than his former remark “you kind of have to act like 25% tariffs going into place.”
In Q1 2019, tariffs remained a hot topic and Dennis Knowles gave us several insights on the company’s strategy and planning surrounding those major issues.
Dennis Knowles (source)
Our expectations for tariffs remain unchanged in the immediate turn and we remain focused on efforts to counter these impacts. As we mentioned last quarter, we expect incremental improvement in margins throughout the remainder of the year.
We have spoken about our core strategic priorities for 2019 that are focused on growing the business, enhancing the customer experience and, ultimately, driving margin expansion even in the face of tariffs.
Where does all this leave us?
As of May 10, 2019, tariffs on imported flooring products from China were increased from 10% to 25%. It caught the “management” team completely off guard. Knowles messed up again, and of course, it is at the shareholders expense. This virtually assures that margins at the company will fall in 2019. Unless something drastic changes, CEO Dennis Knowles will be proved completely wrong in his last quote.
I would also like to say that in my discussion with Lumber Liquidators IR, I can confirm that as of today, there has been no change in sourcing products from China. Despite everything that was said by Martin Agard, Dennis Knowles and even Charles Tyson, product sourcing from China has not changed. The new sourcing, away from China, will only start in Q3 2019 and it will only be a very small portion of the product mix. There will not be any significant sourcing change until 2020. Is it any wonder that the stock is now trading at under $10?