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article imageOp-Ed: Declining wholesale business plaguing Costco, Lumber Liquidators

By David Goehst     Mar 3, 2016 in Business
One could be liable for cancerous flooring, the other just watched their credit arm go from Amex to Citi. The business of offloading excess inventory has been uncharacteristically slow in 2016, so what are Costco and Lumber Liquidators doing wrong?
Lumber Liquidators, with an already crushed stock amidst the formaldehyde scandal, just watched composite floor maker Trex pull their products from LL shelves. After a recanted report upgraded the threat of cancer causing chemicals to three times what was originally thought, LL lost 10 percent of its value.
Costco will swap credit backers in June, meaning the cozy Amex contract will get handed to Citi. Not normally a big deal if it was anyone else, yet losing Amex in business equates to a tornado ravaging through your building. Yes, it’s meteoric. Even worse, earnings estimates show Costco is lagging behind last year’s numbers.
If you’re in wholesale, these small things add up.
Several major liquidation companies across the United States, such as GBY Liquidations, have seen drastic reductions in truckload sales, an indicator that Christmas may have bit into consumer sentiment heading into 2016. But as March begins, industry experts may soon panic if Costco and LL aren’t successful in turning sales around.
Products from such retail giants like Home Depot have been slow to roll into the secondary supply chain, while Walmart, BJ’s Wholesale and Target have not changed in terms of aftermarket wholesale volume, primarily sold by truckloads or auctioned off by pallets.
Maybe investors had cause to panic heading into Q2.
How investors may see Costco and Lumber Liquidators
Unfortunately, predicting Costco and Lumber Liquidator’s future place in wholesale is exceptionally difficult, if not entirely impossible. Few people have been able to bet successfully based on general market trends over long time-horizons. Moreover, many investments are only related to the macro-economy in the short-term rather than the long term, so overemphasis on macroeconomics can be distracting. That being said, macroeconomic expectations should be included in the investment process to the extent that they lead to sensible expectations with these two wholesale giants’ stocks.
In stock nomenclature, certain asset classes become so clearly over-valued that investors should reduce their exposure to them. For example, the U.S. stock market, always prone to booms and busts over history, had various stages at which lowering exposure would have been prudent. In December 1999, the price-to-earnings multiple of the S&P 500 was over 40X, meaning that, absent of growth, an investor would have to wait forty years after investing before the earnings would accumulate to what they paid. In such a case, where a correction towards historical norms is highly likely, investors need to re-evaluate their positions and cover their exposures to risk.
At least from an astute investor’s standpoint, this is how forex brokers view the global FX exchange and similar platforms, which contribute heavily to stock worth. Costco (NASDAQ: COST) and Lumber Liquidators (NYSE: LL) share volumes have deviated very little since this article’s date of publish.
Rebound coming?
Generally speaking, most liquidation companies see their busiest season come and go by mid-February. Although the year has seen an increase in jobs and somewhat sustainable consumer activity, the secondary market may bloom late this year.
Lumber Liquidators, specializing primarily in overstock flooring, enjoys their busy seasons when Fed rates drop since home improvement loans and second mortgages are often how LL products are funded. With Costco and similar wholesale outfits, busy seasons are normally year round.
Whether wholesale businesses rebound or tank could depend on how these two company stocks perform, coupled with consumer sentiment heading into Q2.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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