Last week’s earnings results were fun to watch, as three o (NASDAQ:ORLY)f the names blew away expectations, and each redefined their upside potential. What was most intriguing was that two of the three names, O’Reilly Automotive Inc (NASDAQ:ORLY) and Lumber Liquidators Holdings Inc (NYSE:LL) , trade at relatively high multiples, implying that the market accepts that they are no slouches. The third name, GNC Holdings Inc (NYSE:GNC) , which actually provided the biggest change in perception, saw the largest move, as expectations were subdued to negative going into results.
The question we touch on here is whether this is a precursor as we move into our heavier earnings season, or was this just the luck of the draw? Also, should we expect others to duplicate this?
What brought the surprise?
To address the above and to try to pick other names that may provide similar upside, let’s begin by looking at what caused the upside for the three names above. In each case, there was a change in the way the retailer came to market and a change in the value-add to consumers. Importantly, the market surprise was a reflection of the previous lack of understanding the potential from these changes.
For example, GNC Holdings Inc (NYSE:GNC)’s change in its Gold Card membership program brought in significantly more customers, and the 60-day free offering did not impact gross margins as much as expected. That points to much higher earnings beginning later this year into next year.
The GNC Holdings Inc (NYSE:GNC) story, which has a powerful catalyst in Member Pricing over the next several quarters, is shaping up nicely. Some 3 million incremental consumers joined the program in Q2 (on top of 5.9 million existing members) and the business is on track to generate high single-digit comps in Q3 and Q4. This sets the stage for an acceleration in top- and bottom-line growth and positive earnings revisions.
Lumber Liquidators Holdings Inc (NYSE:LL) remains an evolving story. Through store redesigns, expanding product offerings, and an advertising program to attract segments that traditionally did not consider buying their own flooring, Lumber Liquidators Holdings Inc (NYSE:LL) has changed its model. That continues to lead to higher expectations of ROIC, but where that ends is still undefined.
Lumber Liquidators reported very strong results, with comps of 14.9%, and EPS rising 68% to $0.73. As important, while beating expectations by $0.12, the company raised guidance on the high end by $0.25, showing confidence in upcoming results. In addition to strong comps, gross margins rose an impressive 400 basis points as the company continues to improve execution and benefit from changes in mix and sourcing.
Under Rob Lynch, this company has redefined the way it comes to market, redesigning the stores, revamping its advertising program to attract new customers, buying its key sourcing partners and investing in systems and distribution. Moreover, the margin power in the mid-to-high teens is becoming more visible.